Partnerships promote innovation in food supply chains

Abstract

Food Science and TechnologyVolume 36, Issue 3 p. 33-37 FeaturesFree Access Partnerships promote innovation in food supply chains First published: 01 September 2022 https://doi.org/10.1002/fsat.3603_7.xAboutSectionsPDF ToolsExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Tom Hollands of Raynor Foods and Jason Cresswell of Sagesight identify some of the factors that stand in the way of supply chain innovation and suggest a new, more collaborative approach to food manufacturing and distribution. A reality check For people in the UK, the COVID pandemic and the cost-of-living crisis has been an alarming wakeup call. For the first time in generations food has been scarce and/or unaffordable. But this is not just a blip, it is the new normal. In fact, it will get worse as the climate crisis intensifies, because food production now dominates life on our planet: 26% of all greenhouse gas emissions come from food production1 50% of all liveable land is used for farming2 62% of mammalian life is livestock, only 4% is wildlife (the remaining 34% is human beings)3 All this makes the next fact all the more shocking: A third of all the food produced is not eaten, but lost or wasted4. The reality is that our food system is extremely fragile, arguably at the point of collapse. Sadly, none of this is new. Experts have been voicing these concerns for years, but well-briefed leaders and politicians have deliberately ignored the problem, each preferring to pass on the ticking time-bomb to the next incumbent. The hard truth is that if we do not get better at coordinating how we produce and distribute food globally there will be famine and hunger at levels not seen in generations5. Back to basics Some things are so commonplace that we never question them. What is absurd in food production, is that the businesses in the supply chain for a single item of food do not work together to produce it, but instead compete with one another. This is taken for granted because it is how our economy works: businesses compete! Competition, of course, brings benefits. We want businesses to improve their operational efficiency, producing the same goods at a lower cost. We want businesses to innovate, producing better products and more choice. We also want businesses to negotiate over price with their suppliers and buyers, keeping costs low and preventing cartels. This is all true, but it misses one crucial fact: businesses do not bring products to market, supply chains do. Every piece of food we buy was produced and delivered by a large group of businesses, most of which are competing with one another. Haggling over price by businesses in the same supply chain has become so extreme that most companies in the food sector now operate with margins so modest that they are struggling to survive. The major brands and retailers have thin profit margins, but they are protected by the huge and predictable volumes of food they sell. The problem is that 97% of all food businesses in the UK are SMEs6, and their lack of scale means their margins are even thinner. The resilience of our food system is being put at risk by the precarious financial situation so many businesses are in. These are the same businesses that form the supply chains of the ‘stable’ brands and retailers. There is no getting away from the fact that our food systems are on the edge of collapse7. Why supply chain innovation fails Many commentators have pointed out that supply chains could be more efficient, resilient and sustainable. It is widely accepted that digital technologies will drive much of the necessary improvement. As a result, huge amounts of money have been invested in recent years into developing solutions including marketplaces, order management platforms, supplier portals, traceability platforms, supply chain mapping tools, sustainability platforms, supply chain finance solutions, etc. Despite all efforts, there have been few commercial successes. Few solutions have been able to penetrate beyond the first tier of a corporate supply chain. None have ever solved a complex end-to-end supply chain problem. To do this a solution needs to be able to answer both of the following questions in the affirmative: Do the benefits of collaboration sufficiently outweigh the risks for each party in the supply chain? Is there enough trust between all the parties to enable collaboration? These may seem obvious, but our research suggests that failure to work out the answers to these questions is behind the low success rate. The problem is that most projects are designed around the needs of large corporates (which are probably paying for the solution). The organisations leading the development of the solutions dedicate more time to the needs of the large corporate (which is paying their bills), and less time to understanding the needs of the rest of the supply chain. They build up an idea of how to solve the single problem outlined by the client (traceability, carbon footprinting), but they do not build up an understanding of the system as a whole. Typically, the solution does not distribute the benefits of collaboration fairly, giving one party an unfair competitive advantage (usually the company paying for the solution). The result is a platform that does not strike the right balance of risk and reward for all participants. A poor product development process like the one described does not build trust either. Collaboration will result in businesses doing different things, and this will impact their business model. In a low-trust environment, businesses will not tell their competitors sensitive information about how their business runs to allow them to find inefficiencies in the system. It is more rational to leave the system as it is and protect your business. Furthermore, solution mismatch is often found out too late; few supply chain businesses would tell a large and dominant customer that the solution it is developing is destined to fail. It is not possible to discover the answers to these two questions, however, unless the product development process is implemented with a systems thinking approach. Supply chains are a system, so they should be treated as one. For example, one of the Digital Sandwich's goals is to provide item level traceability across the end-to-end supply chain. However, many traceability platforms have been built over the years, all with limited success. The problem is that while they deliver enough value to a corporate to justify the cost, their primary value for the supply chain is keeping the corporate happy. Even though they are usually provided to the supply chain for free, the ongoing cost of using them is not outweighed by the value of keeping the customer happy. While the corporate can apply pressure to its first tier suppliers to use the platform, they can place little pressure on their supplier's suppliers, and none further up the chain. Through the lens of systems thinking, however, solutions begin to appear. Corporates need traceability. Supply chain businesses need better financial services. The data needed to provide item-level traceability also provides real-time validation of a company's assets and processes, and if you can provide this then you can reduce the cost of working capital and insurance. This same data can be used to automate large amounts of compliance processes, export paperwork and product data management (including allergen information). It would also speed up the process of onboarding new suppliers, as well as verifying and embedding new materials. In addition, it can be used to effectively match supply to demand. Just a fraction of these benefits would be enough to justify the cost of the platform for the supply chain, providing the corporate traceability for free. Only systems thinking reveals these types of solutions. Collaboration is crucial In order to make supply chains more efficient, resilient and sustainable, the best place to start is the system itself. Both authors have been working on a major Innovate UK project called ‘Digital Sandwich’ that is using cutting edge technologies to digitise the endto-end supply chain and enable new business models, with an explicit focus on SMEs. Early research (pending peer review) indicates that collaboration in the supply chain could let SMEs benefit from economies of scale that have only been available to corporates until now. This could reduce the cost of Days Receivable Outstanding by up to 80%, Days Inventory Outstanding by up to 86%, and the Weighted Average Cost of Capital by up to 65%. For the average food SME these three benefits alone would approximately double its profit margins. In comparison, an SME could invest in digitising its processes to improve its operational efficiency, but these gains would be marginal and the cost and risk of implementation would be more or less the same. Sustainability goes hand in glove with financial stability because a business that is struggling to survive cannot afford the investments needed to improve its environmental footprint. Left to its own devices the primary achievement of yet further competition will be marginal gains and ever-increasing risk. Collaboration on the other hand offers significant gains, gains that can fund the transition to a sustainable food system. Furthermore, only through collaboration are we able to better match supply to demand, reducing unnecessary waste in the supply chain caused by the bullwhip effect (when small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw material supplier levels), and ensuring that food ends up where it is needed. A new kind of supply chain The benefits of collaboration have always been available to vertically integrated supply chains. It is not hard to enable collaboration in a supply chain owned by a single entity, but we are not putting forward a case for them. Firstly, they are not as resilient as outsourced supply chains, as they tend to fail if a single part breaks. A key value of outsourcing is having multiple sources available for every component and process, guaranteeing that production can continue. Secondly, vertically integrated supply chains may simplify the process of reducing systemic inefficiencies, but the loss of competition in them increases the amount of inefficiency at each stage of production. If we returned en masse to the use of vertically integrated supply chains, we would eventually recreate the kinds of economic inefficiency revealed in eastern Europe economies after the collapse of the Soviet Union. There is not much difference between a centrally planned economy and a vertically integrated supply chain. We need the best of both worlds: a resilient, outsourced supply chain that can solve systemic inefficiencies, akin to a vertically integrated one. Innovations enabling collaboration in supply chains It is possible to build a collaborative supply chain and unlock value for all participants using the approach outlined above. The Digital Sandwich has 12 partners, and within these teams are several experts who have proven in previous studies that collaboration can solve systemic problems, finding answers to sustainability challenges and unlocking significant value for businesses on a small scale. In order to build solutions that can scale and solve industry-wide problems, however, we need some innovations not yet available in the market. Digital Sandwich shows that the two key ones are: An independent third party to represent the supply chain's needs Shared digital infrastructure with strong data privacy protections. In the past, supply chain innovation has typically been led and paid for by corporates. While it is likely that a significant proportion of the required funding will come from corporates (they are by far the largest nodes in the network), they cannot lead these projects because few businesses would trust them not put their interests first. As no one can implicitly trust anyone else, the leadership role must be undertaken by an independent third party with a governance structure that can maintain that independence. The Digital Sandwich has investigated different structures for this independent third party, including joint ventures and a buyer's cooperative, and plans to trial a mutual structure. It is too early to say what type of structures are best, but it does suggest important new roles for industry bodies and institutes in the future. Collaboration at scale will also need to be underpinned by digital connectivity between the various participants. This connectivity will need to be supported by next generation data privacy protections, because in a supply chain all information is commercially sensitive. Some of the most sensitive information is Personally Identifiable Information (PII) and Corporate Identifiable Information (CII). Years of revelations, starting with Edward Snowden's release of National Security Agency files in 2013, have shown how even the most innocuous piece of data can become powerful insight when put in the right context. An independent third party cannot be expected to manage all the data that runs through a supply chain as it would form a single point of failure that would create unacceptable economic and GDPR risks. Digital Sandwich has proven that these concerns can be solved by a new approach to digital collaboration called Proof-Oriented Programming. This by-passes data privacy problems by letting businesses collaborate without needing to share any data at all. This digital platform is also decentralised and open-source, avoiding single points of failure and ensuring that no single business can control the system. ‘Never doubt that a small group of thoughtful committed individuals can change the world. In fact, it's the only thing that ever has.’ – Margaret Mead, Anthropologist. You may be worried that this is an impossibly huge task. It is not. The tried-and-tested method to solving systemic problems is to start small and change the system little by little. This makes the problem manageable as you do not have to do everything at once. You just have to make sure that you try to take into account as much of the system as you can, and ensure each improvement meets an acceptable level of risk-reward. Starting small also means you do not need too many participants to begin with, you just need a participant from each part of the system. Once this group has proven a solution, it will not be too hard to convince others to join. The biggest challenge is solving real problems, scaling them is relatively easy. Conclusions Insanity is doing the same thing over and over and expecting different results. If we want to improve supply chains we cannot just leave it to the market. Competition between businesses will not solve our problems. Conventional economic theory says that independent businesses making rational decisions about what is best for them will produce the most efficient outcome for the economy as a whole. This would only be true if a single business made a product from start to finish with no suppliers or buyers (other than you, the customer). Worse still, competition appears to have created conditions that have made food businesses financially precarious and unable to afford the innovations required to improve their operational efficiency (and profitability) or sustainability. It is certainly preventing them identifying and solving gaping inefficiencies in the system itself. Collaboration offers a way forward. All that is needed now is more businesses willing to try to put these learnings into practice. Tom Æ Hollands, Innovation and Technical Director, Food Science and Innovation Department, Raynor Foods, Chelmsford, Essex Tom has worked in both government (Food Standards Agency) and the private sector. He is a true innovator and has won many national and international accolades, in 2021 he was cited in The Manufacturers Top100 as an Exemplar Innovation Leader for UK manufacturing. Tom's innovations are focused on sustainability and meta food systems, their emerging technologies and the complex links that join them. email tom.hollands@sandwiches.uk.net web raynorfoods.co.uk Jason Cresswell, Expert in supply chain innovation Jason has 14 years’ experience leading R&D into supply chain innovation with a focus on sustainability and untangling the practical problems that prevent meaningful change. He is passionate about putting people before technology and building pragmatic solutions to real issues. email jason.cresswell@sagesight.solutions web sagesight.solutions References 1 IPCC. 2014. Climate Change 2014: Synthesis Report. Contribution of working groups I, II and III to the fifth assessment report of the intergovernmental panel on climate change (eds R.K. Pachauri, L.A. Meyer), pp. 151. IPCC, Geneva, Switzerland Google Scholar 2Poore, J., Nemecek, T. 2018. Reducing food's environmental impacts through producers and consumers. Science 360: 987- 992 CrossrefCASPubMedWeb of Science®Google Scholar 3Bar-On, Y. M., Phillips, R., Milo, R. 2018. The biomass distribution on Earth. Proceedings of the National Academy of Sciences 115: 6506- 6511CrossrefCASPubMedWeb of Science®Google Scholar 4Boston Consulting Group. 2018. Tackling the 1.6-billion-ton food loss and waste crisis. Available from: https://www.bcg.com/publications/2018/tackling-1.6-billion-ton-food-loss-and-waste-crisis (accessed 29 July 2022) Google Scholar 5 FAO of the UN. 2021. The state of food security and nutrition in the world 2021: the world is at a critical juncture report. Available from: https://www.fao.org/state-of-food-security-nutrition/2021/en/ (accessed 29 July 2022) Google Scholar 6 FDF. 2021. Our industry at a glance. Available from: https://www.fdf.org.uk/globalassets/business-insights-and-economics/facts-and-stats/our-industry-at-a-glance-2021-factsheets.pdf (accessed 29 July 2022) Google Scholar 7 FAO of the UN. 2021. The state of food security and nutrition in the world 2021: the world is at a critical juncture report. Available from: https://www.fao.org/state-of-food-security-nutrition/2021/en/ (accessed 29 July 2022) Google Scholar Volume36, Issue3September 2022Pages 33-37 ReferencesRelatedInformation