Action Plan. Securing crop supply through whole crop purchasing

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1 Waste Action Plan Author: Alan Spray Securing crop supply through whole crop purchasing This Action Plan is intended to be used by a Director or Senior individual within a Procurement function in a Retail organisation. Key Point: Overview Food security is becoming increasingly stressed as global demand and climate change present new challenges to producers and retailers. Supply security, and supply chain resilience are expected to fall in the short to medium term, while price volatility will continue to increase. These challenges mean that it is more important than ever to ensure that waste is minimised throughout the supply chain. With approximately 3 million tonnes of food waste generated each year in food manufacturing, distribution and retail operations (WRAP, 2010), there is significant potential for waste reduction. Whole Crop Purchasing (WCP) is a practice that involves manufacturers or retailers buying an entire crop from producers, and then incorporating below-sellable quality food (i.e. European quality class <III) to other parts of their supply chain that have less stringent aesthetic requirements. For example, an entire onion crop may be purchased and then 80% deemed suitable for direct produce sales while the remaining 20% is graded as a suitable food grade product. This 20% can be used in other products such as pies, pizzas, soups and sauces. Buying the entire crop can provide benefits from increased cost and supply control. At the same time this approach can provide a secure market for producers that may reduce overproduction, storage and other supply chain waste. Opportunities Cost and resource security through partnerships Methods currently employed in crop distribution depend heavily on producers deciding where, and how, to sell the various grades of crops grown. This Action Plan presents the opportunities to secure supply, costs, and relationships, through the procurement of producers entire crops. However, as all crops have different waste rates in the supply chain, targeting the specific crops that have the greatest potential within each supply chain presents the biggest opportunity for savings. Table 1: Percentage loss and waste for eleven different fruits and vegetables through the supply chain (WRAP, 2011a) Product Field loss (Central Grading loss Storage loss Packing loss Retail waste range) Onion 3-5% 9-20% 3-10% 2-3% 0.5-1% Apple 5-25% 5-25% 3-4% 3-8% 2-3% Potato 1-2% 3-13% 3-5% 20-25% 1.5-3% Tomato 5% 7% No data 3-5% 2.5-3% Broccoli 10% 3% 0.00% 0% 1.5-3% Strawberry 2-3% 1% 0.50% 2-3% 2-4% Lettuce 5-10% No data 0.5-2% 1% 2% Raspberry 2% No data No data 2-3% 2-3%

2 Author: Alan Spray From the wastage data in Table 1, onions, apples and potatoes are the three crops that have the most significant potential for waste reduction through a WCP programme. Improvements of as much as 20% more crop use have been demonstrated through the use of WCP (Morrisons, 2011). These savings can be achieved by reducing crop waiting times from grading, storage and packaging systems. Significant loss can also be avoided where crops currently perish, or are unusable following whole batch rejection at the retailer and consequently returned to suppliers. There are a number of ways WCP can be implemented within the supply chain. These range from vertically integrated ownership models (e.g. Morrisons, The Co-Operative), to using the scale of the purchasing organisation to buy in volume and then sell produce to other suppliers (e.g. own brand ready meals). Implementation Process Aim: To secure local and global supply of produce through a whole crop purchasing system. Step 1 Step 2 Step 3 Step 4 Step 5 Retailers/Major Purchasers Producer Identify key commodities Develop resource maps Engage suppliers in WCP discussions Engage in partnership discussions with major customers Identify suitable subcontracting sorting/pack house partners Develop a logistics plan with partners Trial with select producers Trial relationship with one crop Step 1 Identifying key commodities Review the sales portfolio to identify key crops and ingredients used throughout the business. WRAP identified onions, apples and potatoes as being significant opportunities for waste reduction; however each supply chain should be analysed for high volume or value ingredients that may be more relevant. It may be beneficial to incorporate the step 2 analysis at, or previous to, this stage to identify and keep in mind the most suitable suppliers for a pilot. One of the key variables that should be assessed is the supply chain location in which the waste is occurring. Producer waste that takes place on farm (i.e. it does not go to grading) can potentially be high, but this waste is often not reported and reincorporated on farm into new processes. Engagement with producers to begin recording and incorporating in-field waste in reporting is important to enable informed decisions throughout the supply chain. Later in the supply chain, such as during storage, waste can materialise in a number of locations and can ultimately become another input (e.g. conversion to animal feed) or treated as waste (e.g. anaerobic digestion, incineration). Wherever possible, agricultural products should be used at their highest value rather than being down-cycled into lower grade products. Utilising WCP will reduce the amount of products which result in lower value alternatives. This will increase financial returns for producers, and as supply is increased, reduce costs for retailers. Step 2 Developing a resource map A resource map (also termed as value stream maps, or lean/waste prevention audits ) should be developed through work with the procurement team to understand where fresh produce and grocery products are coming from. In particular, the crops, suppliers and quantities of ingredients that are procured annually should be recorded for further analysis.

3 Author: Alan Spray The greatest benefits from WCP are likely to come from using localised supply chains that do not require much transport before being stored or packaged. All things being equal, greater transport distances increase the amount of time a product spends inside a supply chain. Mapping the supply chain highlights production hotspots, and can indicate where effective partnerships or investment in close-to-farm grading should take place. Step 3 Engage suppliers in WCP discussions Initiate a workshop and commercial discussions with key suppliers on the potential of WCP. This process should highlight the key opportunities and challenges in implementing this type of programme within the supply chain. Some of these may include identifying potential cost sharing arrangements for sub-contracting or investing in a suitable sorting facility (see Step 4). Step 4 Identify suitable sorting/pack house partners Retailers that do not have vertically integrated supply chains may be less familiar with the processes, requirements and technologies needed to implement a grading and storage system. Work with suppliers to identify suitable grading and storage partners close to the production (i.e. farming) centres. This process does not necessarily need to include direct investment from the retailer; however this possibility may need to be considered if closer supply chains are desired. Step 5 Trial WCP with select partners Initiate a small scale trial with a few suppliers in a region to test the process. Some of the key findings from this trial will feed into the scaling up of the programme and its use in new territories. Some of the key factors to assess include: Local market potential for lower grade outputs Grading technology and operation requirements

4 Benefits Author: Alan Spray Savings Supply Chain Actor Environment Financial Producer Manufacturer Retailer Consumer Reduced product waste Protection from cost Single customer Reduced sourcing time Cost control. Potentially lower costs throughout the production and fluctuations. relationship. spent on materials. Reduced supply chain (expected to have distribution process. Reduced unit costs through Full crop sales certainty. waste. minimal impact). Materials and Waste Less volume purchases. Reduced pressure to Improved relationships Greater retailer control input material waste. Additional revenue overproduce before the with producers. of sales price and Greenhouse Gases Less generation stream through sorting stage. Improved/extended promotions. material, transport and secondary sales. shelf lives of products. Improved/extended energy waste. product lives. Consistent availability of products. Barriers Barrier Description Mitigation Producer Manufacturer Retailer Uncertainty over precise supply chain saving potential Economic drivers may result in producers generating higher efficiency in the current system of distribution in comparison to a large retailer. Negotiate with retailer on fair market rate n/a Identify partners to manage grading and sorting Retailer involvement in supply chain production Need to integrate supply chains Intra-retailer collaboration and information sharing Crop-specific opportunities The increased risk of owning, handling, sorting and redistributing produce would be likely to need significant initial changes in some large retailers business structures. Although WCP has been trialled and implemented by retailers, such as Morrisons and The Co-operative, they have vertically integrated supply chains. May be seen as competitive, commercially-sensitive approaches that prevents learning of lessons and common requests being made to suppliers. Although there is evidence that there can be potentially large savings in waste for a few crops it may be that this is not the case for others. n/a n/a Short term investment in new operational programmes; or investment in new partnerships Formation of cooperatives or other producer organisations Closer relationship with producers to understand production forecasts Vertically integrate some aspects of the supply chain n/a n/a Establish an information sharing network with peers in a precompetitive environment Communicate with customers regarding waste rates and their drivers Closer relationship with producers to understand challenges and production forecasts Identify which crops would benefit from a WCP programme

5 Case Study The Co-operative Food Author: Alan Spray The Co-operative Food has been working directly with farmers and producers for a number of years through their integrated supply chain. Description The Co-operative deploys WCP through two parallel streams: 1) The establishment of producer organisations to bring farmers together to produce the same crop. This spreads the risk of crop failure by varying planting times, soil types and locations whilst still benefiting from centralised harvesting, packing and marking of the crops for lower grade produce. 2) Creating a WCP programme for demand which exceeds the production outputs of the producer organisations. For example, as only 50% of their potato demand can be procured through their farming network, this additional capacity ensures that customer demand is still satisfied. This incorporation of WCP into their existing producer organisation programme scales particularly well since The Co-operative already has the necessary pack house and sorting systems in place to make decisions on crop streams quickly. Because there is variability in different product lifespans, The Co-operative treats stored (e.g. root vegetables, apples) separately from perishables (e.g. lettuce, soft fruits). By separating these two types of produce, perishable crops can be fast tracked through the grading and sorting process to speed up decision making when needed. On the other hand, stored produce has greater secondary market potential due to the longer life of the product, and can therefore be redistributed more easily over a longer period of time. This means that sorting facilities and pack houses can adjust for the peak seasons of perishable items when the window for decision making is small. Business Case Financial Environmental Consumer Crop security in the supply chain reduces price shocks New revenue stream for the business Produce goes through grading faster and can therefore have a longer shelf life Reduced distribution waste as market decisions are made faster Consistent availability of products Greater retailer control of sales price and promotions Feasibility: Some retailers have less experience of deeply engaging with supply chain processes Lack of existing markets and relationships may prove to be a challenge until suitable experience is gained. This is particularly relevant when selecting appropriate sorting/packing partners Better, and accurate, ordering systems should be implemented to maximise reduction potential

6 Author: Alan Spray Resources 1. European Commission, Parliament Calls for Urgent Measures to Ban Food Waste in the E.U. European Parliament News. 2. Lee, P., Willis, P., Waste arisings in the supply of food and drink to households in the UK. 3. Official Journal of the European Union, Commission Implementing Regulation (EU) No 543/2011 of 7 June 2011 laying down detailed rules for the application of Council Regulation (EC) No 1234/2007 in respect of the fruit and vegetables and processed fruit and vegetables sectors, 543/2011/EU. 4. Smithers, R., Christmas shoppers told to expect potato and sprouts shortages [WWW Document]. URL 5. The Government Office for Science, Global Food and Farming Futures. 6. Tristram, S., Food redistribution is a win-win solution for food waste [WWW Document]. URL 7. WRAP, 2011a. Fruit and vegetable resource maps. 8. WRAP, 2011b. New estimates for household food and drink waste in the UK, Final report (version 1.1). 9. Morrisons. Today, Taking Good Care for Tomorrow. Corporate Responsibility Review 2010/11, You may also be interested in these related Action Plans/Topic Guide(s): How to identify high sustainability, reputation, supply chain risk and resilience How to use digestate as a fertiliser substitute Harmonising smart planning (manufacturers) and demand forecasting (retailers)

7 Author: Alan Spray Appendix: How to calculate the financial business case Establishing the financial business case for changing from an existing conventional produce purchasing system to a WCP system requires the consideration of a number of inputs to understand the medium to long term cost implications of the decision. These considerations relate to: 1) Recurring annual cost of putting product on shelf 2) Supply failure cost to the business 3) Intervention cost for the research, development and implementation of a new system. Recurring annual cost Before assessing the cost of changing to a new purchasing method, it is necessary to calculate the recurring costs of the existing method. This process is important for identifying what the current costs are to the business, and for projecting potential savings from switching to a more efficient method. Cost Area Energy use Cost of product Salaries and manage ment Description Cost of electricity (or other energy) required to run heating, lighting and other energy consuming activities at distribution centres. Cost of purchasing ready-to-sell product. Salary and management costs for the buying, quality assurance, handling and other operations associated with the activities between demand forecast and sales or waste disposal. The same cost analysis model and questions should be applied to the new method of operation to quantify the recurring cost of operation. A key element of presenting the business case is the assessment of payback periods for investing in the new method. By dividing investment costs by the estimated savings, you will calculate the number of years needed to operate your new method before the investment costs result in real business savings. Note: Energy price fluctuation and inflation may also have an impact on future cost projections. Where this may be relevant, consult an authoritative source for estimating impacts (e.g. (Department of Energy & Climate Change, 2013)). System Failure An analysis of the implied costs embedded in the risk of product supply failure may also be included. Increasing insecurity in supply of key products mean the cost implication of the risk of lack of supply in cost calculations could become a significant factor. This cost can be estimated by assessing the potential cost to the business of a lack of supply, and combining this with an estimate of the probability of it occurring.

8 Operatin g Costs Investment Author: Alan Spray Cost Area Lost revenue Description The cost to the business as a whole of product supply failure (e.g. lost revenue due to customers changing shop) multiplied by its probability of occurring. Calculation should include the expected change in product supply failure probability over the period considered. Intervention cost The cost of any required investments for a new purchasing method will need to be included. This may include expenditure on research (e.g. identifying key commodities, discussions with suppliers, identifying partners for sorting/pack houses), cost of capital purchase or subcontracting contract negotiations (e.g. pack houses, storage companies, haulage and processors) and the cost of training new staff and management to use new purchasing methods (including reduced efficiency while workers adjust to new methods). Additional operational costs of WCP include the costs of operating or subcontracting pack houses, storage facilities and transportation of the product. The benefit of income from product sold to processors will also need accounting for. Any increase or decrease in sales of primary product will need to be included in the calculation. Cost Area Cost of purchasing whole crop Description Purchase and delivery cost of whole crop of product. Pack house Storage Cost of establishment and operation or subcontracting pack houses for product. Cost of establishment and operation or subcontracting storage (potentially with temperature or climate control) for product. Transport Cost of establishment and operation or subcontracting transportation (potentially with temperature or climate control) for product. Sales to secondary market Change in sales See Recurring Annual Cost section above See System Failure section above Sales of product to secondary market (e.g. soup processors, animal food producers). Change in sales of primary product (e.g. increase sales of slightly less aesthetically pleasing product). Projected costs of operating the new and/or improved method. The cost to the business as a whole of product supply failure. Template A cost/benefit template spreadsheet can be downloaded from the PSF Knowledge Base, designed to be used for calculating the business case, and tailored using the considerations mentioned above. Resources Department of Energy & Climate Change. Estimated Impacts of Energy and Climate Change Policies on Energy Prices and Bills 2012, March https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_- _Price_and_Bill_Impacts_Report_Final.pdf.

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