Partnerships for risk and reward

That was the view of Mike Snell, Asda's director of sourcing and development, speaking at Food Manufacture's Collaboration Forum held in London in November, sponsored by specialist IT suppliers Geac, Indigo Software and Ramesys.

Snell was joined by Stephen Holding, md of Salads & International Produce with Geest, and Amanda Atkinson, Corporate law associate with Eversheds LLP, who together described a collaborative project they had been working on for the past three years (see panel story on p38).

Collaboration comes in many forms. For example, new legislation on traceability coming into force this month will force retailers and suppliers to work more closely together in demonstrating due diligence. And retailers will inevitably want to know more about their suppliers' operations.

"I think we are going to see growth in own-label and this is going to affect the way retailers protect their brands," says Neil Griffiths, chairman of the Society of Food Hygiene Technology and chief executive of Law Laboratories.

NPD failures and waste

Meanwhile, pressure to reduce the high failure rate in new product development (NPD) will dictate more collaborative working. And if waste is to continue being driven out of the supply chain, then more 'gain sharing' deals are likely to emerge.

Nigel Montgomery, director of European Research with AMR, takes a philosophical view of collaboration: "It's a mindset ... it's not about sharing information either, it's about a strong common goal."

One thing's for sure, future relationships between retailers and their suppliers will need to become closer if Britain's food and drink sector is to continue to provide the products and services that consumers want.

No longer will it be acceptable for buyers to just beat their suppliers about the head on price in order to make their mark -- and ensure their career progression. A pipe dream? Perhaps, but change is already under way and Asda could be in the vanguard.

That isn't to say retailers are planning to go soft on their suppliers. Negotiations will continue to be tough and based on hard commercial facts. As Snell says: "We need to treat suppliers well, but that doesn't mean we have to prop up inefficiency."

Technology can help to improve collaborative working through the sharing of information in a timely manner, and there are various new IT systems available to fit the bill. But alone, technology is unlikely to be enough.

Young's Bluecrest, for example, which works with most of the major multiples as well as many own-label and branded food manufacturers, has made extensive use of Ramesys' Creations package for NPD for over six years. This has enabled it to respond to an increasing stock keeping unit (SKU) count (finished products have risen 10% year-on-year and raw materials have increased even more), while improving business response times to its customers and improving the accuracy and consistency of technical data.

Better communication

But even with good IT systems in place, success or failure will hang on how good communications are between individuals within their own and partner companies.

Chris Jackson, Young's group technical and NPD director, admits collaboration with partners has not always run entirely smoothly due to changes in priorities, diversion of resources, acquisitions and restructuring -- which has proved particularly "challenging". And then there is the continuing issue over setting "over-ambitious timescales".

Research conducted by Deloitte and outlined by its head of consumer products, Lawrence Hutter, reports one leading retailer as saying: 'Manufacturers are too focused on the use of technology, and not placing sufficient effort on related internal changes and collaborative business processes.' While another says: 'Collaboration is useful, but mutual profitability impact is the key'. Yet another says: 'Manufacturers need to demonstrate that they have sufficient skilled resources to make sharing the information worthwhile.'

And yet, adds Hutter: "Retailers admit they haven't put enough effort into collaboration." They even recognise that 'traditional buyer behaviours present barriers to progress'. "The realities of collaboration are quite difficult to manage," he concludes.

What came out strongly throughout Food Manufacture's Collaboration Conference was the need to create greater trust in the business relationships between manufacturers and retailers. Unfortunately, at present trust isn't common.

'Retailers are still cautious over releasing the power and competitive advantage that is inherent in the information they are asked to share,' one manufacturer says in the Deloitte survey. So the power imbalance evidently continues to be an issue.

"It has got to be about building trust," says Rodger Seaman, national account manager for Ilchester Cheese Company, which this year projects a £22m turnover in its added-value cheese business serving retailers such as Tesco, Sainsbury, Somerfield and Budgens and foodservice outlets such as 3663. "And it's about forgiveness," he adds. "Things will go wrong."

Costs of collaboration

Seaman accepts that to work collaboratively with your customers means providing dedicated resources in the manufacturing operation -- and that will mean extra cost. And there are dangers, too.

"You've got to be careful you don't get an adverse seasonal bias into your business," he adds. He also warns about the underlying threat posed for manufacturers of "commoditisation" caused by retailer every day low pricing (EDLP) strategies.

However, he adds, the rewards of collaboration are clear: "You can improve your profitability, it can reduce your risks and it can improve your long-term business planning." By working collaboratively with Budgens, for example, Ilchester has won an additional 11 listings over three years and has achieved a seven-fold increase in turnover in four years. This year sales are targeted to grow by a further 12%, claims Seaman.

Asda's Snell is convinced about the merits of closer collaborative projects such as his one with Geest: "It is better than we intended because the legal processes forced us to think more objectively."

The trick is in negotiating an acceptable split of risk and reward, claims Holding. "That enabled us to get to a fair position. We got there because we trusted each other."

So it all comes down to trust then.FM

Documentation from Food Manufacture's Collaboration Forum is available, price £145, from Symposium Events on 020 7684 0756.

international produce: Model collaboration

International Produce is the result of Asda's close collaboration with Geest. The £250m turnover joint venture company, in which Geest is the majority shareholder, went live last July.

Already it has one site operational in Kent and another in Yorkshire is scheduled to come on stream in March.

While it's still early days, the initial results look promising and it could become a beacon for other similar collaborative ventures.

International Produce was created to streamline sourcing and raise the continuity of fresh produce from suppliers around the world to Asda's UK stores. It was 18 months in its inception and planning, with another seven to agree heads of terms and a further eight finalising details and achieving completion.

All agree, it wasn't easy. According to Stephen Holding, md of Salads & International Produce with Geest, the most frustrating aspects were going through the legal processes. "When you're going through it, it's absolute hell," he says.

For Geest it offered the prospect of reduced risk and better margins. And for Asda, it helped simplify some particularly complex supply chain issues, involving the importation of fresh produce from 47 different countries around the globe. "Collaboration was the way to go," confirms Mike Snell, Asda's director of sourcing and development.

But, while at the outset he thought it would be a relatively simple process, Snell was soon to discover it would be quite tortuous, ultimately involving 12 separate legal agreements. For such projects to work, he says, everybody involved needs to be clear of the reasons for embarking upon them.

"Do you really want to collaborate when you talk about it?" he asks. "In its truest sense it is good, but unless you're sure why, then my advice is steer clear of it." It requires a big commitment in terms of resources, finances and people, he adds.

Also, he advises other retailers and suppliers that might be considering embarking upon similar ventures to make sure that collaboration is compatible with their management structures. For example, small private companies tend to operate quite differently from major PLCs where issues such as corporate governance play a more important role.

For Holding, who had never been involved in such a big legal process before, one of the most positive outcomes was the clarity of the deal reached. "The legal process ensures the clarity comes before commitment," he says. "The legal process does ensure real commitment of all parties rather than just a handshake." Because it's a formal deal involving a five-year supply agreement it also enables Geest sufficient security to plan ahead.

With this approach everyone knew what they were responsible for and what financial commitment they had signed up for, says Snell. It also set out "how you share that risk". But, it's also about "writing an agreement to reward the right behaviours", he adds. And the outcome offers financial benefits for both parties.

The part played by the lawyers in such deals is outlined by Amanda Atkinson, Corporate law associate with Eversheds LLP, who says: "[The deal] needs to be understood properly to ensure issues that come later do not come as a surprise."

One issue that did surprise the partners, however, was that while there is a tendency to concentrate on how dealings with third parties such as growers, banks, hauliers, etc, will work, "often it's the internal parties that can trip you up", claims Holding. He recommends bringing on board in the project at an early stage those individuals who pose objections.

Holding is convinced Geest's venture with Asda will become a model for others to follow: "I think this will become common for large manufacturers over the next five years."

Printer friendly version

Email this article to a friend

Bookmark this

---