Putting BPM to Work in the Food & Beverage Industry

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By Nikhil Daxini

The food and beverage industry is in the midst of a strategic shift. In addition to a focus on removing costs and improving back-end operations, the industry is trying to figure out the right formula for developing new products to meet rapidly shifting consumer trends. This article lays out the trends and competitive pressure facing the industry and explains how business process management (BPM) can be leveraged to:

• Gain productivity improvements in distribution centers.
• Achieve supply chain efficiencies.
• Optimize direct store delivery (DSD) processes.
• Optimize inventory management.
• Integrate regulatory compliance with operational excellence.
• Streamline new product development and introduction.

A Food and Beverage Industry Background

The food and beverage industry encompasses the full range of companies that produce, process, manufacture, sell and serve foods, beverages and dietary supplements. It's an economic powerhouse, accounting for about $1.3 trillion in gross output worldwide. It employs millions in the manufacturing, distribution, service and retail sectors. Accordingly, changes in the practices of food and beverage operations ripple throughout the industry and have an impact on the global economy. This industry is characterized by short lead times, low margins and high volume products. Companies now offer more products to meet the changing demands of consumers. As their business becomes more complex, the companies need business processes that are flexible enough to keep up with the rapid pace of change.

Product lines must be constantly adjusted to meet consumer demand. Business models now integrate roles from all points in the value chain. Integration, collaboration and access to timely, accurate information -- from the field to the store -- are all important challenges for today's food and beverage companies.

Key Industry Trends

Following are the key trends in the food and beverage industry:

• Profit margins often fall below 5%.
• Global sourcing and private-label items squeeze margins for existing products.
• There's a renewed focus on product development and innovation.
• "Good-for-you" and ethnic foods are hotter than ever. Consumers are continuing a gradual evolution towards a more balanced and healthy diet.
• Trade promotions spending increases and analytics solutions to measure effectiveness become important.
• Large retailers are driving food and beverage manufacturers to become more efficient and organized in inventory control, supply chain and pricing.
• Food traceability requirements have heated up across United States.
• Efforts focus on improving operations amid escalating energy, labor and material costs, to gain a sliver of competitive advantage.
• There's an increase in on-the-go and impulse purchasing of beverage. This segment is valued at $170 billion.
• Consumers have tightened budgets and bypassed premium foodstuffs for generic brands.
• Consumers tune out traditional advertising. Integrated marketing communication improves the shopping experience.

Industry Challenges and the BPM Solutions

Working with perishable products with razor-thin margins, the information that companies use must be accurate, timely and complete. Mix in stringent regulations, health-conscious consumers, ease of preparation, a multitude of ethnic-oriented products, and operating profitably in the food and beverage industry becomes highly complex. Manufacturers of food and beverage products are confronted with a myriad of competitive pressures that require rapid response.

BPM can address the challenges of the food and beverage industry in a number of ways.

Productivity in the Distribution Centers

Warehouses in the food industry are typically high product throughput, labor intensive and multi-temperature environments. Using real-time reporting and alerting mechanisms provided by BPM solutions, food and drink suppliers can optimize their distribution center processes by being proactive instead of reactive in addressing logistical issues and managing the flow of products and orders. For example, by monitoring lot and date tracking, suppliers can identify when perishable goods are nearing their expiration dates and can send an alert to notify marketing or sales to run a special on the product to incite orders and avoid inventory expiration and spoilage.

Substantial Cost Reduction in Outbound Logistics

Real-time visibility allows food and drink suppliers the ability to increase cross-docking opportunities where inbound shipments are sent directly to promptly satisfy customer demand. This kind of flexibility is a major productivity advantage, particularly in a large food distribution facility where customers are constantly making and changing demands and orders must be turned around quickly.

Supply Chain Efficiencies

In order to extend the benefits of real-time visibility, collaboration with suppliers and other supply chain partners such as consolidators and freight forwarders is essential. By establishing real-time methods of information exchange and synchronizing business processes, end-to-end supply chain communication and global visibility is possible. With BPM and trading partner management technology, food and drink suppliers can exchange data in real-time with both vendors and customers so that it can be executed on immediately. This ensures efficiency and productivity improvements throughout the supply chain, resulting in better in-stock positions, increased sales and enhanced customer service.

Direct Store Delivery

Direct Store Delivery (DSD) is becoming increasingly critical to maintaining high sales levels in the industry -- a trend that is expected to continue as consumer demand for "fresh" requires increased speed of product from manufacturer to retailer shelf. Given the vast amount of DSD delivery "traffic," retailers and their suppliers have much to gain by examining the DSD supply chain to extract greater levels of productivity that drive sales up, while holding costs down. And without question, this requires better understanding of the business processes across the supply chain.

Application of Lean and Six Sigma to the DSD business process can help:

• Streamline and align receiving environments, through backdoor and backroom observations and time-motion analysis studying deliveries, receiving methods and overall backroom operations.
• Define DSD service levels including one-stage (route), two-stage (merchandiser) and three-stage (pre-sell).
• Define DSD business controls/key performance indicators (KPIs).
• Remove non-value added activities that detract from retail execution efforts on the sales floor.

Global Process Standardization

Increasing customer sophistication and the constant demand for improved product quality are changing the rules for sustaining and growing profitability for food and beverage manufacturers. Sinking margins and eroding brand loyalty are exerting pressure on virtually every business function and process in the industry. Manufacturers are forced to consolidate their supply base and expand in the emerging markets. The result is an increasingly complex value chain.

To master value chain complexity, companies must achieve operational excellence that requires them to collaborate with their suppliers to increase product mix, innovate and launch new products faster, with higher quality and lower cost. To achieve this, the companies must standardize processes across the global value chain, incorporating the local variance. Companies can take their demonstrated best practices from mature markets to the emerging markets.

Business process architecture is a compelling baseline to realize the goals of business process standardization:

• Real time agility to react to changing business needs.
• Optimization of operational performance.
• Reuse to minimize investment.
• Ability to manage the inter-relationships among people, systems, information and business events at the boundaries between process and technology.
• Common language to enable clear top to bottom communication.
• Ability to outsource more fine-grained business processes.
• Simplify merger/acquisition integration.
• Continuous improvement opportunities.

The data derived from the business activity monitoring (BAM) solution provides information that can be used to gain visibility into the production process, analyze operations, identify root causes of production problems and implement changes to improve operations. There are multiple areas where food and beverage companies can improve operations employing process roundtrip engineering.

Inventory Management

A focus of many continuous improvement processes can be the measurement, management, and reduction of raw material, work in progress and finished goods inventory. The reduction of these inventories reduces the amount of capital invested in them and frees it for other uses.

In-process inventory is proportional to process throughput and process cycle time. Business process analysis using quantitative and qualitative methods (such as Lean and Six Sigma) can help companies reduce end-to-end cycle time by:

• Reducing critical activity times.
• Eliminating non-value added activities.
• Redesigning the process to replace sequential processing with parallel processing.
• Moving work from critical paths to non-critical paths.

Inventories within the manufacturing facility can be reduced by implementing BAM systems that monitor and record actual usages in real time. Because of a lack of accurate usage information, companies maintain costly safety stock to ensure they have enough raw materials to meet the demands of their customers. The safety stock is manifested not only in raw materials, but is also maintained in the finished goods inventories. BAM tools deployed correctly can gather data on actual material usages in each step of the manufacturing process. This enables the manufacturer to know actual inventory levels and to order just the amount of raw material that it needs.

Integrating Procurement Using Metastorm's BPM solution, Martin Martin, a retail food chain based in Spain, has developed an integrated procurement process accessing multiple applications across its purchasing process. It guides the user in all the necessary steps that must be followed to achieve a correct output of the purchase order. Customer benefits include: Reduction of purchase cycle time from 40 to 10 days. 15% of the resources previously used could be allocated to better serve other customers needs. 18% stock reduction. 8% increase in purchase margin

Product Quality and Consistency

The quality of the product being produced is a major concern for food manufacturers. The concern is not solely focused on meeting quality standards, but making sure that the finished product's taste, texture, shape, smell and consistency is the same from batch to batch and at all manufacturing facilities making the product. Brand equity is maintained by ensuring the product is the same, no matter where it's purchased.

To achieve a high level of quality and consistency, manufacturers must take into account the dynamics of the manufacturing process. And variables abound. For example, is there an impact on the final quality based on which mixer was used? Which oven the product was baked in? The relative humidity? The quality of plant's water supply? Can the food manufacturer use two different suppliers for an ingredient or does that affect the quality of the product?

Answers to these questions are not always easy to discern. They require a systematic approach to data collection and the ability to analyze the data to understand relationships and causes of product quality problems. Manufacturers are finding that properly implemented BPM solutions collect this critical production data. These applications provide the user with the ability to analyze the data and understand relationships, to determine the cause of quality problems using quantitative and qualitative methods.

Integrating Regulatory Compliance with Operational Excellence

Food and beverage companies are increasingly paying attention to how regulatory compliance and operational excellence can be aligned using industry best practices. What is less apparent is that operational excellence and quality management are two sides of the same coin -- they go hand-in-hand.

Proactive quality processes reduce non-conformance, scrap and inventories, while also reducing direct and indirect labor associated with manual processes. Fewer quality leaks mean fewer customer complaints and recalls along with reduced reverse logistics cost. The result is improved customer satisfaction and lower cost structure.

BPM provides manufacturers with capabilities to configure processes that span across multiple functional areas and traditional application boundaries. For example, an integrated business process can define and enforce accurate component/raw material picking from warehouse bin locations as the first step for executing a work order. It can ensure that components have undergone appropriate quality inspections by certified inspectors. Such integrated processes are difficult if not impossible to execute using disparate systems. The BPM tools enable modular services across multiple areas to be invoked by an integrated business processes. Since processes are configured by process engineers with easy drag-and-drop tools, food and beverage manufactures can more quickly respond to changes in customer needs and desires, suppliers and products.

New Product Development and Introduction

New product development and introduction (NPDI) is probably the most important process for many food and beverage companies, but also one of the least understood (and perhaps worst executed). NPDI is responsible for the revenues and margins that a company can achieve and its ultimate value. It is the least well understood process because few companies assign a single individual to be responsible for the whole process. Instead, it is usually driven through a series of functional "silos," causing delays to build up and, often, the original market requirements to get lost.

In most markets -- and especially those relating to consumer products -- the number of new product introductions per annum has increased dramatically. For example, a study into the consumer packaged goods market showed that new product introductions had increased 10-fold over an 18-year period.

Number of Product Launches	1980	1998
Cereals	34	192
Ice cream, frozen yogurt	57	556
Spices, extracts, seasonings	61	403
Deoderizers, air refresheners	53	372
Paper towels, napkins	11	126
Milk, yogurt drinks	26	255
Coffee	11	384
Beer, ale	25	187
Source: University of Nottingham

Yet, for all its importance, the NPDI process is in trouble. For example, according to AMR Research:

• Food retailers spend $957,000 per store on new products that fail.
• 95% of new consumer products (1996-2001) lost money or just broke even.

For a successful NPDI, three critical capabilities are required:

• A better portfolio strategy
• Better product management
• Better functional execution

Although many of the benefits of improved NPDI will result from improved portfolio strategy and the implementation of improved methods for product management, the ability to execute effectively and avoid costly errors is the final essential step.

Today, most business functions rely on one or more enterprise systems to manage business processes. For example, the engineering function will use a PLM system to manage product information and processes; the manufacturing function will use an ERP system to manage processes, such as scheduling and purchasing. In order for different functions to be able to work together through the NPDI processes, these systems need to be integrated.

The new way of doing business -- driven by visionary CXOs -- requires a fundamental shift, making business process owners accountable for cross-functional and inter-enterprise business processes that focus on the ultimate "user" -- the customer. Doing this is hard work, not only from a change management perspective but also from a systems approach, because most IT applications follow a functional focus. That's where BPM software comes in -- providing a layer of software that orchestrates business processes by integrating different (and often stovepiped) applications, databases and human interactions that deliver customer value.

Integration-centric BPM systems focus on integration between the applications and systems that support cross-functional processes both within the enterprise and among trading partners. Also these tools can provide an NPDI dashboard, presenting management with all of the critical information needed to provide proper strategic control. Management no longer has to rely on painstakingly-crafted presentations or spreadsheets (which may be biased towards a certain point of view) but, instead, can see the world as it is. With an NPDI dashboard, management has the essential information required to provide good management of the NPDI process.

The author thanks Vijayalakshmi P.S., Practice Head for the BPM Consulting Group, Wipro Technologies, for giving me the encouragement and support in writing this article.

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