A Commercial Approach to Managing the Supply Chain - IFT.org

A Commercial Approach to Managing the Supply Chain - IFT.org

[Session: Transportation and the Supply Chain] A Commercial Approach to Managing the Supply Chain MR. FRANK SIMS CARGILL, INC. T hanks to the Insti...

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[Session: Transportation and the Supply Chain]

A Commercial Approach to Managing the Supply Chain MR. FRANK SIMS CARGILL, INC.

T

hanks to the Institute of Food Technologists for this opportunity to spend some time with you this morning to talk a little bit about transportation of the supply chain and how we view it at Cargill or what I describe as a commercial approach to the supply chain. Before I get started let me briefly give you some background information about myself and about Cargill. I’m a Corporate Vice-President as Alan just shared with you at Cargill where I have particular responsibilities in the area of transportation, supply chain management and some of the risk management and financial solutions businesses units that are in the Cargill portfolio. For those of you who aren’t familiar with Cargill we are an international provider of food, agriculture and risk management products and services. The customers we serve are in many different industries, including crop, livestock, food, health, pharmaceutical, industrial, and financial businesses. In the USA or North America, we produce a wide variety of grain and oil seed based food and feed ingredients. Specific to the transportation part of the supply chain, we are heavily involved in what we describe as bulk transportation of whole grains and oil seeds; bulk to export points and domestic use facilities. We also transport dry and liquid processed food ingredients and finished products such as flour, starches, sweeteners, oil and sauces, salt and chocolate. Our portfolio also includes refrigerated products like raw and further processed meats and processed eggs. These products are transported to other food manufacturing facilities as well as to retail and food service distribution centers. Cargill is a very large user of many modes of transportation including truck, rail, barge and ocean going vessels. We use these for hauling both bulk and packaged products. For example, we manage a rail car fleet of 20,000 rail cars including tank cars, hoppers and box cars and we spend over 700 million dollars a year on truck freight alone. Effective transportation is critical to the success of Cargill’s business. With that information as background, I would like to use my time to emphasize 2 main ideas as part of this discussion about food protection and defense of the food chain and its transportation links. First, we need to focus on assessing and improving processes in order to identify opportunities to improve the supply chain security. New technology information requirements and other items can help enable improvements but we should let process assessment drive changes. Second, we must take a commercial approach as we contemplate changes. By considering improvement in food chain security in the context of other business drivers, not in isolation by themselves we

will produce the best results that are a win-win for both the safety of the public as well as the actors in the supply chain. On the first point I think our focus on process is the best way to achieve improvement in the security of our food system. While I am sure many of the people in this room would recognize that it a pretty basic statement. From time-to-time in my job I am approached by people who want Cargill to invest in some kind of new technology or new system or participate in some sort of consortium in order to reduce some risk or deal with some issue in our transportation or other supply chain operations. However often the proposals fail to appreciate that merely bolting something new on top of an exiting process may not really deliver the intended benefits or represent significant enough improvements to justify the cost and effort of changing the existing system. For example, today the explosion of new technologies, information technologies, testing and detecting technology can provide us with a wealth of new data that improves the monitoring of our supply chain. Yet merely creating a massive new fire hose data about food and feed movements to the supply chain does not by itself make the chain anymore secure. Instead we first need to look at the process that is being measured or monitored and find the improvements that can be made in government’s policies for the way that people are doing things. Now I want to be clear here that I am not implying that new technologies are not important; actually, it’s to the contrary. New technology can be invaluable in making processes better. It can reduce errors, improve accuracy and reliability of information and make our supply chain more responsive. But it must be applied in the context of an overall process improvement to produce meaningful results. As a case study of sort, let me talk for a few moments about traceability of grain and grain products and some of the challenges involved. Though I am sure that many of you are intimately familiar with the food ingredient supply chain in the US I think it will be worthwhile to take a moment to give you an illustration of the scale of some of the activities involved as context for this whole discussion. Speaking in very approximate terms, for corn a farmer might produce between 100 to 200 bushels per acre, an average for wheat or soy beans is more like 40 to 50 bushels to an acre. So if a farmer grows 100,000 acres of corn he will produce perhaps 150,000 bushels of corn. Although a lot of this grain will get stored temporarily on the farm, sooner or later it will get hauled by truck to an elevator or processing facility such a feed mill or flour mill. A typical truck might carry about 100,000 bushels of grain; so for just one farm growing 1,000 acres,

Proceedings of the Institute of Food Technologists’ First Annual Food Protection and Defense Conference

A commercial approach . . . there will be 150 truckloads to take his corn to the market. The elevator in turn will combine the grain in large bins like the ones in the picture, often with some sort of limited segregation based upon quality traits and then loaded out into trucks or railcars or barges that in turn will carry the grain onto another elevator or a processing facility. In many cases there is a semi-continuous glow of grain through the bins. It is very common for new deliveries to be added to a bin at about the same time that deliveries are being loaded out into bulk barges, for instances. In the case of an export supply chain the grain that has been barged, railed or trucked to the terminal will then get further recombined and commingled and loaded into an ocean going vessel. A barge can hold over 50,000 bushels of corn, an export vessel can carry anywhere from 1 to 2 million bushels in bulk. The point of all of this is to show you that one ocean going vessel will contain the grain equivalent to well over 100,000 actual truck loads of grain. If you wanted to know the lists of all the possible sources of grain that went into the boat, back to the farms themselves, because of all the commingling in a traditional commodity supply chain in which grain often may be handled four or five different times, the list can grow to 10s of thousands of individual truckloads that might have contributed some grain to the vessel. The story is similar for processing plants especially larger ones. In large food processing facilities there are a very high number of transactions in terms of truck and railcar unloads of whole grains and truck and railcar shipments of finished flour, feed ingredients or other products. The scale can vary widely depending upon the product line but to give you an idea of scale in just our corn wet milling business in the US which produces sweeteners and starches and feed ingredients, we unload about 1,000 truckloads of corn everyday and that’s just on the inbound. That’s roughly the equivalent of about 350,000 truckloads or more per year. I won’t begin to attempt to enumerate the further transformation and transportation that takes place when our customers turn our products into consumer packaged goods, for instance, which are in turn distributed and redistributed on through wholesale and retail steps in the chain. So now back to traceability of all this stuff. It would be possible to apply information and other technology to greatly increase the amount of data we have available for all these movements through the chain. For example, for certain cargo specialty grain programs we can use specially designed software to provide online traceability reports so that our customers can log on to see the traceability of a shipment they received back to whatever level is necessary to meet their needs, whether inbound trains, groups of truckloads in or out of a mill or all the way back to the field in some cases. The reason the trace reports for these programs are meaningful is that they have made changes to the process that delivers the product to that the customers are getting something different than the traditional commodity process which would produce the traceability software – the traceability software merely documents the system and makes it more transparent but special process could be and sometimes is documented manually and still produce more specific results than a traditional commodity process that has been highly digitized. We could produce a traceability report on a commodity export vessel that identified the tens of thousands of possible trucks that could have been in a source. That doesn’t do much to reduce the scope of a recall if we had to have one. Simple and low tech new process protocols would have a far greater impact than applying real high tech testing and information technologists to the same old process. When we think about improving the security of the food system a better approach is to institute policies that make the processes safer and more reliable rather than trying to measure the safety of each of the systems outputs. We can’t measure security into the system. What I am describing is similar to the hazard analysis of critical control points

called HACCP, an approach that is used as a foundation of most food safety programs. As we look at all the many transportation handoffs that take place from farm to fork, we can try to document the movement of each individual transportation unit better or have greater transparency of data about the process that loaded and unloaded them. Such changes might enable us to reduce the scope of a contamination event once we have discovered that it occurred. What we really want to do is reduce the risk of that event occurring in the first place. That requires not just measuring the system in action but rather changing the processes involved. Specific to transportation processes obviously Cargill or anyone else can make process changes and take your products or the data about them from their end to possession but then a contamination event or other kinds of disruption can occur in route. In many cases, we are relying upon others to provide transportation services to us. I still think the lesson is the same; look at the process involved in the transition whether at loading, unloading or in transit and then consider the whole tool kit of options that might be available. We can see the critical control points in which there is a risk of a disruption of some kind when we do that. We can then decide what risk mitigation steps to employ that are commensurate. For any given truckload or railcar we may want to record new information or require additional certifications from third parties or testing and analysis or even just incremental change to the status quo standard operating procedures. Whatever is the most efficient way to achieve the amount of mitigation that would determine is appropriate for a given risk, that’s what we normally employ. This leads me to my second major point, mainly that we need to take a commercial approach when we think about changes that improve the protection and security of the food system. For sure it is simply the right thing to do to take measures that reduce the public’s risk of suffering a terrorism event in the food supply. However, the same changes will be both more effective and meaningful for the players in the food supply chain if they take into consideration other key drivers that can also benefit this. By considering improvements and security in the context of other business drivers, not in isolation of themselves, we will produce the best result that are a win-win for both the safety of the public as well as the actors involved in the supply chain. The grain system that I just walked through with the pictures is one that has been focused on maximizing efficiency. The U.S. food system has been driven relentlessly by competition and innovation to become ultra efficient, which while not being incompatible with improved security, it is generally not been done with security in mind the way we think of it in today’s world. Any process changes that we make that reduce the system’s efficiency and the pursuit of improved security, while perhaps being the right thing to do will generate costs that will be distributed somehow across all the players in the chain including the consumer at the end. It may be a small price to pay to improve the security of the chain even by itself but we shouldn’t forget that costs also may be created. So as I mentioned before, we could require massive amount of data to be reported about all the movements of the transportation units in the chain into a gigantic data base somewhere solely to improve our ability to respond to the event of a terrorism event. However at the same time, if we take a commercial approach we can see that some of the same changes that impact security also impact other important business issues. For instance, some of the disruptions that would take place if a terrorism event occurred at not unique to international terrorism. A simple, honest mistake by a well meaning farmer or an employee at a plant as well as an intentional ill meaning action by some disgruntled or criminal can produce what the FDA terms a significant adverse health consequence. Likewise a mechanical problem or even a national disaster can cause costly supply chain disruptions and some of the risk mitigation measures we might consider for a given process wheth-

Proceedings of the Institute of Food Technologists’ First Annual Food Protection and Defense Conference

A commercial approach . . . er a modified process step, new information reporting or whatever, might or might not also produce results that have the benefits in addition to improve security. Perhaps we will be able to use the additional data for valuable benchmarking or to optimize some aspect of our supply chain system. The new food security risk introduced by terrorism for instance, is in some ways just one new variable to factor into what was already a complicated equation though obviously with some distinctly imported responsibilities to serve public safety. These are the kind of issues that businesses have always had to deal with in their supply chain management in terms of making sure that our supply chain appropriately balances the risk of some kind of disruption to the chain with our ability to serve our customers profitably and efficiently. To the extent that changes reduce efficiency without creating any additional and offsetting benefits, the market will have to price those changes across the chain including on to the end consumer. Therefore, perhaps only incremental changes will produce meaningful improvements to public safety in an appropriate price that actors in the chain are enabled and they are willing to bear especially if diminishing returns set in on our ability to mitigate a given risk. If the system overall has a new risk profile that we must mitigate then the costs of mitigation can be priced into the system appropriately. We won’t be able to eliminate entirely the risk of a food security incident even if we were to impose extreme new measures on the supply chain. However, there may be modifications to processes that can and do produce significant improvements in public safety with only modest investments on the part of the supply chain. Let me give you another example from the gain business. Some customers around the world do not want to buy products that either contain or derive from genetically modified crops commonly known as GMOs. Because of the way the supply chain works today in a variety of production factors with the lack of dedicated facilities and transportation units the likelihood that a trace yet detectible amount of GMO corn being present in any load of corn is very high. Research has shown that it is relatively inexpensive to develop processes that will consistently deliver 95% non-GMO corn with the cost rising only gradually towards 98%. However the cost to guarantee higher purity levels rise expediently after that. Cargill simply refuses to sell 100% GMO free corn. The risk of noncompliance is plain and simply too great. Some customers are willing to pay any premium whatsoever for non-GMO while some of us are willing to pay more for the higher cost system. Clearly, food security issues are not perfectly analogous to the GMO example as the consequences of a failure are dramatically different. No one is going to get sick or die from some GMO presence even if they didn’t want it, yet there is a similarity in that speaking about transportation, it could be extremely costly and damaging to the efficiency to attempt to do everything we can think of – new procedures, new technologies, whatever, to ensure the safety of food in transit.

At the same time, there may be some process changes that do produce meaningful improvements and safety at a cost that is variable by the supply chain. I want to be very, clear with my remarks this morning in that you understand that I do not mean to suggest that profitability should come before safety, far from that. I’m merely suggesting that taking a more holistic commercial approach is the way in which we should consider food security improvements. I have mentioned before that food chain protection should not be treated in isolation from all the other supply chain issues. At Cargill, we have a variety of corporate requirements related to facility and transportation unit security that must be met by all or our business units and facilities worldwide. For instance, our corporate food safety requirements have certain requirements around product security including in transport, in our environment, health and safety standards and requirements about site security including dealing with our own and third party transportation units while on our sites. Some of the requirements have existed even before recent antibioterrorism regulations with an explicit objective of reducing the risk of incidents such as vandalism, sabotage and terrorism. There are also requirements under good hygiene principals that govern measures to protect food and transport. However, due to the diverse nature of our business and their products, our requirements are not overly prescriptive in the detail of how they be met, instead focusing on a standard that applies to all of our business units. The units themselves are then responsible for assessing their own situation and taking necessary action to meet the global corporate standards that Cargill has in place. Some of our business units have transportation systems with more critical control points or possible risks of contamination or the disruptions and consequently they will have more detailed procedures around verifying, certifying or monitoring their transportation units. However I stress that a lack of prescriptiveness does not mean lack of accountability or attention. Again, the requirements must be met by all of our business units regardless of how relatively risky their supply chains may be or how much it costs them to reduce their efficiency in order to comply. Improving food security systems fit into this context. In some ways there are incremental changes to what businesses have already been doing which are appropriate expenditures to mitigate the potential downside should an event occur. When we think about the risk profile of our food’s transportation infrastructure, we should focus on processes first and then take a commercial approach to balance mitigation of risk with both the potential cost that may be created and the other business benefits that could be achieved at the same time. There will not be a one size fits all set of procedures or technologies appropriate for every change but at the same time every chain must be sure that improved security is one of the required elements in the assessment that drives processes.

Proceedings of the Institute of Food Technologists’ First Annual Food Protection and Defense Conference