Global pressures on the food and beverage industry will only increase in coming years. More strategic supplier relationships will ensure you are ready for the changes.
Amid rapidly transforming supply-and-demand pressures—from a growing middle class in developing markets to increasing weather volatility—the leading food and beverage companies are rethinking their supplier relationships. Are the current suppliers prepared to apply new technology, adequately control sources of supply, and respond quickly in today's dynamic, global marketplace? Do sourcing agreements favor short-term price advantages over long-term sourcing availability and security? Are supply partnerships adeptly managing increasing regulations on food safety, sustainability, and ingredient traceability? Are the right partnerships in place to deliver innovation to tomorrow's consumers?
Considering these difficult questions, the time is now to reconsider the future of your food products portfolio and assess the agricultural constraints that you might face in the coming years. Most will have to scale up or collaborate with suppliers to secure supply sources.

Supply Availability Trumps Price

As the path from farm to fork narrows, the world is moving to a global industrialized system of food production (see figure 1). In the next decade, a small set of companies will likely control the vast majority of the food supply. Key commodities supplied by a few large market players include: starch and vegetable fats and oils manufacturing, wet corn milling, soybean processing, sugar manufacturing, creamery, butter manufacturing, and dry pasta manufacturing. The world's seven billion consumers will have more than 70 percent of their choices provided by 300 to 500 companies. Farmers and producers are more likely to be corporations and consumers will likely be serviced by large global retail and restaurant chains. Future competition will not be between companies but rather supply systems. Forward-thinking operators, distributors, and manufacturers are already reevaluating their sources of supply.
The food value chain
The food system's industrialization is speeding up as new market demands emerge, and regulatory and resource constraints may limit the number of companies that have the internal resources to manage supply volatility and regulatory requirements. Access to approved suppliers will become more difficult; dedicated supply systems will be required to assure adequate supply and manage costs in a volatile environment. To win the competition between supply systems, successful companies will need to ensure their sources of supply and develop strategic partner­ships with suppliers that have the tools, resources, and agility to achieve a competitive edge (see sidebar: Supply-and-Demand Forces at Work).
For critical commodities, price-based relationships will evolve into more strategic relationships, in order to counter the disruptive changes affecting supply-demand dynamics. Over the next decade, it is very likely that supply availability will trump price as the crucial factor in supply decisions. Ensuring availability requires rethinking current criteria for supplier evaluation, identifying the right set of suppliers, and selecting suppliers that can offer a complementary set of capabilities to improve a company's overall position. These suppliers will also be integral to achieving value beyond cost—this value could simply be securing supply, or it could be other factors such as innovation or improving capital return.

Segmenting Suppliers into Specific Categories

What are your strategic suppliers? The ones that show high levels of both current performance and long-term potential (see figure 2). These suppliers provide high value in business-critical areas, often represent a majority of category volume, participate in the planning stages of category ideation, and allocate dedicated resources to their clients. Strategic suppliers share mutual objectives and often have had a long-term relationship with the client. And they excel at delivering what we call "supplier energy"—a high level of resources, skills, capacity, and goodwill that help their clients achieve their broader strategic objectives.
Supplier energy segmentation framework
Segmenting suppliers based on their level of strategic importance allows food manufacturers to capture current opportunities within supply networks, to get in line for future ones, and to strengthen the most valuable ones.
After identifying potential strategic suppliers, the next step is working to create a mutually beneficial partnership based on shared goals, ownership, and risk. Three types of distinct supplier interaction models offer the best chance for success:
  • Influence. Tap into supplier technology to develop and launch new products or services jointly. Exclusivity is typically not a requirement.
  • Integrate. Enter a multi-year relationship with the objective to shape the market. There is often an opportunity to change the rules of the industry across a sizeable portfolio. Exclusivity may be an option to allow for game-changing moves.
  • Invest. Jointly build competencies and commit resources on both sides to develop game-changing portfolios.
While the preferred partners would be highly motivated to become strategic suppliers, and thus ready to agree to reasonable terms of transparency, collaboration, governance, and risk, some buyers may need to make cost tradeoffs in order to secure supply resources from these preferred suppliers. Over time, these costs prove worth it, as strategic supply partnerships unlock competitive value, retain expected benefits, secure supply, and lower risk exposure.

Moving Supply Systems in the Right Direction

Building strategic supply relationships today can give companies a disproportionate advantage as global forces impact resource availability, commodity availability, and pricing and consumer tastes. Engaging in strategic partnerships brings benefits across the portfolio in areas of growth and innovation, sustainability, risk management, product quality and safety, and long-term costs (see figure 3).
Strategic supplier opportunities
The following examples show companies that are moving in the right direction.
Growth and innovation: Frito-Lay and Taco Bell. The 2012 deal between PepsiCo's Frito-Lay and Taco Bell to bring Doritos-flavored taco shells to Taco Bells led to the restaurant's most successful product launch in its 50-year history. A year later, Doritos unveiled two new chip flavors replicating the flavors of the Doritos Locos Taco, helping bring some of the restaurant's success into grocery aisles.
Sustainability: General Mills and AgroMantaro. General Mills' four-year, $1.1 million sustainability sourcing program with supplier AgroMantaro in Peru is designed to help smallholder artichoke farmers in that country increase their crop yields and improve profitability. General Mills will share its knowledge of supply chains and the agricultural economy with farmers, while AgroMantaro will provide technical assistance and engineering support. As Augusto Fernandini, general manager and partner at AgroMantaro, described it, the plan "created a rich business model that fosters world-class value throughout the entire supply chain—for the farmers, our company, our clients, and the end-consumers."1
Risk management: PepsiCo and Anglian Water. Potatoes require an abundant water supply to successfully produce. PepsiCo, seeking to ensure a solid, long-term supply of this critical ingredient for its potato chips, partnered with Anglian Water to identify the impacts of climate change on potato suppliers and to develop a strategy to tackle the potential risks. PepsiCo and Anglian Water have succeeded in reducing water use among farmers (through tactics such as drip-feed irrigation), identifying where they need to introduce new species of crops, and installing sensors to monitor and update suppliers on changing climate conditions.
Product quality and safety: Dole and Matanuska Africa. In January 2014, Dole Fresh Fruit Europe entered a long-term partnership with Matanuska Africa (a subsidiary of Rift Valley Corporation) whereby Dole assumed all sales operations and became the sole distributor of Matanuska's Mozambique banana production in the Middle East, Europe, and Africa. It also agreed to assist Matanuska logistically and supply technical support in its farming operations. The deal gave Dole a supply base close to its Middle East customers, while Matanuska obtained expertise to improve its product and increase production.
Long-term costs: Procter and Gamble and Amazon. E-commerce giant Amazon has begun co-locating in P&G warehouses, letting Amazon direct-ship orders for P&G products, eliminating the typical transportation and warehousing steps. For Amazon, co-locating reduces the space needed to store bulky items; for P&G it reduces logistics costs while allowing faster delivery for customers. Amazon is now inside at least seven P&G distribution centers worldwide, including in Japan and Germany, and if it's successful, expansion to other suppliers is likely.

Preparing for the Next Decade

In the next decade, increased consumer demand, changing consumer tastes, increased regulations, limited availability of arable land and water, and consolidation within the commodity industry will put pressure on sources of supply. The market's future leaders are those that are challenging their own thinking and pursuing solutions to take advantage of global opportunities while mitigating global risks. They are collaborating with key suppliers to drive innovation, establish sustainability strategies that reach across the entire supply chain, manage their supply risk, ensure product quality and safety, and create long-term cost advantages based on strong category management.
Rethinking supply requires all levels of food and beverage leadership to ask the hard questions, to make choices between suppliers based on future potential, and to influence, integrate, and invest where appropriate in sourcing initiatives with longer payoff horizons. Marketing strategies need to anticipate rapid changes both in consumer tastes and ingredient availability. The future is bright for companies that know their strategic suppliers and develop relationships that achieve innovation, share risk, and provide for ongoing product security, sustainability, and long-term advantage.
 
1 General Mills news release, "General Mills launches $1.1 million sustainable sourcing program in Peru," 5 September 2013
November 2014