Just as consumers and businesses are breaking free of the after effects of the recent recession, some financial experts are predicting another one—mild though it may be—by early next year. According to the April 2012 Trends Report from ITR Economics, a combination of rising taxes and reduced government spending will hit families in the pocketbook.
The report’s authors say the effects will be mild, partly because the Fed will do its best to fight inflationary forces. However, the Fed’s focus on “core inflation” will not include food and energy, so prices in those two areas will continue to rise. That will reduce consumer spending power—and possibly set off a familiar chain reaction.
If the consumer has less to spend, they buy less, and when they buy less, producers have less to spend, so they buy less. That means investments in equipment and supply chain technology may take a hit. Indeed, this report expects orders for industrial machinery to decline through this year.
Consumers and producers cite good reasons to be worried. But some producers are refusing to be paralyzed by fear. Tom Clark is one of them. As operations manager for LoBue Citrus, an independent, family-owned grower, packer and shipper of California citrus products, his narrow profit margins make any kind of investment in technology risky. What Clark realizes, though, is that if you don’t invest in your supply chain’s performance, the risk is even greater.
Demand for Traceability
LoBue is one of many family-run businesses that have to fight the forces of inflation while complying with the forces of regulation. In the produce industry, the demand for product traceability is forcing these companies to consider The Produce Traceability Initiative, an industry-sponsored effort to develop standardized trace-back procedures. The goal is to achieve supply chain-wide adoption of electronic traceability of every case of produce.
This hasn’t yet become an FDA mandate, but even if it doesn’t Clark sees it as an opportunity to improve his business.
He joined forces with CH Robinson, a 3PL service provider; FoodLogiQ, a traceability software provider; Intermec, provider of compliance labeling and tagging systems; and Associated Grocers, a food retailer association, to test available tracing technologies. His goal was to see if his company could do a better job on trace-back and trace-forward to improve their record keeping documentation. It required that LoBue develop G10 global identification number coding for the majority of its products. The company input those codes into an Intermec Smart printer system. The system downloaded the codes to printers then developed laminated sheets of bar codes so an operator can look at a product being produced, scan a code, and prepare and produce a case code with the G10 ID on it and apply that label to a container.
Clark was a bit concerned how his workers would take to the technology.
“We work with a labor force that doesn’t have a high education and English is a second language in many cases, so we needed a system that would fit our industry,” he says. “But this simple plug and play system gives us control at the container level, so we have containers that are then palletized and we create a hybrid pallet tag with bar codes that tie them back to the containers on that pallet.”
The pallet tag IDs are scanned and recorded as shipped out of inventory, and those cases tied to that hybrid pallet tag are then shipped to the receiver’s warehouse. On that G10 code there’s also a voice pick code the receiver uses in their warehousing that identifies the product. That case is then picked from their warehouse to be shipped to the retailer. That retailer has the code on that container, and if there’s a recall that G10 code will tie the product back to its origins at the lot level.
Cost vs. Investment
LoBue did mock recalls before and after implementing this system. With the previous manual tagging system it took up to two hours to trace a shipment, whereas with this technology the information was available instantly.
This isn’t to say that technology is easy to justify in the face of mandates. Producers realize they’d have a hard time adding the cost of this technology to the price of their products.
“In most cases the retail trade says you’ll do this if you want to do business with us,” Clark says. “That cuts into our margins so we had to find some other way to justify the benefits of the system.”
He found that justification in the system’s efficiency. It gave LoBue a higher level of inventory control, enabling them to be more efficient in staging and shipping product. The company runs two facilities and with its traditional method of inventory checks they’d send two people on an evening shift to do a physical inventory of packed product in both houses and do the same in the morning as a redundant double check. That labor alone cost LoBue $240 a day.
Now it does cycle counts three days a week that each take about an hour. This alone saves them $200 a day just on the manual inventory.
That’s not to say there aren’t costs. In addition to the initial purchase of the system, ongoing costs include consumption of labeling materials. That adds about 3 cents to the cost of each container, which LoBue must absorb.
“We’re packing 3 million cartons, so it adds up every year,” Clark admits. “But we have to consider that as necessary for us to do business with certain retailers and to deal with what we expect to be a mandate.”
If traceability does become a mandate, it may give larger organizations like LoBue a competitive advantage over smaller growers that can’t afford the investment—possibly driving some out of business. On the positive side, it means better control over information in case of contamination somewhere in the supply chain.
So the next time you read about the economics of the food chain in a pending recession and how it will affect families’ spending, remember that growers like LoBue are families too and that their spending isn’t as discretionary. In fact they have the extra challenge of making their spending pay them back.