How Strategic Sourcing Reduces Spend in the Food and Beverage Industry
The food and beverage industry is a massive one, especially in North America. According to the United States Department of Agriculture (USDA), in 2019, U.S. consumers, businesses, and government agencies spent $1.77 trillion on food and beverages in grocery stores and other retailers. Generally speaking, food and beverage prices remain fairly stable, increasing just 2.3% per year over the past decade. Consumers are resistant to big hikes in food prices. At the same time, the food and beverage sector tends to operate on razor-thin margins.
NYU’s Stern School of Business published data showing that in the first quarter of 2020, the net profit margin for the food processing industry was just 1.31%. In comparison, computer makers averaged net margins in the 13% range during this time, while restaurants averaged a net margin of over 10.5%.
Consumer Resistance to Price Hikes and Thin Margins
Put these two conflicting trends together, and it’s clear that companies in the food and beverage industry face challenges in remaining profitable. Making the situation even more challenging, there is a constant fluctuation in the prices of raw materials used in the production of food and beverages. Supply and demand can cause rapid price increases, weather-related events can wreck crops and cause shortages, and currency fluctuations can cause a rapid rise in prices.
One more issue, food is perishable. The USDA published figures dating back to 2010 that pegged U.S. food waste at between 30% and 40% of the food supply—$161 billion worth of wasted food. And that was a decade ago. Consumers and retailers generate much of that waste. However, industry suppliers and manufacturers are also major contributors. The USDA, the EPA (Environmental Protection Agency), and the FDA (Federal Drug Administration) formed a joint task force to reduce food waste in the U.S. in 2019. One of the priorities identified by this task force was collaborating with private industry to reduce food waste across the supply chain.
Companies in the food and beverage industry are under more pressure than ever to reduce their spend and boost those margins. And they have to do so while dealing with end customers (consumers) who are highly resistant to price hikes. Perishable food and raw materials cut into margins, and now there is an extra incentive to address food waste in the form of government involvement.
How can companies meet these goals? All eyes are on the sourcing department, which plays a pivotal role in this industry. Procurement teams are seen as being the key to success in the food and beverage industry, and the biggest tool in their arsenal is strategic sourcing. Here’s how procurement teams can leverage strategic sourcing and predictive procurement tools, such as Arkestro’s Predictive Procurement Orchestration platform, to reduce spend in the food and beverage industry.
Track Global Pricing Variables
Most food and beverage companies rely on a global supply chain for raw materials. While this opened up a huge variety of ingredients and the opportunity for competition that could drive down the price of some raw materials compared to local supplies, it comes with challenges.
There are variables that procurement professionals absolutely must track and account for—ideally in real-time. Factors that can affect both availability and cost are currency fluctuations, blights, and storm damage.
Also, crucial in all this is consumer behavioral data. We’ve seen that in play this year when the global pandemic triggered panic buying among consumers that led to shortages for food products such as flour. Sudden popularity can cause ripples through the supply chain as well. Last year, a fad diet trend for drinking celery juice resulted in the cost of celery skyrocketing by 300%. Celery wasn’t just suddenly more expensive and difficult for consumers to find in stores. As a raw ingredient in many food products, it also caused price and supply disruptions for many companies in the food and beverage industry.
Evaluate and Manage Suppliers
One of the most critical elements of strategic sourcing in the food and beverage industry is effective supplier management. It’s all but impossible to achieve this goal when using multiple systems. Consolidating all the supplier information in a single system, including the capability to track and manage communications and messaging, is a huge win. By doing this, the procurement team can effectively manage their relationship with all suppliers globally—and it helps the suppliers to have a better relationship with the company as well.
Having centralized and up-to-date supplier information also makes it possible to quickly evaluate suppliers based on their performance, creating an award decision easier and not based purely on price.
Evaluate and Manage Transportation and Storage Partners
Food and beverage companies must also carefully manage their transportation and storage partners. In this industry, the raw material is critical, but transportation and storage can be just as important due to the perishable nature of many ingredients. One of the easiest ways to lower spending is to reduce waste, and that means picking the best transportation and storage partners. When avoiding spoilage is a requirement, “best” isn’t necessarily the least expensive.
A strategic sourcing approach with a centralized system also makes it far easier to audit these partners to ensure they comply with applicable regulations for food handling.
Above all, strategic sourcing offers food and beverage companies the ability to move quickly and confidently when it comes to the bidding process. Raw materials can change in value dramatically overnight because of a storm or a sudden surge in popularity. Taking too long to enter into the bidding process or rushing in without being fully prepared all but guarantees paying too much.
There are an incredible number of moving pieces for procurement in the food and beverage industry. Arkestro—Predictive Procurement Orchestration platform powered by AI—is the secret ingredient to successful sourcing. Schedule a demo today to see how Arkestro will revolutionize your company’s procurement capabilities.