FRESH THROUGH THE CHAIN

Logistics Insight Asia, 1/1/2008

Asia's cold chain is still largely underdeveloped. ELIZA LEUNG talks with Accenture's Jeff rey Russell to find out how food and beverage manufacturers can overcome the hurdles.

Asia is suffering from the growing pains of severely constrained cold chains, says Jeffrey Russell, Managing Partner, Supply Chain Asia Pacific, Accenture Singapore. While India has attracted the interest of the world by providing access to markets, manpower and materials, much remains to be done to knit its underdeveloped network of transport, distribution and logistics systems to global supply chains. Cold-chain infrastructure is largely absent in the country, which is currently covered by a complex andunderserved distribution system of 5,161 towns and 638,000 villages.Transport delays and inadequatecold storage now cause 30 to 40percent of fruit and vegetables torot at the harvesting site or while intransit.

China’s situation is woefully similar. Its marketplace is one of the most competitive in the world. Nevertheless, only 15 percent of all perishable products are transported by refrigerated vehicles, compared to levels that hover around 90 percent in developed countries. In the recent climate of food scares and recalls, Chinese consumers have also had to deal with various levels of food poisoning due to improper handling, inadequate refrigeration, and a lack of cold-chain regulation and enforcement.

OBSTACLES
The reality is that the 3PL industry is still in its infancy. Comparative scarcity of processing practices and a lack of government regulations has foiled cold-chain development in the region. Only 25 percent of the food Chinese citizens consume is processed, compared to about 80 percent in more developed countries. While these cold chains are regulated by an intricate network of authorities, there are few or no country-level laws or regulations governing food safety in the areas of storage, transportation, distribution and retail. Trade rules and customs rules are also complex, varying from region to region. Railcars are scarce and road vehicles are ill-equipped to handle large volumes. Poor coverage, high costs and insufficient capacity have also ruled out the widespread use of airfreight for perishable-food transport.

While transport is one culprit, inadequate storage is also to blame. Organized cold-storage capacity in India is low, with 3,252 stores offering an installed capacity of only 8.7 million tons. In China, cold-storage capacity covers about 25 percent of total output, which is low in comparison to the 70 to 80 percent in developed countries. Then there is the issue of proximity. Even though cold-storage warehouses are generally found in major port cities, few are near theirsupply bases.

Most food companies in India have access to very few cold-chain specialist 3PLs, with the situation only marginally better in China. China has more than 510,000 such companies; however, most only furnish basic transportation and storage services. Technology shortcomings can be found in every aspect of the nation’s cold chain – the most acute being the need for precise commodity sorting and atmospheric control during transport. As a result, companies have little choice but to rely on in-house logistics groups to support their cold-chain needs.

Opportunity knocks
So the argument for an efficient cold chain is strong. Good supply chain management contributes to savings and efficiency, waste reduction, and vast improvements in public health. The case for investment in Asia is compelling, even if these investments come with some inherent risks. Corporations investing in cold chains in China and India may have to live with smaller returns on their investments – more so than they are used to – for the initial period. Nevertheless, there is considerable room to maneuver. Current estimates put transportation and logistics costs for China’s perishable foods at about 20 percent of a product’s selling price. (In the US, it is four percent.)

Then there is the convincing argument for “first-mover” advantage. The Chinese market wants a strong cold chain. Supermarkets want to increase their frozen-food shelf space to meet the gastronomic needs of an increasingly urban population. Frozen food is growing at an estimated annual rate of about 10 percent, and the annual output of processed frozen food is double that.

Food and beverage manufacturers can improve their supply-chain effectiveness by concentrating onthese six areas:

1. Use 3PLs
Most food and beverage companies have in-house logistics. Outsourcing these operations and concentrating on one’s core capabilities would be helpful. In fact, Accenture research has confirmed this. High-performing businesses improve their operating model and sustain a competitive advantage when they outsource non-core competencies to service providers for which the work is a core competency. This could also be helpful where the products have to travel to various locations and require significant coordination. However, for outsourcing to be a success there is a greater need for more third-party service providers with capabilities that have costeffective, integrated, end-to-end supply chain management.

2. Benchmark leading practices
Food and beverage manufacturers should try to benchmark against leading practices in developed countries. Through a comparison, companies can identify their own performance gaps and develop new solutions.

3. Leverage special technologies
Non-electric cold containers which use pressurized carbon dioxide to reduce spoilage are available. Easy-to assemble insulated pallet containers are designed to provide excellent thermal protection for large payloads, while polyurethaneinsulated containers are ideal for maintaining temperature in shipments over long periods or extreme temperature conditions. Other special packaging, materials and equipment are available on the market to extend product and shelf-life.

4. Invest in training
Extensive distance-learning programs for line and staff are available for nearly all aspects of supply-chain management. These can greatly improve an organization’s productivity and overall performance. These programs can also be customized to focus specifically on areas like receiving, inspection, cold storage and delivery.

5. Develop KPIs
Metrics such as distribution cost as a percent of sales, productdamage ratios and on-time delivery should be calibrated to ensure high performance.

6. Plan and forecast
Balancing demand and supply is particularly tough in emerging markets where physical distances are great, buying patterns erratic, and delivery and product quality less predictable. Deployment of planning/forecasting technology is vital. However, unique, situationspecific capabilities also are needed to understand supply conditions and make adjustments.

Government intervention
According to Accenture research, all high-performance businesses exhibit the above capabilities. Also important is the use of technology as a strategic asset, a highlyproductive organization and culture, and the deployment of inclusive but appropriately-focused metrics which is key to forming an anatomy that enables companies to out-execute the competition.

Still, corporate investment alone will not be enough to foster the sufficient growth of cold-chain infrastructure in Asia. Governments will have to do their part to set up regulatory frameworks to accelerate growth. Aggressive but achievable plans would stimulate the expansion of cold storage, leading to a healthier marketplace, and a healthier consumer. The development of more transparent and predictable laws and policies at the national level would further regulate supply-chain activities.

Uniformity of supply-chain laws and regulations would also go far to improve unbiased enforcement, in order to create a more level playing field. Ultimately, the end goal should be a network of third-party service providers with capabilities that include cost-effective, integrated, end-to-end supply chain management. Governments need to establish new mechanisms for protecting consumer health and safety, including channels for voicing complaints, says Russell.

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Accenture is a gobal management consulting, technology services and outsourcing company.(www.accenture.com)

In Good Spirits

For Heinz-Peter Faust, CEO, Cougar Express Logistics (now part of Menlo Worldwide Logistics), the wine and spirits industry is an important and fast growing customer segment. He discusses some of the key issues for Logistics Insight Asia.

The Wine & Spirits business is an important one for Cougar. It contributes about a quarter of our annual revenue and we see it growing at 20 percent on average over the next few years. In Singapore, we estimate we already have 30 percent market share in the sector. In terms of resources and capabilities, we have a (bonded and non-bonded) storage facility (10,000 sq m) in Singapore, and provide transportation services not only for Southeast Asia but also Australia and New Zealand, plus a number of other countries across the world. One of the challenges of wine and spirits’ logistics is climate sensitivity of the product, and so we offer various type of storage conditions – ambient, air-conditioned, temperature controlled – to cater to the various needs of merchants. Through our warehouse management system (WMS), clients can have online access to their inventory 24/7, place orders, track movement, print reports, and gauge capital outlay needed for any impending duty payment. Cougar also provides a logistics consultancy service for new companies in the wine & spirits industry that are looking to build their own import, storage and distribution capabilities. People are an important part of our growth and success in wine & spirits. After over a decade of serving the industry, we have dedicated, trained and knowledgeable staff to cater to the particular logistics of the sector – such as late evening deliveries and product returns. The business is also very cyclical, so we have to be prepared for seasonality peaks, such as at year end, when volume can easily double. Heinz-Peter Faust, CEO, Cougar Express Logistics

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