Food and Drink Manufacturing in Europe

Dr Cesar Revoredo-GihaSRUC

Technische Universität München (TUM)Freising, 9-13 March 2015

Content• Overview of organisation of manufacturing

– Structure– Procurement– Manufacturing processes– Inventories– Logistics– NPD

• European food and drink processing in figures. • Major policy related to processors.

Overview of food manufacturing• The principal role of manufacturing in the food supply chain is to ‘add

value’ to food product ingredients such that they meet the requirements of other supply chain members, including consumers themselves.

• The act of undertaking manufacturing activities involves adding costs and the de facto commercial rule is that the value added should, at a bare minimum, exceed the costs incurred.

• In history, manufacturing activities were undertaken by household members and specialised firms, largely with a view to preserving otherwise perishable food products between seasons for crops, and between slaughtering for meat products.

• Basic preservation techniques, such as drying, smoking, salting, pickling and, later, bottling, canning and freezing, are still today the key techniques of food manufacturing, although new techniques have emerged.

Overview of food manufacturing• One characteristic of the nature of food products in many, particularly

economically developed, countries has been the burgeoning and steady growth in demand for convenience, ‘ready-to-eat’, ‘ready-to-heat’, etc., attributes. This reflects consumer changing lifestyles where the principal meal preparation constraint is time, not money.

• Meal preparers are willing to pay others – decades ago servants, now food manufacturers or food service providers – to strip the labour and inconvenience out of feeding themselves and their families. In short, the raw ware potato has become the problem, and the microwaveable French fry the solution.

Overview of food manufacturing• Manufacturers do much more than simply transform ingredients into finished

food products. They have a key role in linking the point of manufacture with the point of product sale (supermarket, corner store, etc.) and, in history, have been leading transportation providers.

• Transportation of final products to point of sale accounts for approximately 40% of total distribution costs, with warehousing responsible for much of the remainder.

• However, the manufacturer’s responsibility for transportation of goods to the major supermarket chains that account for 85% or more of the grocery trade may be increasingly a function of the past.

Hypothetical structure of a manufacture

Procurement/ Transport/ Production Transport/ Transport/ Useacquisition storage storage storage

Raw materialsSubassemblies Regional Customer

Manufactured parts Factory Production Finished goods warehouse orProprietary parts store processes warehouses depot or consumer

Packaging intermediaryOther materials

Inventory Work in Inventoryprogress

(Materials management) Logistics (Physical distribution management)

Input phase Output phase

Procurement• The words purchasing and procurement are often used interchangeably to

define the action of buying or obtaining goods and/or services by effort from a third party to make them available within an enterprise or organisation to allow fulfillment of business objectives in a timely and cost efficient manner (Steele & Court, 1996; Steward, 1997).

• Purchasing and procurement are in fact very different: though both words describe the act of acquisition, procurement is a more strategic way of acquiring goods and services to help enterprise-wide strategies and objectives to be met.

• Due to changes in the business environment procurement has evolved from buying cheap for the production of commodities towards more selective purchases (differentiated products).

• Changes in the macro economy, market maturity and consumer demand have stimulated a cultural shift in approaches to procurement:

- Early supplier involvement in the supply/production chain, - Development of relationships with suppliers, - Monitoring and assessment of suppliers on a continual basis, - Supplier certification and measurement of performance

They have become key principles in strategic, market responsive, procurement activities

Procurement

Manufacturing processes• There are a number of basic manufacturing processes: production line,

continuous flow, custom manufacturing, and fixed position manufacturing.1. Production Line - The production line is arranged so that the product is

moved sequentially along the line and stops at work centers along the line where an operation is performed.

• If needed some parts can be removed from the production line and stored as semi-finished goods. It is very suited to high volume manufacturing of a single product or product group.

• Some disadvantages to using the production line manufacturing process are:– the fact that the production line manufactures a single product or similar products limits

its ability to manufacture anything else. – The second issue with production lines is that there is a high cost involved in the initial

set up of the production line and it requires a large volume of goods to be produced to justify the capital investment.

Manufacturing processes2. Continuous Flow - The continuous flow manufacturing process is similar to

the production line, but the products that are manufactured cannot be removed from the production line and stored. Examples include chemicals, pharmaceuticals, and plastics. The continuous flow process is more inflexible than a production line.

3. Custom Manufacturing - If a company manufactures a wide range of products that can be modified based on the customers requirements, then a custom manufacturing process is a good fit.

• The custom manufacturing facility has a number of skilled employees and a range of equipment that can be used to manufacture and modify a wide range of items.

• The facility should be set up with a number of dedicated areas. The custom manufacturing facility is not designed for high volume products, but is ideal for customized products.

Manufacturing processes4. Fixed Position Manufacturing - Fixed position manufacturing is different

from other manufacturing processes as it involves the finished product not moving from its fixed position from the beginning to the end of the process.

• This is the method used in large scale manufacturing such as the manufacture of an aircraft or ship, but is also used for products that are being constructed in place for the customer, such as a conveyor system.

Example: Coordinated supply chain in Mackie’s crisps

The supply chain is engineered from the farm to the factory. The requirements of the final product are passed back to farm.

Source: Mackie’s crisps website.

Example: McCain organisation of its supply chain

Source: Vermont, Nick (2012). Developing relationships up and down the supply chain. The Oxford Farming Conference.

The McCain supply chain is engineered like Mackie’s but includes a much expanded organisation, including financial management. The ultimate goal is to ensure the quality of produce required for the factory and a reliable supply of potatoes.

What are Inventories?• Inventory or stock refers to the goods and materials that a business holds for

the ultimate purpose of resale (or repair).• Examples of inventories

– Finished product held for sale

– Goods in warehouses

– Work in process

– Goods in transit

– Staff hired to meet service needs

– Any owned or financially controlled raw material, work in process, and/or finished good or service held in anticipation of a sale but not yet sold

Inventories• Reasons for keeping stock (All these stock reasons can apply to any owner

or product)1. Time - The time lags present in the supply chain, from supplier to user at

every stage, requires that you maintain certain amounts of inventory to use in this lead time.

2. Seasonal Demand: demands varies periodically, but producers capacity is fixed. This can lead to stock accumulation.

3. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.

4. Economies of scale - So bulk buying, movement and storing brings in economies of scale, thus inventory.

5. Appreciation in value - In some situations, some stock gains the required value when it is kept for some time to allow it reach the desired standard for consumption, or for production.

Reasons for not to keep high inventory levels1. Obsolescence/perishability: due to progress of technology, the bought

inventory for future use may become obsolete.2. Capital investment3. Space usage4. Complicated Inventory Control Systems: higher number of inventory items

complicates the control and monitoring items.

Typical Inventory Conflicting Cost PatternsC

ost

Replenishment quantity

Stockout cost

Procurement cost

Total cost Minimum costreorder quantity

Logistics• Logistics is the management of the flow of goods between the point of

origin and the point of consumption in order to meet some requirements, of customers or corporations.

• The resources managed in logistics can include physical items, such as food, materials, animals, equipment and liquids, as well as abstract items, such as time, information, particles, and energy.

• The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security.

• The complexity of logistics can be modelled, analyzed, visualized, and optimized by dedicated simulation software.

NPD: What food is produced - Manufactured

• Let us concentrate on new product development (NPD) where both retailers and manufacturers compete for “hitting the jackpot” (i.e., finding a product that appeals to consumers, brings plenty of money and stays on the shelf for a long time) (Raubitschek, 1988).

McCain new products within the chips category.

Source: Vermont, Nick (2012). Developing relationships up and down the supply chain. The Oxford Farming Conference.

NPD: What food is produced - Manufactured

Manufacturers and supermarkets compete on hitting the jackpot. According to Nielsen UK the percentage of new products that fail is 90%, defining "failed" as being dropped by retailers within 6 months of launch.

Source: Own elaboration based on Kantar Worldpanel data.

Percentages of company sales in Scotland 2011 (i.e., value shares)

EU Food Processing in Figures

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EU Food Processing • Food and beverages manufacturing is one of Europe’s most important and

dynamic industrial sectors. It produces a vast array of products that range from staple food products (such as flour, milk, salt, water) to luxury, sometimes high value items (such as foie gras, caviar, chocolates, sparkling and still wines).

• Compared with most industrial activities, the food and beverages manufacturing sector is fragmented, with a relatively high proportion of small and medium-sized enterprises that tend to serve local, regional and national markets; some of these specialise in the production of geographical specialities.

• Nevertheless, there are also a handful of large multi-national manufacturers within the sector and many of these have considerable market reach, characterised by global brands.

Distribution of value added at factor cost of food and beverages manufacturing, EU-27, 2008

In value added terms, and based on the group (3-digit) level of NACE Rev. 2, the four largest food and beverage manufacturing subsectors in the EU-27 in 2008 were other food products (including, the manufacture of sugar-based products, tea and coffee, or pre-prepared meals, NACE Group 10.8), bakery and farinaceous products (Group 10.7), beverages (Group 11.0), and meat products (Group 10.1).

EU Food and drink manufacturing: Turnover and employment

EU Food and drink manufacturing: Small and medium enterprises (SMEs)

EU Food and drink manufacturing: Exports and world importance

EU Food and drink manufacturing: Export market share

EU Food and drink manufacturing: Research and development (R&D)

EU Food and drink manufacturing: Productivity

Distribution by size and value added of major processing sectors, 2008

The food manufacturing sector (excluding beverages) in the EU is dominated by small enterprises: 92.7 % of enterprises employed fewer than 50 persons in 2008, while 6.0 % employed between 50 and 249 persons, leaving a residual 1.3 % employing 250 or more persons.

Many brands are owned by a few manufacturers

Policy affecting manufacturing

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Policy affecting manufacturing• Food and beverage processing is affected by a range of legislation,

including that on animal welfare, food safety and food hygiene, food additives and residues, and labelling. Let us consider an example:

• Animal welfare legislation dates back as far as 1974. However, since the Lisbon Treaty, legislation has been based upon the premise that animals are sentient (conscious) beings – with the result that all subsequent legislation seeks to ensure that animals need not endure avoidable pain or suffering.

• Animal welfare legislation impacts upon food processors in two particular areas: the transportation and the slaughtering of animals. Council Regulation ((EC) 1/2005) aims to help safeguard animal welfare during transport. It requires that animals are transported so as to avoid injury or undue suffering, while stipulating journey and rest times, health criteria, means of transport, as well as loading and unloading practices.

Policy affecting manufacturing• Legislation on slaughtering practices is based upon the use of properly

approved stunning and killing methods. In 2004 and 2006 the European Food Safety Authority (EFSA) adopted two opinions on such methods and the European Commission subsequently proposed a legislative revision.

• In 2009 the Council adopted Regulation ((EC) 1009/2009) on the protection of animals at the time of killing, which comes into effect as of 1 January 2013; the Regulation also requires slaughterhouses in non-member countries exporting meat to the EU to comply with similar standards.

Guaranteeing agricultural product quality• EU quality schemes identify products and foodstuffs that should be

farmed and produced/processed to exacting specifications – be these in relation to geographical indications, traditional specialties, organic produce or certification schemes.

• Protected geographical origins are used as a quality guarantee for a range of other food and beverage products, for example, through the protected designation of origin (PDO), the protected geographical indication (PGI) and traditional speciality guaranteed (TSG);

• Each of these has its own logo to help consumers easily identify authentic products. The names of more than 500 products are currently registered as either PDOs or PGIs.

Guaranteeing agricultural product quality• Fruit, vegetables and cereals, cheeses, meats and (olive) oils had the highest

number of registered names for protected foodstuffs in the EU-27 in 2008. The vast majority of these products were grown and processed/manufactured in Greece, Spain, France, Italy or Portugal.

Food labelling policy • General food labelling is governed by Directive 2000/13/EC.• Nutritional labelling is regulated through Directive 90/496/EEC; it used to be

optional (unless a nutritional claim is made by a manufacturer, in which case the labelling of such information becomes compulsory).

• Labelling provides one means for food and beverage processors to pass on essential information (such as use-by dates and safety warnings), as well as other details which may be used by consumers when they are trying to make informed purchasing decisions (for example, nutritional labelling and recycling details).

• Labelling can be used by food processors to highlight the benefits or advantages of their products, especially when these relate to additional costs that may have been incurred during the production/processing of food items (the use of animal-friendly production techniques, or organic food products).