Magazine article Financial Management (UK)

Thinking: Risk Management and Performance Measurement in the Food Chain Business

Magazine article Financial Management (UK)

Thinking: Risk Management and Performance Measurement in the Food Chain Business

Article excerpt

Growing food is a precarious business, yet somehow there is a reasonably constant supply of fresh produce. Nowadays quality is high and prices are relatively low. Intermediary businesses in the food supply chain ensure that this happens, but it's a high-risk operation with low net margins: typically about 2 per cent. How do they survive, and what lessons can they offer to other supply-chain businesses?

Four intermediaries we spoke to in the UK and Spain said that retailers are looking for the quality that comes from long-term relationships, but prices that come from open trading. These businesses therefore need to develop long-term relationships with growers that will survive pressures on price. Long-term relationships with customers are also sought because, as one director told us, retailers then come to understand crop timings better and bring some stability: "They are still hard on pricing, but at least you can plan."

The cost carrot

The main risk identified by all the businesses we spoke to was commercial: the risk of losing the transaction, in some cases for no reason other than the offer of a cheaper price elsewhere. It's a case of "our customers and retailers being promiscuous with suppliers by chasing the cheapest grower all the time, having no longevity for their source". These "super-middlemen" manage the obvious risks in growing food--including adverse weather, disease and transport problems--taking measures such as sourcing vegetables from another country at short notice to cover shortages. Two of the big grower-packers we spoke to were so good at managing the risks that they achieved "on time, in full" delivery in 99 per cent of cases.

But there are other threats. There is a high risk to reputations, especially when there is a food safety scare. But the intermediary can sometimes protect the supplier on this front. …

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