Food Logistics April 2018 by Supply+Demand Chain/Food Logistics

SPECIAL EDITION: REGULATORY COMPLIANCE, BRAND REPUTATION

Food Logistics

AND RISK IN THE GLOBAL FOOD SUPPLY CHAIN

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Global Supply Chain Solutions for the Food and Beverage Industry

COUNTRY OF ORIGIN AND FOOD A FAMILY OF TRADE ISSUES

TAX REFORM

A CORNUCOPIA OF

STRATEGIES FOR THE LOGISTICS INDUSTRY

AN INCREASINGLY COMPLEX GLOBAL FOOD SUPPLY CHAIN MEANS EVEN GREATER RISK, YET THOSE WHO STAY ON THE LEADING EDGE WILL DISCOVER NEW OPPORTUNITIES

Issue No. 195 April 2018

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The Ford F-650/F-750 is 45% quieter inside the cabin at idle than the previous generation* with reduced noise, vibration and harshness, improved suspension and refined cab craftsmanship. More reasons Ford Medium Duty trucks are the fastest-growing-volume medium-duty brand.** And the winner of Work Truck magazineâ&#x20AC;&#x2122;s Medium-Duty Truck of the Year award for two years running.

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THE F-650/F-750 /// FORD.COM

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ON THE MENU

OCTOBER 2015 ISSUE NO. 171

April 2018 ISSUE NO. 195

SPECIAL EDITION 14

A Cornucopia of Risk

COLUMNS FOR STARTERS

N ew Risk Requires New Tools

The increasingly complex global food supply chain comes with an equal measure of risk, yet those who stay on the leading edge are discovering new opportunities.

Technology holds the key to better conservation of finite natural resources and food supplies while optimizing the complex supply chain from farm to fork.

racking T Assets in a Complex and Ever-Evolving Landscape

The technology is available now, but choosing the right asset tracking solution takes serious thought.

P utting the Food Safety Puzzle Together

Successful food and beverage companies must align their food safety, regulatory compliance and brand protection practices.

COOL INSIGHTS

Merchandise Warehouses takes its operations to the next level with the help of Raymond cold storage solutions. FOOD (AND MORE) FOR THOUGHT

C ountry of Origin and Food: A Family of Trade Issues

S trategies for the Logistics Industry after Tax Reform

G S1 Standards: The Foundation for a More Agile Supply Chain

Proper planning can ensure you don’t miss out on tax-saving breaks.

G round Beef Is At Risk of Disruption

It may be a challenge to replicate a steakhouse quality filet mignon—but what about a burger?

U.S. trade rules surrounding country of origin and the issues they raise pose significant business risks in the food supply chain as well as opportunities.

A Case Study in Warehouse Optimization

DEPARTMENTS

Supply Scan 10 Food on the Move 41 Ad Index 8

Smooth supply chain operations are a must for grocers hoping to capitalize on technological investments and captivate digital-savvy consumers.

B ankruptcy Risk in the Supply Chain

Unprecedented levels of corporate debt mean it is more important than ever for businesses to monitor insolvency risk in the supply chain.

E nterprise Risk Management in a Global Trade War Proactive risk assessments can help any business navigate through the uncertainty of a possible global trade war.

WEB EXCLUSIVES • Wasted Motion Can Cost Your Warehouse foodlogistics.com/20998744

• The Importance of IPM Procedures in Food Facilities foodlogistics.com/20995993

• Food Logistics’ Educational Webinar Series foodlogistics.com/webinars

Published and copyrighted 2018 by AC Business Media Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording or any information storage or retrieval system, without written permission from the publisher. Food Logistics (USPS 015-667; ISSN 1094-7450 print; ISSN 1930-7527 online) is published 10 times per year in January/February, March, April, May, June, July, August, September, October and November/December by AC Business Media Inc., 201 N. Main Street, Fort Atkinson, WI 53538. Periodicals postage paid at Fort Atkinson, WI 53538 and additional mailing offices. POSTMASTER: Send address changes to Food Logistics, P.O. Box 3605, Northbrook, IL 60065-3605. Canada Post PM40612608. Return undeliverable Canadian addresses to: Food Logistics, Station A, P. O. Box 25542, London, ON N6C 6B2. Subscriptions: U.S., one year, $45; two years, $85; Canada & Mexico, one year, $65; two years, $120; international, one year, $95; two years, $180. All subscriptions must be paid in U.S. funds, drawn from a U.S. bank. Printed in the USA.

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WE’LL PROTECT YOUR RETAIL RELATIONSHIPS.

OD’S MABD SERVICE MEETS TODAY’S SUPPLY CHAIN CHALLENGES Old Dominion’s Must Arrive By Date (MABD) service is supported by a 99+% on-time rate and #1 ranking for damage-free deliveries.1 With OD, your time-sensitive shipments will arrive intact and are guaranteed2 to meet shrinking retail delivery windows. MABD helps strengthen your retail partnerships, protects your vendor scorecard and delivers value in every shipment. Throughout the entire process, you have 100% door-to-door visibility with an OD Customer Service Representative as your single point of contact. For more information, visit odfl.com or call 1-866-637-7333.

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Old Dominion Freight Line, the Old Dominion logo, OD Household Services and Helping The World Keep Promises are service marks or registered service marks of Old Dominion Freight Line, Inc. All other trademarks and service marks identified herein are the intellectual property of their respective owners. ©2018 Old Dominion Freight Line, Inc., Thomasville, N.C. All rights reserved. Major League Baseball trademarks and copyrights are used with the permission of Major League Baseball Properties. Visit MLB.com. 2

1 2017 Mastio & Co. National LTL Carrier Report. If scheduled delivery time is missed, charges revert to standard rates. Restrictions apply.

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FOR STARTERS

FROM THE EDITOR’S DESK

DETAILS

Published by AC BUSINESS MEDIA INC. 201 N. Main Street, Fort Atkinson, WI 53538 (800) 538-5544 • www.ACBusinessMedia.com

WWW.FOODLOGISTICS.COM

NEW RISKS REQUIRE

NEW TOOLS R

SOWINSKI

ecently, I came across an article on how scientists are using ships’ emergency beacons to track industrial fishing activity throughout the world’s oceans. This advancement gives scientists a clearer look at just how intensely our oceans are being fished. From 2012 to 2016, researchers used artificial learning computer programs to glean information from ships’ location signals, such as where boats were fishing, how they were moving, what they were likely fishing for and how they caught the fish. According to the journal Science, “Large-scale commercial fishing covers more than 55 percent of the oceans with the world’s fishing fleet traveling more than 285 million miles a year—three times the distance between the earth and the sun.” China, Spain, Taiwan, Japan and South Korea are responsible for 85 percent of high seas fishing, which one marine biologist described as “more like factories that are mass producing product for a global market and less like hunters that are stalking individual prey.” Another marine biologist noted that, “The maps of global fishing in this report are sobering.” In order to feed a growing world

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population we need to explore new ways of producing food—from plantbased alternatives to more precise, less wasteful growing and harvesting methods, while simultaneously guarding our natural resources. Overfishing is one of many risks to the global food supply chain. In this month’s special edition on risk, we look at several others, including changing consumer demands and how they are redefining the supermarket of the future; food safety, compliance and brand reputation; country of origin rules and the impact of the new federal tax law; and how stakeholders in the global food supply chain need to improve collaboration in order to mitigate risk. While so much news related to the global food supply chain is indeed sobering, there is plenty to be hopeful about, especially when it comes to technology. Technology truly holds the key to better conservation of finite natural resources and food supplies while optimizing the complex supply chain that starts at the farm, field or ocean all the way to our plates. Enjoy the read.

LARA L. SOWINSKI, EDITORIAL DIRECTOR LSOWINSKI@ACBUSINESSMEDIA.COM

PRINT AND DIGITAL STAFF Group Publisher Jolene Gulley Associate Publisher Judy Welp Editorial Director Lara L. Sowinski lsowinski@ACBusinessMedia.com Editor John Yuva jyuva@ACBusinessMedia.com Assistant Editor Amy Wunderlin awunderlin@ACBusinessMedia.com Web & Copy Editor Mackenna Moralez mmoralez@ACBusinessMedia.com Contributing Editor Barry Hochfelder Senior Production Manager Cindy Rusch crusch@ACBusinessMedia.com Creative Director Kirsten Wiskus Audience Development Director Wendy Chady Audience Development Manager Angela Franks ADVERTISING SALES (800) 538-5544 Associate Publisher (East Coast) Judy Welp (480) 821-1093 jwelp@ACBusinessMedia.com Sales Manager (Midwest and West Coast) Carrie Konopacki (920) 542-1236 ckonopacki@ACBusinessMedia.com National Automotive Sales Tom Lutzke (630) 484-8040, tlutzke@ACBusinessMedia.com EDITORIAL ADVISORY BOARD Jaymie Forrest, Chief Supply Chain and Commercial Officer, ScanTech Sciences Inc. John Haggerty, Vice President of Business Development, Burris Logistics Robert A. Norton, Ph.D., Professor of Veterinary Microbiology, Public Health and Biosecurity, Auburn University; Coordinator of National Security Initiatives, The Futures Laboratory Jon Shaw, Director of Sustainability and Global Marketing Communications, UTC Climate, Controls & Security Smitha G. Stansbury, Partner, FDA & Life Sciences Practice, King & Spalding CIRCULATION & SUBSCRIPTIONS P.O. Box 3605, Northbrook, IL 60065-3605 (877) 201-3915, Fax: (847)-291-4816 circ.FoodLogistics@omeda.com LIST RENTAL Jeff Moriarty, InfoGroup (518) 339-4511 jeff.moriarty@infogroup.com REPRINT SERVICES Carrie Konopacki (920) 542-1236 Fax: (920) 542-1133 ckonopacki@ACBusinessMedia.com AC BUSINESS MEDIA INC. Chairman Anil Narang President and CEO Carl Wistreich CFO JoAnn Breuchel Digital Operations Manager Nick Raether Digital Sales Manager Monique Terrazas Published and copyrighted 2018 by AC Business Media Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage or retrieval system, without written permission from the publisher.

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Confidence is 0-60 in over 12 seconds. When you need to improve safe driving habits in your fleet, you need Verizon Connect. Our data can help improve driver behavior, like sudden starts and stops, so you can create a safer workplace. Discover more at verizonconnect.com

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SUPPLY SCAN

NEWS FROM ACROSS THE FOOD SUPPLY CHAIN Daily Updates at FoodLogistics.com

HERSHEY TAPS SAP ERP SUITE FOR BETTER CUSTOMER INSIGHTS

The Hershey Company selected Accenture to implement SAP S/4HANA as part of a program designed to help streamline manufacturing and supply chain processes, gain real-time customer insights to inform decision-making and accelerate revenue-generating innovation to drive growth. The project is part of The Hershey Company’s strategy of growing core confectionery and snacking products, expanding margins and leveraging technology. “Our collaboration with Accenture will enable us to increase competitive advantage and support our growth ambition through greater collaboration and innovation, as well as service delivery built around the needs of our customers,” says Terry O’Day, chief product supply and technology officer for The Hershey Company. “We selected Accenture for its understanding of our industry, technology credentials and proven track record in delivering enterprise transformation at scale.”

COCA-COLA, US STATE DEPT COMBAT FORCED LABOR WITH BLOCKCHAIN

ONLINE ALCOHOL SALES EXPECTED TO GROW

Grocers that offer e-commerce are expected to see a large gain of market share for home delivery of alcohol in the coming years. Currently, only 5 percent of alcohol sales are made online, but a report by Rabobank, a global leader in food and agriculture financing and sustainability-oriented banking, predicts the number to increase up to 14 percent by 2025. The report also states Google searches for alcohol delivery have increased by 500 percent in the last six years, sparking interest from companies like Amazon and Kroger. The online grocery industry will be especially successful for wine and beer because of their direct association with foods. There also is a growing market for food and alcohol pitched together in meal kits.

DEAL REACHED TO FIX TAX BREAK FOR FARMERS

Coca-Cola and the U.S. State Department are using blockchain to create a secure registry that will fight the use of forced labor worldwide. According to the International Labor Organization, nearly 25 million people are currently working in forced labor conditions. In turn, food and beverage companies are receiving pressure to address the risk of forced labor. For its part, Coca-Cola will conduct a 28-country study on child labor, forced labor and land rights for its sugar supply chains by 2020. The beverage giant has been exploring blockchain projects for more than a year now. The new venture is intended to create a secure registry for workers and their contracts using blockchain’s validation and digital notary capabilities. The State Department will provide expertise on labor protection.

Congressional committees and farm groups have amended language in the federal Tax Cuts and Jobs Act to fix a provision that gave an unintended tax advantage to farmers who sell their crops to cooperatives instead of private companies. The Section 199A Fix is included in the $1.3 trillion federal omnibus spending bill released in late March. The National Grain and Feed Association led the effort to amend the language. The change would be retroactive to Jan. 1, 2018.

TRUMP’S TARIFF HIKES ON ALUMINUM COULD COST 20,000 BEVERAGE JOBS

The Trump Administration’s plan to impose a 10 percent tariff on imported aluminum is generating backlash from many, including U.S. allies, but now is facing critics from the beverage industry, too. Brewers are arguing that the aluminum tariff could potentially bring a new tax on any beverage in an aluminum can. According to The Beer Institute, the tariff would increase the cost of aluminum, resulting in job losses throughout the entire beverage supply chain. The institute estimates that the new tariff will bring an extra $347.7 million tax on the beverage industry, resulting in the loss of over 20,000 jobs.

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SUPPLY SCAN

NEWS FROM ACROSS THE FOOD SUPPLY CHAIN Daily Updates at FoodLogistics.com

MOBILE APP CREATES CHAOS, MCDONALD’S WORKERS QUIT

McDonald’s has been revamping its brand by using technology, delivery and an ever-changing menu. The impact on employees, however, has been disruptive. Employees are handling many more tasks without pay raises or adequate staffing. Meanwhile, with unemployment so low, turnover is becoming an increasing problem. Employees would rather walk away than deal with the pressure. As a result, drive-through times have already slowed to 239 seconds last year, according to QSR magazine. And they say McDonald’s drive-through experience is already slower than Burger King, Wendy’s and Taco Bell.

BLUE APRON TO SELL MEAL KITS IN STORES

In an attempt to boost its lagging subscription sales, Blue Apron will start selling meal kits in supermarkets. Blue Apron was one of the first meal kit delivery services, but with increasing competition from the likes of Walmart and AmazonFresh, its sales are lagging. Blue Apron reported only 750,000 subscribers in February, a dip from its peak of 1 million last year. Surveys revealed the loss of consumer interest on the expense and the commitment of maintaining a subscription may be to blame. In response, Blue Apron is attempting to boost its competitiveness by offering kits that do not require a subscription in supermarkets.

SWEET POTATO PRICES FALL AS POPULARITY RISES

Sweet potato growers and shippers are seeing stronger demand from retailers and foodservice distributors. As the popularity for sweet potatoes rises, however, so too has competition, and prices are reflecting it. Prices for a 40-pound carton range from $12-$16, down $4 from 2016. U.S. growers harvested 159,300 acres of sweet potatoes in 2017, down from 163,300 acres the previous year. North Carolina, which is the leading producer of sweet potatoes, could see its acreage decrease due to lower prices. Growing segments of the overall sweet potato business include value-added, organic and varieties like Murasaki, a purple-skinned Japanese potato that is newer to the market.

WALMART IS DEVELOPING A SOFTWARE THAT KNOWS WHEN PRODUCE WILL SPOIL

Walmart is developing a technology called Eden that uses machine learning and other sophisticated technologies to monitor freshness in fruits and vegetables to determine when they will spoil. Eden was developed in-house as a result of a hackathon among engineers in Walmart’s fresh merchandising teams. Even though it is still in the early production phases, Eden is being utilized in 43 distribution centers across the country and has saved Walmart $85 million since deployed. The technology is expected to save the company upwards of $2 billion over the next five years.

MILLENNIALS WANT HEALTHY SNACKS TO GO

Millennials’ expectations for snacks and grab-and-go foods are at an all-time high. Yet, the influential generation does not want negative consequences when it comes to their food. For instance, millennials say they are more willing to buy from a brand that communicates their sustainability and ethical efforts. Nearly 64 percent of millennials surveyed by the Culinary Visions Panel report that there was a lack of ethical grab-and-go options for snacks. Consumers under 35 years of age are willing to pay more for food as long as they know that it is coming from an ethical source. www.foodlogistics.com

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STUDIES SHOW AMERICANS WILLING TO EAT LAB-GROWN MEAT

Four in 10 Americans are more willing to eat lab-grown meat, with vegans most likely to do so, according to new research from Surveygoo. When asked if they would consume uncultured meat, 39.8 percent of U.S. consumers said they would do so. The number continued to rise over 60 percent when vegans, vegetarians and pescatarians were asked. While it may seem surprising that a considerable number of Americans expressed a willingness to eat meat produced in a laboratory, a recent survey from Packaged Facts showed that 58 percent of U.S. consumers are more concerned about food animal welfare than they were just a few years ago. APRIL 2018 | FOOD LOGISTICS

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FOOD ON THE MOVE

LOGISTICS TRENDS IN OUR INDUSTRY

TESLA ELECTRIC SEMI-TRUCK MAKES ITS FIRST DELIVERY RUN

Tesla’s electric semi-truck went on its first real delivery from Nevada to California in March, carrying batteries from its factory in Reno to the Tesla factory in Fremont. CEO Elon Musk made the announcement on his Instagram page. The Tesla semi-truck is expected to haul cargo for up to 500 miles before recharging and can hit 0-65 mph in 25 seconds fully loaded.

NWSA FEARS NEW TARIFFS COULD NEGATIVELY IMPACT EXPORTS The Northwest Seaport Alliance (NWSA), a joint venture between the ports of Tacoma and Seattle and the fourth largest maritime shipping gateway in North America, worries that the new tariffs on steel and aluminum could impact industries that rely on those materials. Retaliatory exports could hurt agriculture and manufacturer exports. “As a state in which 40 percent of our jobs are tied to international trade, we are risking jobs and quality of life by levying blanket tariffs against

some of our most important trading partners and opening the door to their retaliation,” said Don Meyer, co-head of the Northwest Seaport Alliance, in a statement. The NWSA stands to take a hit if trade partners retaliate with higher tariffs on U.S. products. It’s the second largest export gateway for overall agricultural and forest products in the United States, with the value of those exports adding up to more than $6.8 billion in 2016, comprising threequarters of its containerized exports.

WALMART TO EXPAND ONLINE GROCERY DELIVERY

Walmart plans to expand its online grocery delivery service to more than 40 percent of U.S. households by year’s end. Currently, only six markets have grocery delivery available. Customers will place their orders online at Walmart.com or via the Walmart Grocery app. They then can select if they want to pick up their groceries or have them delivered. Curbside pickup will be free, while delivery has a flat rate of $9.95 with a minimum $30 order. Walmart’s key advantage is that it’s more affordable than its competitors. The prices of its groceries are the same online as they are in-store.

DAT SOLUTIONS’ MONTHLY FREIGHT REPORT

The Trucks Are Out There By Mark Montague Spot truckload van and refrigerated freight rates have been neutral in recent weeks—and that’s not bad news.

The load-to-truck ratio for refrigerated truckload freight on the spot market fell from 16 in January to 9.8 in February, in line with expectations since this is typically the slowest month for freight. The national average spot reefer rate fell, too, down 22 cents month over month to $2.42 per mile. But that rate was 6 cents higher than the average contract rate, an indication that there’s still tremendous pressure on reefer capacity nationwide. Shippers need trucks. It’s worth noting that in January, the first full month after the Electronic Logging Device (ELD) mandate took effect, the number of reefer trucks on the spot market actually increased 3 percent, followed by a 1.7 percent increase in February. It was a similar story on the van market, where the number of trucks posted increased 5.7

percent in January and 4.4 percent in February. No doubt many carriers took an extended holiday in December and were enticed into the market by strong rates. Those trucks are back, and there’s plenty of freight to move. The end of March coincides with the end of the first quarter, Easter weekend, and the start of the full penalty phase of the ELD mandate on April 1. Shippers will want to move all types of goods ahead of these key dates, and the additional demand will intensify the strain on van and reefer capacity. The trucks are out there. But shippers may have to pay more to get them.

Mark Montague is senior industry pricing analyst for DAT Solutions, which operates the DAT network of load boards and RateView rate-analysis tool. He has applied his expertise to logistics, rates and routing for more than 30 years. Montague is based in Portland, Oregon. For more information, visit www.dat.com.

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FOOD ON THE MOVE

LOGISTICS TRENDS IN OUR INDUSTRY

AGRICULTURE RECEIVES EXTRA 90 DAYS FOR ELD MANDATE Transportation Secretary Elaine Chao announced an additional 90-day extension on the agriculture exemption from the Electronic Logging Device (ELD) mandate. The mandate would have been problematic for the agriculture industry because the devices do not account for the agricultural exemptions currently provided in the law.

The ELD rule went into effect in December 2017, with the U.S. Department of Transportation (DOT) granting the agriculture industry an initial exemption that was set to expire on March 18, 2018. With the granting of another extension, the agriculture industry will now have additional time to comply.

DOMINO’S AUTONOMOUS VEHICLE DELIVERY SERVICE LAUNCHES IN MIAMI Ford Motor announced the launch of a service to test self-driving food delivery vehicles in Miami. The partnership includes a pilot period with Dominos as well as Postmates. Even though there will be a driver for safety reasons, the vehicle will be disguised to look as if there isn’t

DELTA TO OFFER REAL-TIME TRACKING ON CONTAINER SHIPMENTS

Delta will become the first U.S. passenger airline to provide real-time tracking for unit load devices (ULDs). This move marks a new era for Delta Cargo and the more than 500 million kilograms of cargo it flies annually. The technology will replace manual tracking for all shipping containers, which move cargo shipments, baggage and mail globally. Real-time ULD tracking information will also allow Delta’s cargo control center to more accurately monitor and reroute shipments that are delayed due to irregular operations, like inclement weather. When implemented, the new tracking system will also enable Delta to produce electronic unit control receipts, which is required by the International Air Transport Association when ULDs are transferred between parties. www.foodlogistics.com

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a driver. The two companies are interested in learning how customers interact with the autonomous vehicle. The move to Miami comes after the two companies did a small test run of the service in Ann Arbor, Michigan. In Miami, the companies expect to gain insights from maneuvering around a more urbanized development.

CARRIER TRANSICOLD, SINGAMAS INTRODUCE CUSTOMIZED CONTAINERS

PrimeLINE ONE, a new refrigerated shipping container developed through a joint initiative between Carrier Transicold and Singamas Container Holdings Ltd., was announced at Intermodal Asia 2018. The PrimeLINE ONE refrigerated container provides an alternative to the traditional approach of bolting a complete refrigeration system to the front end of an insulated shipping container. Instead, refrigeration system components are assembled into customconfigured Singamas containers in a new Carrier Transicold factory located adjacent to Singamas’ new refrigerated container facility in Qingdao, China.

$125 MILLION LOGISTICS PARK PLANNED NEAR PORT OF SAVANNAH

Plans for a new industrial park near the Port of Savannah were recently announced. The good news promises to alleviate rising prices for warehousing space in the area. Capital Development Partners will build the $125 million Savannah Port Logistics Center. The 197-acre complex will include more than 2.3 million square feet of warehouse space. Cargo traffic through the Port of Savannah grew to a record of nearly 4 million twenty-foot-equivalent units (TEUs) in 2017 and is expected to keep growing as work continues on deepening the Savannah River channel. CDP plans to start the first phase of the development in April, with a second phase to start later this year. In February, ports officials announced the agency was developing a 10-year, $2.3 billion expansion plan that would allow the Port of Savannah to accommodate 10 million TEUs annually.

UBER EXPANDS FOOD DELIVERY SERVICE TO 100 NEW CITIES

UberEats is expanding to 100 additional cities around the globe, ahead of its 2019 IPO. UberEats was profitable in 45 of the over 200 cities it serviced in 2017. The new areas of operation will include 40 cities in the U.K., 35 cities in France, as well as cities in Ireland, Egypt, Romania and the Czech Republic. The rate of UberEats trips by drivers grew more than 24 times over the 12 months between March 2016 and March 2017. APRIL 2018 | FOOD LOGISTICS

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COOL INSIGHTS

BY AMY WUNDERLIN

A CASE STUDY IN WAREHOUSE OPTIMIZATION M Merchandise Warehouses takes its operations to the next level with the help of Raymond cold storage solutions.

High-density, deep lane racking and Raymond’s Radioshuttle pallet shuttle system led to fewer touches, plus maximum storage utilization.

erchandise Warehouse, a logistics provider of multi-temperature warehouse services, hasn’t stopped growing since its beginning as a 50,000-square-foot dry warehouse. Today, the third-generation, family-owned warehouse has increased its facility size by eight times, with more than 400,000-square feet of cooler and freezer space. While the company continued to excel, for years they relied on common warehouse operations. Traditional pallet racking was working; however, continued growth was already pushing Merchandise Warehouse to its limit. The facility was busting at its seams with product, and the company’s customers were demanding even more room. That growth, along with Merchandise Warehouse’s more aggressive pursuit of the latest technologies, presented the perfect opportunity to act on the company’s motto: “Take it to the next level.” “We’re always trying to be bigger, faster and stronger, and are looking for the latest and greatest tools that will help us achieve that,” says Seth Hamman, warehouse manager at Merchandise Warehouse. “When

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we were facing even more rapid growth, we saw it as an opportunity to find and implement those latest solutions that were revolutionary in the industry.”

Next Level Solutions Merchandise Warehouse knew what it needed: practical and affordable solutions that would help it be more efficient for its customers. The company started its search with who it knew and trusted: Associated and Raymond, an authorized Raymond Sales and Service Center. “Associated and Raymond have always been leaders in the industry, so we knew we could trust them with this project,” says Scott Whiting, vice president and general manager, Merchandising Warehouse. Merchandise Warehouse worked with Associated to assess the current operations and technologies and determine the best options for upgrading. They landed on high-density, deep-lane racking and a pallet shuttle system from Raymond called Radioshuttle, which are both especially suited for cold storage. Radioshuttle allows additional capacity and pallet positions, while also helping store and pick product faster with its pallet shuttle system. It’s efficient, yet has fewer opportunities for product damage on account of fewer touches required to move product. While Radioshuttle moves pallets through racking, the operator—typically using a reach truck—is free to do other work. Most importantly, Radioshuttle allowed for maximum storage utilization. By using the full height of the warehouse and high-density, deep-lane racking, Merchandise

Warehouse could better fill the facility with product. A further reduction in product touches occurred with the integration of three conveyor systems: one moves product from the blast freezer through a de-spacing operation on to staging for lift truck put-away in the Radioshuttle system, and two others take product from the Radioshuttle storage freezer and stage it for truck loading.

Efficient Solutions, Immediate Results The collaboration between Merchandise Warehouse, Associated and Raymond didn’t just work—it thrived. Merchandise Warehouse added more than 14,000 more pallet positions with the new solutions, and in doing so, was able to keep staffing levels the same. “Overall, the warehouse was more efficient—44 percent more efficient,” notes Whiting. “What used to take seven man-hours now takes about four. And what used to take 12 touches from receiving to shipping now only takes six. Fewer required touches means less opportunity for product damage.” Outside of the storage, Merchandise Warehouse was also able to update its spacer removal process, cutting the time in half. Removing spacers from pallets used to take four hours, but now only takes two. “Four or five years ago, I was dreaming of this kind of process improvement and upgrade. I was scribbling this stuff on napkins,” says Hamman. “It’s remarkable to see it come to life with the help of Radioshuttle and the new racking. We couldn’t have asked for a better experience or results.” www.foodlogistics.com

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4/5/18 10:27 AM

COVER STORY: RISK

BY LARA L. SOWINSKI

RIS

A CORNUCOPIA OF The increasingly complex global food supply chain comes with an equal measure of risk, yet those who stay on the leading edge are discovering new opportunities.

he big food manufacturers have one thing in common— they recognize that changing consumer demands focused on healthier foods is a macro trend they need to embrace wholeheartedly in order to stay relevant. Last year, Nestle SA turned in its slowest growth in the United States in decades. Campbell’s sales are also struggling, prompting CEO Denise Morrison to acknowledge in a Wall Street Journal report that, “We know that consumer preferences for fresh and healthier food continues to be strong,” and management is “acting with urgency” to reshape the food giant into a health-oriented snacking company. For its part, Kraft Heinz says it will move faster this year to keep pace with changing consumer demands. It’s not just big food manufacturers that are slow to adapt to the changing landscape; the grocery store sector lags other retail sectors when it comes to implementing technology to improve the customer experience. A survey of over 1,000 adults across the United States conducted by Phononic found that half of those polled said grocery stores haven’t figured out how to use technology like other retailers, while 89 percent want to shop in a grocery store that understands how

to make buying groceries an easier and/or more efficient experience. Tony Atti, founder and CEO of Phononic, notes that, “As e-commerce innovation continues to disrupt brick-and-mortar retail in response to consumers’ desire for a more convenient and personalized shopping experience, traditional retailers are adapting to stay relevant.” The solution, he says, is to look toward technology, which OF U.S. ADULTS “will improve SURVEYED SAY: consumers’ Grocery stores haven’t figured out how to shopping experiences” use technology like other retailers. and allow gro-

50% Phononic

FOOD LOGISTICS | APRIL 2018

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cery stores to “ultimately survive— and thrive—in this increasingly competitive landscape.” In its grocery industry survey “Supermarket 2020,” Symphony Retail Ai, a leading global provider of artificial intelligence-enabled decision platforms, solutions and customer-centric insights, identified current challenges faced in the sector, along with a number of decidedly positive opportunities. Among the key trends revealed in the survey: • Large weekly shopping trips being displaced by online shopping and preferences for prepared foods. The weekly “pantry-loading” shopping trip to the local www.foodlogistics.com

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ISK grocery store is declining, with a 3 percent to 4 percent decrease in large baskets from just a year ago. Consumers are increasingly turning to online shopping when purchasing 15or more items, and online grocery shopping has risen 14 percent in the United States. In addition, 76 percent of consumers report that they are increasingly buying prepared food instead of cooking dinner. • Amazon’s disruption through its acquisition of Whole Foods. Whole Foods immediately lowered prices on many products on Day One of the Amazon acquisition, and together, Amazon and Whole Foods have a huge www.foodlogistics.com

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logistical advantage. Eighty-one percent of Whole Foods shoppers represent the same demographics as Amazon Prime customers, and 95 percent of Amazon Prime customers now have refrigerated Amazon distribution centers within 10 miles. • Growth of private label brands. CPGs are feeling the pressure, too, facing increasing competition from private label brands. Private label is up 18 percent in the United States, leading to revenue losses and lower margins for major CPGs and creating headwinds for future growth. • Continued, fierce competition from discounters such as Aldi, LIDL, Walmart and others. Aldi and LIDL are turning up the heat on traditional supermarkets by rapidly increasing their store count in the United States. Far more than just discounters, they are expert product curators with highly efficient stores that feature higher-margin private label brands and low overhead. Adding to this, Walmart has declared a “price war” on grocery SKUs, asking CPGs to move all trade promotion dollars into “Everyday Low Price.” In the meantime, the evolving supermarket will feature several distinct characteristics, states Symphony Ai, including: • Stores will have fewer than 10 aisles instead of today’s 15+ aisles, with an average product range of fewer than 10 highly curated SKUs per category to meet consumer needs for convenience and quality. Stores can support this in-store model by offering a million SKUs online as part of their multichannel strategy, giving shoppers virtually unlimited product access. • Stores should remove the center store aisles to make room for prepared foods,

taking advantage of shoppers’ intentions to spend 3 to 4 times more on prepared foods compared to other areas. Symphony’s research indicates that year-over-year growth in prepared foods is 8 percent to 9 percent annually for supermarkets. • A special products aisle can offer a “surprise and delight” section that engages shoppers with products that change twice a week. • Grocers can recreate a farmers market in every store, supplied by local and regional farms and suppliers that meet strict requirements. • Private label will represent a much higher percent of SKUs, increasing 40 percent to 45 percent compared with today’s 18 percent to 20 percent. • Stores will offer shoppers convenient tools such as click & collect, 3D store-navigation that allows shoppers to connect their shopping list to store layout on their mobile phones, and AI-enabled, real-time basket cost reduction offers. Commenting on the survey’s finding, Symphony Retail Ai’s Pallab Chatterjee, chair and CEO, notes that, “Supermarkets face unprecedented competitive pressures today. In order to compete and win, grocery retailers must transform their outdated store models and become ‘stores of the future’ that are agile and aligned with today’s consumer preferences.” Simply put, the food industry at large cannot afford to remain on the sidelines while other retailers rethink their products, services, delivery methods, and entire business models to keep pace with the rapid changes underway. That would be a huge risk. On the following pages, we’ll look at a host of other risks facing our industry—and the remedies we can employ to meet the new demands of the future. APRIL 2018

89% WANT TO SHOP IN A GROCERY STORE THAT UNDERSTANDS HOW TO MAKE BUYING GROCERIES AN EASIER AND/OR MORE EFFICIENT EXPERIENCE.

Phononic

| FOOD LOGISTICS

4/3/18 3:18 PM

COVER STORY: RISK

BY PETER NILSSON

TRACKING ASSETS

IN A COMPLEX AND EVER-EVOLVING LANDSCAPE The technology is available now, but choosing the right asset tracking solution takes serious thought.

re you tired of worrying about where your assets are? Have they been unknowingly moved, stolen or otherwise forgotten or misplaced? Has an environmentally-sensitive asset’s temperature or climate changed to an undesirable condition? Have you tried many different solutions to no substantial avail? If so, you are not alone. Thousands of people and companies have tried and tested hundreds of solutions without sufficient functionality or results. Asset tracking solutions have historically not held up to the market promise; while a few have delivered some of what is needed, a complete end-to-end or one-sizefits-all solution that is available to the masses has yet to be recognized and widely adopted. Part of the problem is that everyone has a different set of standards, requirements, needs and wants.

FOOD LOGISTICS | APRIL 2018

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Some want to monitor an asset’s location or temperature. Some want to monitor motion or g-shock events. Others want to know the humidity level within an assets location. And some, of course, want all of the above—and more. The be-all-end-all solution would be a one-size-fits-all product that does all of the above regardless of the vertical industry, size and scope of the deployment, global geography, and the physical environment in which the solution must reside in

order to track the asset—for example, inside a bee hive, within an RV, on a pallet tracking the goods it is carrying, or perhaps inside a high-value tool box at a remote and insecure location. The scenarios are many and the pool of adequate solutions is few. But do not fret. If a buyer takes into consideration a few key and critical points and works diligently in their research to find the holy grail, there www.foodlogistics.com

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are options out there that have all the necessary functionalities in a small and sturdy encasement, work in most geographies globally, and do so quickly and cost-effectively, while generating a rapid return on investment and even recurring revenue streams. To get to the best result and start enjoying greater peace-of-mind, there are five key points to consider when evaluating asset tracking solutions: how to best track the asset(s) in question, the challenges, the technology, the certification process, and, most importantly, who to partner and work with.

Ripe for the Picking The opportunity and need for a quality, end-to-end asset tracking www.foodlogistics.com

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solution is enormous and continues to grow. According to a July 2017 report by Joe Madden, principal analyst at Mobile Experts, titled, Asset Tracking IoT Device Forecast, which covers the agriculture, healthcare, transportation/logistics, industrial, retail and consumer spaces, there is currently an asset tracking install base of 115,779,900 units being monitored, which is expected to more than double and grow to 243,052,170 by 2020 and 369,849,487 by 2022. And these numbers are likely conservative. To paint a picture of what the above-mentioned numbers look like in a real-life scenario, let’s look into one very important vertical market, the North American trailer tracking market. According to First Analysis, the sector features 6 million commercially registered trailers spread among for-hire fleets and private companies. For-hire motor carriers transport goods owned by others for compensation in contrast to companies (e.g., Walmart, Sherwin-Williams) that handle the transport of products incidental only to their own core business using internal capacity. About 4 million trailers are on the road in active service, with the remainder standing idle and being used for various purposes including goods storage. The types of trailers for-hire and that private vehicles pull depend largely on the items to be transported. Figure 1 on page 18 highlights the different kinds of trailers readily observable on the road. Some of the most common include dry van (enclosed units that secure goods from theft and the elements), reefer (refrigerated units for maintaining the temperature of cold goods), flatbed (open-topped units for carrying large items like heavy equipment), tank (sealed units for hauling liquids/chemicals), and chassis (platforms upon which intermodal units can be placed). Dry van, at roughly 65 percent, represents the largest portion of active

units; flatbed and reefer, at 15-20 percent and 10 percent, respectively, are the next largest types. We note new trailer production to replace retired units and support a market growth range from 150,000 to 350,000 units per year, with the majority often of the van type, including dry and refrigerated.

Shrinking Challenges With a ripe market that is only expected to grow exponentially, the need for better solutions with better technology is at the forefront in the minds of manufacturers, third-party logistics providers and companies of all sizes. But as with every opportunity, market and technology, there are challenges and decisions to be made. The good news, however, is that the list of challenges is getting shorter and the technology is getting stronger. The biggest challenge to mass adoption of any one solution has been a combination of four different factors: battery life, accessibility to consumable data (or real information that is displayed in a manner in which people can use it to make better business decisions), total cost, and connectivity to a reliable network on a broad and remote scale. For assets that do not have With a ripe power, new technology has made market that is only it so we can track assets with the expected to grow same reliability and timing as a exponentially, powered asset tracker. In addithe need tion, more modern asset tracking for better solutions are smaller and can be solutions manufactured at a fraction of the with better cost of older battery-operated technology devices. Today, devices can be as is at the small as 4-inch by 5-inch and work on four AA batteries. When used forefront.” in conjunction with a low-power technology such as LTE M, battery life can be as long as 5 to 7 years. But what good is battery power if you don’t have good connectivity? Connectivity is king, and the options are plenty—but the value from some is scarce. There are asset tracking solutions available that employ everything from Bluetooth and WiFi to LoRa and Sigfox, and more. But APRIL 2018 | FOOD LOGISTICS

4/4/18 12:49 PM

COVER STORY: RISK

continued

CONSIDER THIS

A lot of thought goes into any technological investment. With the fast pace of

There are solutions available that are highly configurable to meet just Orbcomm Inc. about Orbcomm any Inc.asset tracking need,

but they are not created equally.”

 The North American trailer tracking market is prime for the picking. About 4 million trailers travel U.S. roads every year, with products demanding to be tracked and traced.

advancement in the asset-tracking space, be sure to consider and find solutions there is only one cellular, and LTE M that offer the following: is the best technology when it comes • Low power LTE M technology • Temperature sensor onboard to cellular and tracking remote • GPS, GNSS, BeiDou enabled • 3-axis accelerometer assets because it offers the broadest • Carrier certified out of the box • Easy access to data via a functional range, lowest power consumption • Long battery life (5 to 7 years) dashboard (within cellular), works indoors, March 8, 2017 March 8, 2017 • Location tracking • IP67 rugged and dust/waterproof plays well with other technologies • Motion tracking, triggering updates enclosure such as RFID, and it is widely adopted and generally accepted by the subscribers, which should drive strong Services revenue growth end solutions endpopulation. solutions subscribers, which should drive strong Services revenue growth majority of the global and improving profitability over the near term. Because we think trailer and and improving profitability over theofnear term. Because we think trailer and4G what does this mean? for longevity the latest intermodal make upSo the bulk of all its pipeline, we examine theseusing markets in more intermodal make up the bulk of its pipeline, we examine these markets inis no more Analyzing the Data It means that as there areas solutions cellular technology detail to test our expectation well help investors handicap the(there likelihood of detail to test our expectation as well as help investors handicap the likelihood of So now that weOrbcomm have a defined available thatWe are highly configushutdown trailer projected for 4G), being successful. look at the North America market inand this Orbcomm being successful. We look at the North America trailer market in this market opportunity, a clear definito meet justwith aboutaany asset review oneof that gives you the option to in report and expect rable to follow it up similar the intermodal market report andlook expect tracking to follow it up similar of theturnkey intermodal market tion of what a solution should need, butwith theyaare not review purchase with full man- in the future. future. like, how it shouldthe work, and the all created equally. Buyers will be aged service or to perhaps bring technology needed to make it work keen to invest in a solution that your own cellular and application. MARKET OPPORTUNITY the way it is supposed to and when, has already gone through the very And don’t forget, your provider MARKET OPPORTUNITY what do we do with the data we are expensive and time consuming scalable IoT infrastrucThe North America market (i.e., the U.S., Canada,must and offer Mexico) features 6M comThe Northit? Americaprocess market (i.e., the U.S., Canada,ture andthat Mexico) features 6Mwith comgathering? How do we access of gaining carrier certifiis capable of growing mercially registered trailers spread among for-hire fleets and private companies. mercially registered trailers spread among for-hire fleets and private companies. How do we disseminate it? What cations, but the most important your company. As a bonus, it also For-hire motor carriers transport goods owned by others for compensation in For-hire motor carriers transport goods owned by others for compensation in does it look like? And most imporconsideration should be your would be good to find a the partner contrast to companies (e.g., Wal-Mart, Sherwin-Williams) that handle transcontrast to companies (e.g., Wal-Mart, Sherwin-Williams) that handle the transtantly, how do we port use itof to products increase incidental partner. Asonly IoT-based technology or business that is willing to help promote your to their own core using internal capacity. port ofbusinesses? products incidental only to their own core business using internal capacity. revenues and better our product companies, your provider solution with creative joint marketOf the 6M, about 4M trailers are on the road in active service with the remainder Of the 6M, about 4M trailers are on the road in active service with the remainder All very good questions that can should understand complexing campaigns. standing idle and used for variousthe purposes including goods storage. The types idleinand used for various purposes including goods storage. The types now be answeredstanding and displayed ities of recommending the right Not only are yourthe customers and of trailers for-hire and that private vehicles pull depend largely on items to be of trailers for-hire and that private vehicles pull depend largely on the itemsthe to be a crisp, clean, graphical manner that technology and designing it for your partners interested in finding transported. In Table 1, we highlight the different kinds of trailers readily observtransported. 1, we highlight theplan different kinds of trailers is easily understood and enjoyed In by Table specific application. to best asset trackingreadily solution,observthe able on the road. Some of the mostIf you common include dry van (enclosed units that able on the of the mostthe common dry vanis (enclosed units both engineers and laymen alike.road. Some white-label or resell solutions,include technology available now. Whatthat secure goods from theft and the elements), reefer (refrigerated units for maintainsecure goods fromstrategically, theft and they the elements), reefer are (refrigerated units for maintainThere are not many, but some should also help you waiting for? ing the temperature of cold goods), flatbed (open-topped units for carrying large of today’s leading asset tracking youofdecide to make these (open-topped units for carrying large ing the temperature cold how goods), flatbed items like heavy equipment), tank (sealed units for hauling liquids/chemicals), solutions come with comprehensive enabling innovations availableunits to for hauling liquids/chemicals), items like heavy equipment), tank (sealed and chassis (platforms upon which intermodal units can be placed). Dry van, at dashboards that offer views the broader companies units Peter is chief marketing officer andreal-time chassis (platforms uponmarket whichfor intermodal canNilsson be placed). Dry van, at roughly 65%, represents the largest portion of the 4M active units; flatbed and into the exact location, motion, tem-represents to incorporate into their offerings Nilssonflatbed has moreand than 25 roughly 65%, the largest portion of the for 4MNimbeLink. active units; reefer, at 15-20% and 10%, respectively, are the next largest types. We note new perature and otherreefer, data theat devices enterprises. yearslargest of supplytypes. chain and IoTnote experience 15-20% and/or and 10%, respectively, are the next We new trailer production to replace retired units and support market growth range from are monitoring. And, it is allproduction beautiful- to Find a complete that can working with industry Ariba, trailer replace retiredsolution units and support market growthleaders rangelikefrom 150-350K units per year, with the majority often of the van type, including dry and ly displayed across150-350K easy-to-navigate beyear, deployed weeks not years, Logistics, Wireless, units per withinthe majority often of Choice the van type,Cingular including dry and refrigerated. software interfaces. a product that has been designed Servigistics and Telit, among others. refrigerated.

TABLE 1 TABLE 1 Trailer Types Trailer Types

TRAILER TYPES

Source: Source:

DryVan Van Dry Dry Van

Refrigerated(Reefer) (Reefer) Refrigerated Refrigerated (Reefer)

Flatbed Flatbed Flatbed

Tank Tank Tank

Chassis Chassis Chassis

Hopper (Commodity) Hopper(Commodity) (Commodity) Hopper

Dump Dump Dump

Livestock Livestock Livestock

First Analysis, TinyGiant.House Odyssey. First Analysis, TinyGiant.House Odyssey. FOOD LOGISTICS | APRIL 2018

FLOG0418_16-19_Nimbelink.indd 18

Source: First Analysis, TinyGiant. House Odyssey.

www.foodlogistics.com

DATA DATA To gain insight into the trailer tracking opportunity, we created a list of the largest To gain insight into the trailer tracking opportunity, we created a list of the largest for-hire and private fleets in North America based on trailer count by leveraging 4/4/18 for-hire and private fleets in North America based on trailer count by leveraging

12:49 PM

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4/4/18 12:49 PM

COVER STORY: RISK

BY SUZZANE RICHER

PUTTING THE

FOOD SAFETYPUZ

TOGETHE

Successful food and beverage companies must align their food safety, regulatory compliance and brand protection practices.

almonella. Typhimurium. Enteritidis. These are infections one rarely considers when eating out or purchasing groceries. Nevertheless, 2018 started with a fair share of illnesses tied to these food pathogens. Though the food industry in the United States continues to be revolutionized by the Food and Drug Administration’s (FDA) Food Safety Modernization Act (FSMA), companies continue to be challenged to improve processes, internal and supplier training, and traceability in a changing global environment. As new FDA regulations roll out and proposed rules become final,

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the primary focus for all companies can be singularly defined as “prevention.” How does a company, in every step of food preparation, production and distribution, prevent a food safety issue from occurring when prevention is favored over corrective action? Regulatory compliance for food safety is mandated and necessary, though implementation is clearly challenging for even the best companies, as the smallest outbreak can negatively impact brand reputation and decrease customer loyalty. Amber Road has compiled three industry best practices to help food and beverage companies align food

safety, regulatory compliance and brand reputation protection.

❶ Build sustainable prevention

and quality culture through alignment with Lean Six Sigma. FSMA regulations aim at the prevention of food illness, with noted training, testing and operational efficiencies built into it. Yet, E.coli still happens. A Lean Six Sigma (LSS) approach can elevate a company’s program by supporting a sustainable quality culture where all employees, regardless of their role, are aligned to a common strategic goal and understand the path to attaining that goal. www.foodlogistics.com

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❷ Develop continuous im-

UZZLE HER The LSS approach requires a belief by team members that perfection is possible. If employees do not fully appreciate, believe and work toward the goal of creating 100-percent, contamination-free food, there will always be a future recall, outbreak or severe food illness. LSS reinforces FSMA rules by involving multiple tiers of the company, from new hires to senior management, in its process. This allows input from all levels of the organization in identified projects, and improves visibility to the senior management team on where they are today, versus where they hope to be in the future. www.foodlogistics.com

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overall mapping of the supply chain provement with success metrics. production process. Once a FSMA program is in place, a Combining this with ongoing and continuous improvement stratrequired auditing of key business egy will help employees focus partners will bring to light anomaon reducing tangible costs while lies in the food production process preventing contamination in and provide an escalation plan to the production and distribution achieve full compliance. Internal process. Identifying, managing and quality teams play a major role in following up on clearly established this area and should be supplementmetrics will improve operational ed by controlled audits through efficiency and reduce costs without qualified third-party auditors. compromising on food quality. A Managing a fully successful food well-defined mapping value stream safety program under FSMA is like will eliminate anomalies caused by building a puzzle and putting all human behavior. the pieces together for success. A company’s focus should be on Developing a corporate strategy empowering employees to identify requires the alignment of goals and any process step undertaken that objectives, providing the necessary adds waste, which can be resources for deployment. defined as any activity As corporate awareness The move that adds cost or time to grows, the move toward toward a production but does not a sustainable culture of sustainable improve the final product. prevention must be built culture of This includes rework as into the company’s DNA. prevention well. Catching a mistake This becomes achievable must downstream and discardwhen all levels of the be built organization are engaged ing product for potential into the in the process of complicontamination is the right company’s thing to do when necesance, with an eye toward DNA.” sary, though analysis of the milestones for building a root cause must result in quality infrastructure and a change to processes to an end goal of 100-perlimit or eliminate the possibility of it cent compliance. The best place to occurring again. begin is with an internal assessment of your “as is” and “should be” Get an “A” in auditing and processes. This will indicate where automation. Timely information on faults and cracks exist, allowing you your full production line, from the the opportunity to transform with a purchase and processing of raw ma- more complete program. terials to truly knowing your supply The strongest companies will chain business partners, is a must. pursue a path of continuous Automation will support the timely improvement, with empowered insharing of information regarding dividuals who will protect the conyour supply chain and provide sumer and company brand through insight into the one-up, one-back an institutionalized approach to tracking capabilities. coaching, metrics, quality gatekeepIf your firm is the U.S. importing and peer review. er of record, knowing all of the players in the supply chain, from the farm or food processor, starts with identifying them, as well as their role in the processing of your purchase. Automation techniques to monitor the cooking process, such as temperature and cooking time, will reduce anomalies in the process and should be part of the

Suzanne Richer joined Amber Road in 2015 to lead the development of a Trade Advisory Practice. She is a licensed customs broker and certified classification specialist with extensive experience in advising focused assessments, C-TPAT cargo security applications and validations, and the Importer Self-Assessment (ISA) program.

❸

APRIL 2018 | FOOD LOGISTICS

4/3/18 3:33 PM

COVER STORY: RISK

BY DEAN A. PINKERT

Dean A. Pinkert is a partner at Hughes Hubbard & Reed and the former commissioner of the U.S. International Trade Commission.

COUNTRY OF ORIGIN AND FOOD:

A FAMILY OF TRADE ISSUES 1/ T

U.S. trade rules surrounding country of origin and the issues they raise pose significant business risks in the food supply chain as well as opportunities.

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he food industry around the world is growing dramatically, and consumers are becoming more quality- and safety-conscious. Supply chain executives making food sourcing decisions need to pay close attention to the U.S. trade rules on country of origin, as awareness of the issues they raise can enable companies to get out in front of significant business risks and opportunities. Food executives should pay close attention to the following five ways such rules may become an issue for them. All of these involve highly technical and complex considerations.

Preferential Tariff Rates Established by Trade Agreements

Anyone following the news regarding the renegotiation of NAFTA has been hearing a lot about rules of origin for automobiles. Those rules are of the type established by trade agreements governing eligibility for tariff preferences, and they have a major impact on the pattern of imports and exports because they influence decisions on where to locate production. Preferential tariff rates under trade agreements give manufacturers an incentive to source their inputs from within the region covered by the

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agreement, enabling consumers to benefit from the comparative advantages enjoyed by each country and supporting regional cooperation and prosperity. If a tradeable good contains value from both inside and outside of the region covered by the agreement, there have to be rules governing whether the good will be treated as originating from that region and is thus entitled to the tariff benefits of the agreement. There are basically three kinds of rules defining origin for these purposes (which can be employed in combination): • Processing that is sufficient to cause a change in tariff classification. •A dded value exceeding a defined threshold. •T he occurrence of a specified physical process. The required rules vary from product to product and agreement to agreement.

FLOG0418_22-27_CountryOrigin.indd 23

Other Tariff Rates

The application of other tariff rates also requires reliance on country of origin rules because, with respect to goods entering U.S. territory that do not enjoy tariff preferences under a trade agreement, U.S. Customs and Border Protection (CBP) must first determine whether the goods are exempt from duty because they are deemed to be of U.S. origin, eligible for tariff preferences established by statutes such as those under the Generalized System of Preferences, or entitled to the non-preferential tariff treatment agreed to by the United States at the WTO. For these purposes, as well as for purposes of the import marking requirements administered by CBP, the analysis generally focuses on where the last “substantial transformation” occurs in the production process. In principle, substantial transformation occurs when an article emerges from processing as a new and different article, with a

new name, character and use. In practice, any of the three kinds of country of origin rules discussed previously—individually or in some combination—might be utilized. The results are thus difficult to predict. For instance, while CBP has held that the roasting of green

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COVER STORY: RISK

continued

it was processed into frozen fish fillets in Cambodia, a country that was not subject to the order. The Commerce Department held that the processing did not shift country of origin for circumvention purposes from Vietnam to Cambodia.

Country of Origin Labeling

In principle,

‘substantial transformation’ occurs when an article emerges from processing as a new and different article, with a new name, character and use.”

coffee beans causes a substantial transformation, it has also held, at least until very recently, that the processing, cooking and freezing of shrimp does not.

such purposes, the agency that promulgates the trade remedy may instruct CBP as to how to determine country of origin. For example, in the context of adTrade Remedies ministering an anti-dumping order Country of origin issues also on frozen fish fillets from Vietnam arise in enforcing trade remedies such and determining whether it had as anti-dumping duties, countervailbeen circumvented, the Commerce ing duties and safeguards—in other Department had to instruct CBP words, where the U.S. government is on the country of origin of certain taking action against imports found frozen fish fillets. The whole, live to be injurious to a U.S. industry. For fish had come from Vietnam, but

3/ 24

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Country of origin labeling (COOL) requirements implemented by the Agricultural Marketing Service of the USDA involve country of origin issues as well, as their name implies. The 2002 U.S. Farm Bill established COOL for beef, veal, lamb, pork, fish/shellfish, fruits, vegetables and peanuts, and it was extended in succeeding versions of the Farm Bill to cover other foods (it was recently rescinded for imports of beef and pork, as discussed below). Supporters of the legislation argued that consumers have a right to know the country of origin of their food, while opponents maintained that COOL was both unnecessary and discriminatory. Every imported item covered by COOL must be marked in English to indicate to the “ultimate purchaser” its country of origin. The ultimate purchaser is generally the last U.S. person who receives the goods in the form in which they were imported, not necessarily the retail shopper. COOL applies only to retail establishments that sell more than $230,000 worth of perishable agricultural commodities during a calendar year, and it does not apply to butchers, hotels, foodservice establishments such as restaurants or processed food. Substantial transformation can be a key issue here. Where www.foodlogistics.com

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imported food is destined for a U.S.based processor who substantially transforms it, then the processor or manufacturer is considered to be the ultimate purchaser and is entitled to receive information about the country of origin of the food. For example, meat that is ground in the United States is considered to be substantially transformed by means of that process and is thus treated as originating from the United States, regardless of the source of the meat prior to the grinding stage. In 2008, Canada and Mexico challenged COOL requirements for beef and pork at the WTO, as they contended that there was discriminatory treatment of their cattle and hogs after those animals entered the United States, and that it lacked a sound rationale. The alleged discrimination stemmed from the additional costs that were incurred in the U.S. meat supply chain when Canadian or Mexican animals were imported—in order to satisfy COOL

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requirements, U.S. handlers had to go to the expense of segregating imported animals, as well as the meat derived from imported animals, from domestic animals (or meat) at each stage of the production process. A simple way for them to avoid this burden was to source only U.S. animals, and the incentive created by COOL to do that, arguably, conferred a competitive benefit on U.S. livestock producers. Canada and Mexico, and the countries that supported their position at the WTO, maintained that COOL worked to the detriment of the meat industry in all three NAFTA countries by promoting trade-distorting, uneconomic decision-making that had no basis in the management of any scientifically based risk assessment. They viewed it as a technical import barrier the effect of which was to confer a competi-

tive benefit on U.S. producers. There were several rounds of litigation at the WTO over the course of more than three years, and Canada and Mexico ultimately prevailed. In WTO litigation, a winning complainant does not receive an award of damages; it receives a ruling in its favor against the measure complained of, which can cause immediate withdrawal of the measure or eventually cause the WTO to

Every imported item covered by COOL must be marked in English to indicate to the ‘ultimate purchaser’ its country of origin.”

APRIL 2018 | FOOD LOGISTICS

4/4/18 12:54 PM

COVER STORY: RISK

Evolving consumer preferences regarding food safety have an impact on U.S. trade rules and can also shape the commercial incentives facing the food industry.”

continued

grant the complainant the right to retaliate against a specific value of exports from the offending country. In this instance, the WTO did finally give Canada and Mexico the right to retaliate against approximately $1 billion in U.S. exports. Congress thereupon, in 2015, repealed COOL requirements for muscle cuts of beef and pork, as well as for ground beef and ground pork. Proponents of COOL for beef and pork are currently advocating using the process of NAFTA renegotiation to reestablish mandatory labeling for those products. They also maintain that NAFTA rules of origin should be amended so that foreign livestock is not treated as solely of U.S. origin merely because it is slaughtered in the United States; rather, country of origin should be the country or countries where the livestock was born, raised and slaughtered. In their view, amending the NAFTA rules in this manner would eliminate an easy method of circumvention of the labeling requirements they favor and would be consistent with COOL principles under U.S. law. Even if COOL requirements for beef and pork are not revived, there remains a significant commercial possibility worth consid-

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FLOG0418_22-27_CountryOrigin.indd 26

ering: consumers, particularly the most demanding ones who are willing to pay higher prices, may insist on country of origin labeling for these products. Businesses that provide such information might for that reason enjoy a competitive advantage, which would drive many of them to incur the costs of COOL compliance voluntarily.

Sanitary and Phytosanitary Restrictions on Imports Country of origin rules also bear upon a central issue in the food industry—food safety—in-

sofar as a country considers imposing sanitary/phytosanitary restrictions on imports, that is, restrictions deemed necessary to protect human, animal, or plant life or health. According to WTO principles, a country must be careful to impose for these purposes only scientifically based, least-trade-restrictive conditions on importation that take into account circumstances in the country of origin and the country of destination. Accordingly, if a country—most likely responding to a public perception of potential harm—is considering whether to regulate imports of food that may carry a certain pest or disease, its authorities must first determine whether the pest or disease is present in the country of origin and represents an actual threat in the country of destination. If they make affirmative findings, grounded in the evidence, on both of those issues, they may impose special conditions on importation such as laboratory testing and certification.

GENERAL LESSONS

ARE THERE ANY GENERAL LESSONS TO BE DERIVED FROM THIS OVERVIEW? PINKERT SUGGESTS THREE. ❶ Evolving consumer preferences regarding food safety have an impact on U.S. trade rules and can also shape the commercial incentives facing the food industry. ❷ Understanding a particular country of origin issue may require familiarity with both CBP practice and the practice of other relevant government agencies, such as the Agricultural Marketing Service of the USDA. ❸ U.S. administrative agency decision-making is highly complex and technical. It is therefore best practice to consult with a U.S. international trade lawyer before finalizing a course of action based on assumptions about how an agency might interpret and apply the relevant rules.

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4/4/18 12:54 PM

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4/4/18 12:54 PM

COVER STORY: RISK

BY DAVID W. APPEL

STRATEGIES FOR THE LOGISTICS INDUSTRY AFTER

Proper planning can ensure you don’t miss out on tax-saving opportunities.

f all the changes in the tax reform bill that Congress passed and the president signed at the end of 2017, some provisions stand out more than others as having a significant impact on the logistics industry. Many of the changes have the potential to be quite positive and lucrative. However, without proper planning, businesses could miss out on tax-saving opportunities or even be negatively impacted from the new provisions. The most notable changes that stand to benefit businesses and corporations in the transportation and logistics industries include the reduction of the federal corporate tax rate from 35 percent to 21 percent and the repeal of the corporate Alternative Minimum Tax (AMT). For example, leaders at Hormel re-

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WRITE OFF LARGER PURCHASES:

port the reduced corporate tax rate will provide them with an estimated additional cash flow of $110 to $140 million in fiscal year 2018. In addition to these corporate tax changes, there are other, more detailed ways the industry stands to gain from tax reform—with proper planning.

INCREASED 

$1 MILLION

 Expensing of

Capital Investments and Bonus Depreciation Businesses can now choose to write off 100 percent of qualified capital expenditures in one year instead of writing them off over the course of many years using a depre-

ciation schedule. The new bonus depreciation rules apply to qualified tangible personal property placed into service after Sept. 27, 2017, and before Jan. 1, 2023. The old rules required property to be new to qualify for bonus depreciation. New provisions allow property to be new or used, as long as the property is being used by the taxpayer for the first time. Businesses can now also write off larger purchases. The maximum www.foodlogistics.com

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amount a taxpayer can expense has been increased $1 million, and the new phase-out threshold is $2.5 million. The first-year bonus depreciation percentage will start to phase down beginning Jan. 1, 2023, and will sunset Dec. 31, 2026. These provisions are great news if you have capital expenditures planned over the next few years for items such as manufacturing, processing or warehouse equipment.

 Qualified

Improvement Property The changes to this area of the law should be welcome news if you’re planning to make improvements to qualified real property. The first thing to know is that the definition of qualified real property has been simplified. The definition previously was broken down into three categories: qualified leasehold property, qualified restaurant property and qualified retail improvement property. Now, the categories have been combined into simply

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qualified improvement property. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property, if the improvement is placed in service after the date the building was first placed in service. Certain improvements are excluded from this definition, including enlargements to the building, improvements to elevators and escalators, and work on the internal structural framework of the building. Other improvements have been added to this definition, such as roofs, HVAC property, fire protection and security systems. Now, qualified improvement property placed in service on or after Jan. 1, 2018, may be eligible for straight line depreciation over 15 years, Internal Revenue Code section 179 expensing and firstyear bonus depreciation. It’s worth talking to a tax advisor to plan the best strategy or strategies to use. Due to the hurried drafting of the law, however, a key provision was

omitted from the final bill that permits a 15-year depreciable life. Congressional leaders and staffers have indicated that it was their intent to establish the 15-year life, and the missing provision should be added in a technical corrections bill later.

 Business Interest Expense Deduction

As a trade-off for being able to expense 100 percent of eligible capital expenses, the deduction for business interest expenses has been restricted. In short, interest expense is now limited to 30 percent of adjusted taxable income. Before 2022, adjusted taxable income will include the add-back of interest, depreciation, amortization and depletion. For later tax years, the definition changes,



FEDERAL CORPORATE TAX RATE:

FROM 35% TO

21%

APRIL 2018 | FOOD LOGISTICS

4/3/18 3:56 PM

COVER STORY: RISK

continued

However, if basis or at-risk rules didn’t apply, the losses could reduce non-business income without limitation. The new tax law restricts the use of business losses for non-corporate taxpayers. Beginning in 2018, taxpayers can only deduct $250,000 (single) or $500,000 (married filing jointly) of these losses, hence the term “excess business losses.” Any disallowed loss as a result of these limitations will be treated as a NOL and carried forward to subsequent years, subject to the new 80 percent limitation previously mentioned.

 Changes in

Accounting Methods

and no adjustments will be made for depreciation, amortization and depletion. Any interest expense that is not deductible in the current year is carried forward indefinitely. The analysis to determine how much interest is allowed under the new law is made by the business entity (e.g., partnership, S-corporation). Businesses with less than $25 million in annual revenue will not be subject to the limit on business interest expense deductions.

 Research and

Development Credit The Research and Development (R&D) credit survived. The costs of designing, developing or improving products, packaging, processes, delivery methods and other eligible R&D activities (and there are many) qualify you for this credit. It doesn’t matter how small the change or improvement may seem. If you are a qualified start-up, then you may be able to monetize this credit to offset up to CAN BE USED TO OFFSET UP TO $250,000 of payroll tax $250,000 liabilities. FOR PAYROLL One change to this credit TAX LIABILITIES is that for tax years begin-

 R&D CREDIT 30

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ning after Dec. 31, 2021, specified research and experimentation expenses must be capitalized and amortized ratably over a five-year period. The amortization period is extended to 15 years for research conducted outside the United States. Expenses for software development are eligible.

 Net Operating

Losses and Excess Business Losses Net operating losses (NOL) can now be carried forward indefinitely, but they can no longer be carried back. Before tax reform, most NOLs were limited to a two-year carryback period and a 20-year carryforward period. Under the old rules, NOLs could be used to offset 100 percent of a taxpayer’s taxable income, barring any other limitations. However, under the new law, NOLs incurred after Dec. 31, 2017, can only offset 80 percent of taxable income. Historically, individual owners of pass-through entities (i.e., sole proprietorships, S-corporations and partnerships) have had basis and at-risk limitations restricting their ability to deduct losses from their trade or business activities.

Businesses with less than $25 million in average annual revenue are now permitted to use the cash method of accounting, simplified inventory accounting methods and the completed contract accounting method for long-term contracts. These accounting methods create more flexibility in tax planning and will provide for easier recordkeeping and tax reporting requirements.

 No More

Like-Kind Exchanges Like-kind exchanges and the deferred taxable gain resulting from these exchanges now only apply to real property as of Jan. 1, 2018. The gain on any like-kind exchange or trade-in on tangible property, such as equipment or vehicles, is now taxable based on the value received in the exchange. The flip side is that while the gain is taxable, the depreciable basis of the new property won’t be reduced by the gain (since it’s no longer deferred). The property should be eligible for 100 percent bonus depreciation on the full cost of the property, or section 179 expensing of the net purchase price after trade, or possibly both, barring any other limitations.

Company Driver Per Diem Expense With the increase in the standard deduction ($12,000 for single, www.foodlogistics.com

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$24,000 for married filing jointly, $18,000 for head of household), many personalized Schedule A deductions have been repealed. Company drivers (W-2 wage employees) can no longer claim the miscellaneous itemized tax deduction for unreimbursed meals and lodging. The deduction was limited to 2 percent of an employee’s adjusted gross income and per diem rates set by the Department of Transportation. Companies that have a per diem or reimbursement program for meals and lodging for drivers may still deduct those costs.

Tax and Repatriation of Profits

 What Should Your Plan Be?

to claim the interest expense deduction rather than 100 percent bonus depreciation. On the other hand, if you’re a smaller business or partnership and you claim any income as a pass-through, you may want to accelerate deductions, since many provisions for pass-throughs and individual taxpayers are scheduled to sunset in approximately five to seven years, depending on the provision. Depending on the complexity of your situation, an audit of your tangible property holdings, your investment plans for the next several years and your accounting methods should uncover some clear answers as to what your next moves should be under the new tax law.

If you’re a multinational corporation or have multinational partners, there are few ways to escape the cost that the deemed repatriation of international profits is likely to take out of any earnings in the 2018 tax year. On the other hand, other rules may make filing simpler and more cost effective, such as

You can’t make any decisions on these new rules in a vacuum. Remember to consider all these variables at once. For example, if you consider the size and the depreciation schedule of your capital investments combined with any deductions you can take for NOLs, it might make more sense

David W. Appel, CPA is managing partner of the South Florida practice of Cherry Bekaert. With more than 30 years of experience, Appel provides tax planning and consulting services to publicly-traded and privately-held corporations, including comprehensive strategic tax planning in closely-held entities, S corporations, partnerships, controlled groups and individuals.

 International

new rules that change the tax treatment of intellectual property (“IP”). Proceeds from IP used to be taxed as royalties at a rate of 35 percent. The new law taxes IP income at a rate of 13.125 percent for the next seven years and 16.4 percent after that. The new rules surrounding international taxes, including the base erosion anti-abuse tax (“BEAT”), which is seen as a sort of minimum tax for multinationals, are complex and could take up volumes on their own, so it’s best to talk to an international tax specialist about your situation.

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APRIL 2018 | FOOD LOGISTICS

4/3/18 3:57 PM

COVER STORY: RISK

BY ANGELA FERNANDEZ

GS1 STANDARDS: THE FOUNDATION FOR A

MORE AGILE SUPPLY CHAIN Smooth supply chain operations are a must for grocers hoping to capitalize on technological investments and captivate digital-savvy consumers.

y 2025—just seven years from now—the online grocery industry could skyrocket from its current valuation at $13 billion to generate $100 billion in sales, representing 20 percent of all grocery sales, according to recent findings from FMI and Nielsen. This rapid market acceleration shows us that last year’s mergers, acquisitions and technological explorations were just mere harbingers of more growth opportunities and disruption to come. Creating an agile supply chain gives innovative retailers the ability to serve and captivate digital-savvy consumers. To fully capitalize on investments, such as e-commerce, click-andcollect and in-store technology like digital shelves, supply chain operations must run smoothly behind the scenes, or retailers risk losing sales and brand loyalty. Manufacturers, distributors, retailers and solution providers are

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collaborating using GS1 Standards as a common foundation to share information about a product as it moves through the supply chain— effectively connecting physical product to its digital presence. Let’s take a look at the importance of standards to create systems interoperability in the digital era, including how trading partners are collaborating on improved data quality and operational excellence.

A Data Quality Focus There is no doubt that retail grocery has been disrupted, and distribution models are already changing to suit faster supply and demand. Whole Foods recently introduced its order-to-shelf system, putting a new spin on an older distribution model. In this example, distributors and suppliers deliver small batches of product, and retailers keep little to no inventory on hand. With cost savings benefits and the ability to

cut down on food waste, order-to-shelf requires close coordination between trading partners to calibrate supply and demand, therefore avoiding empty shelves. Overall, as new distribution models like this are being tested, data quality must be prioritized so that the accurate information can fuel different systems. From an internal operations perspective, entire loading operations can be shut down if the data recorded and shared does not match the product’s actual weight or size. For example, if truck allocations are off, it can wreak havoc on the fulfillment process. Bad data can also affect trading partners’ ability to deliver on consumer dewww.foodlogistics.com

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mands for information transparency. Additionally, data quality affects last mile delivery, which is already a known hurdle to grocery delivery success. What the consumer orders must be what they receive on their doorsteps, or retailers and brands will lose out to competitors that get it right. The global standardization www.foodlogistics.com

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of product information enables companies to ensure complete and accurate data exchange, preventing such loss of loyalty and costly breakdowns in supply chain efficiency. GS1 Standards provide a consistent foundation of unique product identification and automatic data capture for efficient information sharing among trading partners. The most common example of a GS1 Standard is the item number used in a UPC barcode. This is the globally unique product identifier used to track items in An ASN is a notification of pendPIM systems or other various data ing deliveries, similar to a packing management systems. list. It is usually sent in an Companies leveraging The global electronic format and is GS1 Standards are taking standardization an electronic data intertheir investments in this change (EDI) document of product system a step further using used in retail supply information the framework established chains. enables by the GS1 US National Based on the consencompanies to Data Quality Program. The sus of the workgroup, ensure program places emphasis complete the ASN is underutilized on data governance, eduin everyday supply chain and cation and training, and the transactions, and can accurate provide structure in lieu performance of attribute data audits (routine physical of error-prone manual exchange.” audits that compare an processes. Manual apactual product to the most proaches such as phone recent information shared about calls or emails often result in errors that product). Through this process, that can ripple downstream, from data professionals stay committed receiving all the way through to to data quality as new flexible supinvoice and payments. ply chain capabilities are tested. ASNs essentially enhance efficiency in retail grocery warehouse An Operational and receiving operations by moving Excellence Focus the focus off of the minutiae of the A recent examination of order actual physical shipment, and help changes provide another example companies to maintain a holistic of how the industry is collaborating view of their order management to improve flexibility in the supply processes. If traditionally disjointed chain. A retail grocery industry business processes are cleaned up workgroup under the guidance of behind the scenes, companies can GS1 US created a new guideline avoid inventory out-of-stocks and outlining best practices for dealing excel at the innovative fulfillment with inevitable changes originating options that consumers crave. from both supply and demand-side Overall, consumers can expect to partners. The group found that see more exciting innovations as the leveraging GS1 Standards for more retail grocery industry gains its footefficient, automated processes, ing during another potentially pivotal such as using Advance Ship Notices year. Many of the future innovations (ASNs), can ensure that systems, that have long been discussed are transactions and trading partners coming to fruition—now it’s up to remain electronically up-to-date industry to collaborate to bring the and aligned. supply chain up to speed. APRIL 2018

Angela Fernandez is the vice president of retail grocery and foodservice at GS1 US and leads two industry initiatives— the GS1 US Retail Grocery Initiative and the Foodservice GS1 US Standards Initiative —which seek to solve supply chain challenges through the implementation of GS1 Standards.

| FOOD LOGISTICS

4/3/18 4:05 PM

COVER STORY: RISK

BY WILLIAM B. DANNER

STAY AHEAD OF THE STORM:

BANKRUPTCY

RISK

IN THE SUPPLY CHAIN

Unprecedented levels of corporate debt mean it is more important than ever for businesses to monitor insolvency risk in the supply chain.

n Jan. 29, 2018, Rand Logistics Inc., one of the largest bulk freight shipping providers in the Great Lakes region, filed for bankruptcy. The CreditRiskMonitor FRISK score had warned of financial stress at the company for more than a year. This meant that there was ample time for their customers to make other plans or switch carriers, and plenty of alternatives because the rest of the water transportation industry has maintained a steady FRISK

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score over the last year. Other indicators such as free cash flow and debt to equity ratios also signaled trouble on the horizon from Rand Logistics. In fact, the company issued a press release in November 2017 that a Chapter 11 filing was imminent as part of a restructuring support agreement with private equity firm American Industrial Partners (AIP), who acquired Rand on March 1, 2018. The question is: were Rand Logisticsâ&#x20AC;&#x2122; customers and suppliers doing

enough to mitigate the impact of insolvency risk before the company declared bankruptcy? Todayâ&#x20AC;&#x2122;s levels of corporate debt represent an unprecedented risk. And while instruction on how to manage this risk can be dry, its implications are anything but. Global debt conditions have been disconcerting for a while now, and the trend has not changed for the better. The economy looks pretty good right now on the surface, but the current expansion is being drivwww.foodlogistics.com

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en by ever-increasing levels of debt: government debt, consumer debt and business debt. The longer the current situation persists, the more risk will build up in the economy, raising the stakes for anyone tasked with being prepared to respond. Risk management is part of every supply chain manager’s planning process, but that doesn’t always mean preventing the risks themselves—it means watching carefully for their presence in the supply base and being prepared to act. Luckily, there are several common signals companies can look for to monitor insolvency risk in the supply chain, including bond ratings, stock price and financial ratios.

if your suppliers are investment-grade, but below BB you really need to pay attention and have a mitigation plan in place. There is a huge difference in bankruptcy risk between a BB rated company and a B rated company. B is risky, without a doubt, and there are a lot of B rated firms. More rare, and even worse, are Caa/CCC or Ca/CC rated companies. They’re extremely risky; 30 percent are likely to fail within a year or two. Deciding to

select one of these companies as a supplier—especially for a product or service that could be disruptive to your ability to generate revenue—is a gamble. So, if you see these lower “junk” ratings, or if no rating is available, you’ll need to do more analysis.

Market Capitalization & Stock Price

The easiest, fastest insolvency risk signal is a

company’s corporate family bond rating.”

The next easy signal to look for— at least for publicly-listed compa-

Bond Credit Rating The easiest, fastest insolvency risk signal is a company’s corporate family bond rating, or “issuer rating,” or alternatively a senior unsecured bond rating—if there is one. When you’re talking about a public company or a large private company, look for a bond rating. If a company is investment-grade (at least a Baa rating by Moody’s Investors Services or BBB rating by Standard & Poors or Fitch Group, the three largest credit rating agencies) you can be fairly sure the company has a low risk of failure. See investment grade, and except for the largest exposures, you are done. But it can be okay to work with non-investment-grade (also called high yield or junk debt) companies. That’s a good thing, because junk debt companies now out-number those with investment grade ratings. As it turns out, higher-rated firms in this category (Ba by Moody’s or BB by S&P or Fitch) are not that bad in the current economic environment. They may be “junk,” but they are good junk. Until we hit a really rough economic patch, like we did in 2008 and 2009, you are unlikely to have trouble from these higher rated so-called junk companies. (Unfortunately, that may come sooner than you think.) You can sleep easily at night www.foodlogistics.com

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APRIL 2018 | FOOD LOGISTICS

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COVER STORY: RISK

A company with a strong balance sheet typically has the ability to withstand an

extended period of poor earnings results.”

continued

nies—is their market capitalization. If you see a long-term trend of rising market value, the company is unlikely to be in trouble, especially if that rise is steady rather than volatile. Volatility generally means that buyers and sellers of a company’s stock significantly disagree with each other about its investment potential. It is also often associated with higher levels of debt, which leaves the company less financial flexibility. These differences of opinion and diminished flexibility result in a stock price that moves a lot over a relatively short period of time—and that’s not a good thing. It’s especially not great if the stock price is going down. That may sound obvious, but it turns out this is an asymmetric signal. If the stock price falls by 25 percent over a period of a few months, that is a red flag. If it goes up by 25 percent over the same period, that’s not a correspondingly positive signal. A rising stock obviously isn’t bad news, but it is nowhere near as strong a signal as we have when the stock is crashing. We also like to see the market value substantially above the value of total liabilities. At a ratio below 1-to-1 (market value to liabilities), you have a worrisome signal. And if the ratio reaches a small fraction, the company is in real trouble, with an elevated probability that they’ll go bankrupt.

BOND CREDIT RATING CHEAT SHEET

Credit rating is a highly concentrated industry with the two largest rating agencies—Moody’s Investors Service and Standard & Poor’s— controlling almost 80 percent market share globally, and the “Big Three” credit rating agencies—Moody’s, S&P and Fitch Ratings—controlling approximately 95 percent of the ratings business. The credit rating is a financial indicator to potential investors of debt securities such as bonds. These are assigned by credit rating agencies to have letter designations (such as AAA, B, CC) which represent the quality of a bond. Moody’s assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with WR and NR as withdrawn and not rated. S&P and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D. Currently there are only two companies with an AAA credit rating: Microsoft and Johnson and Johnson.

Financial Ratios If there’s no traded stock, or if the indicators above are worrying, the third set of signals to look for includes financial ratios from the company’s profit and loss statement (P&L) and balance sheet, including: • Earnings before interest and taxes (EBIT) over total assets • Equity over total liabilities • Working capital over total assets • Retained earnings over total assets. Values near zero and negative

ADDITIONAL RED FLAGS

Press releases: If the supplier is a public company, they have to report certain kinds of events. Sometimes even private companies will share the news of major events that serve as positive or negative signals. Executive turnover: If there’s an unusual amount of turnover at the senior level, it is worth another look. If you match that news up with other troublesome signals, the level of concern should increase. Financial shenanigans: Most announcements that a company is restating their financials are not terrible news. It is usually a small change, or it could be the result of something good (like an acquisition) and they are required to make a restatement announcement. However, if the change turns out to be more substantial and negative (like the result of weak financial controls), that’s a signal you don’t want to miss. News of a crisis: Unexpected events (such as a natural disaster) sometimes tip companies into severe financial difficulty. Even though they can’t predict, prevent or control many of these events, news of their occurrence always deserves consideration.

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values in these ratios are serious negative signals. Also, look for trends in the components of these ratios. Free cash flow takes into account capital expenditures and depreciation, and trends in equity, working capital and retained earnings may track similar things. Looking at the array of them provides a fuller picture of the company’s financial performance and therefore their risk of failure. For example, Rand Logistics reported negative cash flow in three of the five quarters before they declared bankruptcy. Other signals include the interest coverage ratio, or how well the company can cover their interest payments with their profits. A ratio of six and above is good; once a company is down around one or two they can barely make their interest payments, and this is a bad thing, especially if they are highly indebted. Examine both the income statement and the balance sheet. A company with a strong balance sheet typically has the ability to withstand an extended period of poor earnings results—and maybe even negative cash flows. A company with a weak balance sheet might not. That said, a company with a weak balance sheet and a www.foodlogistics.com

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really strong P&L is not likely to be in trouble. There’s no reason to go bankrupt if there is a lot of cash coming in. The company will be able to pay their bills and go about their business even if they owe more than they own. As long as the company has strong cash flow, they are likely to continue operating.

Crowdsourcing: An Innovative New Signal Credit risk professionals have been sharing their opinions in “credit groups” and in more informal settings for many decades. The next best thing to do when you suspect trouble is to get on the phone and talk to people, including the supplier in question. If you’re doing business with a supplier and the relationship is big enough to matter to your company, chances are it’s big enough to matter to them as well. And don’t forget to use your own company’s credit department as a resource.

The Future of Risk Management The good news is that in today’s economy, four out of five companies are in relatively good shape. The challenge is finding the one in five that’s not in good shape as quickly as possible. If you are tracking more than a few dozen companies, this requires the efficiency and constant monitoring of auto-

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mation in order to be feasible, and should combine structured data sets (such as financial statements) as well as less structured data such as news and the crowdsourced evidence of which companies credit risk managers are spending their time watching. The current economic climate won’t last forever, so you also need to think about recession-proofing your supply chain. The same monitoring is a great first step. In addition, there have been major breakthroughs in the application of artificial intelligence (AI) throughout the supply chain, and credit risk monitoring is no exception. Deep neural networks is a type of AI that allows a computer to learn for itself what it should be looking at and to what degree. CreditRiskMonitor just launched its first neural network-driven score— the PAYCE Score, aimed at evaluating companies where financial statements are not available. These are typically private companies that defy evaluation using the typical methods and signals described in this article, because most of those signals are unavailable. For smaller private companies, it is well known that looking at whether the company pays its bills on time can be a signal of financial strength or stress. The PAYCE score uses AI to examine this data, and achieves a more accurate measure

PAYCE Score Scale:

Probability of Bankruptcy Witin 12 Months

Best

Worst

PAYCE™ Score

From

0.00%0

.38%

0.55%

.55%

0.80%

.80%

1.22%

.22%

1.69%

.69%

2.59%

.59%

3.73%

.73%

6.34%

.34%

10.02%

0.02%5

0.00% Source: CreditRiskMonitor

of a company’s financial stress. Information is the key to monitoring insolvency risk in the supply chain, and the earlier you identify a worrisome risk signal the more time you have to respond through a greater range of alternative responses. They key is to combine prioritization and automation to focus your attention and efforts on the highest risk companies. This effectively allows supply chain managers to turn back the clock and watch for signals of bankruptcy before it happens rather than responding to official news of bankruptcy filings. William B. Danner has been president of CreditRiskMonitor since May 2007. He has more than 35 years of financial and information services experience.

APRIL 2018 | FOOD LOGISTICS

4/3/18 4:11 PM

COVER STORY: RISK

BY STEVEN MINSKY

ENTERPRISE RISK MANAGEMENT IN A

GLOBAL TRADE WAR Proactive risk assessments can help any business navigate through the uncertainty of a possible global trade war.

resident Trump’s order for a 25 percent tariff on foreign steel imports and a 10 percent tariff on aluminum imports into the United States poses significant risks to corporations across the world. A major concern for companies is that the aluminum and steel tariffs may be the first in a list of actions targeting what the Trump Administration terms “unfair trading practices.” European officials have already announced they would impose tariffs on U.S.-made goods import-

FOOD LOGISTICS | APRIL 2018

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ed to the European There are still be targeted includes steel, Union (EU) if the clothing, bed linen, chewmany questions Trump Administration about if, when and ing tobacco and orange imposed tariffs on juice, among others. how these tariffs goods made in the EU. Another key focus is on will play out, but Cecilia Malmstrom, the waiting until the retaliation from China. EU Commissioner for they hit will The United Sates is 26th trade, said that if U.S. on the list of countries to be too late to which China exports steel. tariffs were imposed, mitigate the The Chinese media has the EU could increase damage.” identified potential retaliaprotections for the EU against steel diverted tory measures the Chinese from the United States, in addition government could take in response to imposing tariffs on a series of to U.S. tariffs, on goods like agriculimported goods made in the United tural products, aircraft, technology States. The list of goods that could and even U.S. treasury bonds. www.foodlogistics.com

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The United States is 26th on the list of countries to which China exports steel. Retaliatory measures the Chinese government could take in response to U.S. tarffis could impact goods like agricultural products, aircraft, technology and even U.S. treasury bonds.

companies to put contingency plans in place to mitigate the risk fallout from a trade war.

Protecting Your Business

There are still many questions about if, when and how these tariffs and counter-tariffs will play out, but waiting until they hit will be too late to effectively mitigate the damage. Advanced scenario planning is essential. This is called enterprise risk management. Proactive risk assessments as part of an integrated enterprise risk management program will help navigate any business through uncertain events like global trade wars. With enterprise risk management, areas of potential concern are identified ahead of time, allowing www.foodlogistics.com

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Companies can take certain steps to protect themselves from the uncertain or detrimental effects of a trade war. Risk assessments as part of an integrated enterprise risk management program will identify potentially harmful upstream and downstream impacts from a trade war in advance, and will accurately identify where these impacts will cause the most harm within an organization. Risk assessments then allow companies to objectively prioritize areas of concern in order of the business units or operations that are most valuable and critical for achieving business goals. They also allow management to prioritize and operationalize supply chain changes as needed. To adopt an effective risk assessment program at your organization, experts recommend focusing on the following five best practices: â&#x20AC;˘ Adopt a root-cause approach: Use risk assessments pushed out to the front lines of your business. They are your subject matter experts, and they know the details of the sources or root cause of potential impacts, which are different

for each department, and need a mechanism and process to score the impact and likelihood and outline the connection so that others can plan. The causes are in several departments and can have effects in multiple business areas and

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APRIL 2018 | FOOD LOGISTICS

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COVER STORY

BY ELLIOT MARAS

Global Supply Chain Solutions for the Food and Beverage Industry

Each year, Food Logistics recognizes individual and corporate leaders in the food and beverage industry. Plan now to enter your company â&#x20AC;&#x201D; or a cutting-edge client or vendor â&#x20AC;&#x201D; in one of these industry-leading recognition programs:

2018

TOP GREEN PROVIDERS In recognition of companies demonstrating leadership in sustainability in the food and beverage supply chain Nominations Closed Winners announced in June 2018 issue

TOP 3PL & COLD STORAGE PROVIDERS

FL100+ TOP SOFTWARE & TECHNOLOGY PROVIDERS

Honoring the leading 3PL and Cold Storage Providers that support the food and beverage supply chain

Recognizing top software and technology providers supporting the global food and beverage supply chain

Nomination deadline: May 25, 2018

Nomination deadline: Sept. 21, 2018

Winners announced in August 2018 issue

Winners announced in Nov/Dec 2018 issue

Online nominations open approximately eight weeks before the deadlines listed above. Award results, information and nominations posted on:

FoodLogistics.com/Awards Nomination dates and issues may change. Consult the call-for-entries email and nomination survey for confirmation

FOOD LOGISTICS | APRIL 2018

FLOG0418_38-41_Trade War.indd 40

Nomination dates and issues may change. Consult the call-for-entries email and nomination survey for confirmation

www.foodlogistics.com

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even across supply chains. Identifying the sources and connecting the dots for likely collateral damage is critical. • Standardize your assessment scale: Use a scale from 1-10, with 10 having the most unfavorable consequences to the organization, split into five buckets to provide a high and low of each bucket (1-2, 3-4, 5-6, etc.). Using a 10 scale makes the math easy, and having only five buckets provides flexibility to those performing assessments. • Define objective evaluation criteria: Often, one person’s nine is another person’s seven. You need to provide clear definition on what each of the five buckets are in unambiguous terms. You can choose multiple ways of expressing severity, both qualitative and quantitative, such as financial, legal, strategic, yet only one of the criteria listed for a specific level has to be met in order to rate a factor at that level. This gives qualitative criterion a way to become quantitative and comparable across the enterprise. • Link risks to controls: Once you’ve identified the sources of risks and assessed them objectively, you need to know how your existing controls are actually covering these risks. First, link risks to corporate goals found in the strategic plans for your organization. Then, work with business areas to identify the goals each group impacts and which of the risks you identified are applicable to their operations. • Report and monitor effectiveness over time: By objectively assessing risk across your organization and connecting information to strategic goals, you can present information the board recognizes and understands. Report on your organization’s most critical risks and how assurance of risk coverage changes as you implement rootcause controls. www.foodlogistics.com

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Impacts of a Trade War The imposition of steel and aluminum tariffs by the Trump Administration will have direct and indirect impacts on U.S. companies. An example of a direct impact is the raw material import costs for U.S.-based producers of machinery and cars may rise, while comparable goods manufactured outside of the United States may become cheaper for American consumers. Consequently, manufacturing companies in the United States may see higher costs of goods sold and reductions in overseas (foreign) sales. An indirect impact would be that changes in production and prices will require modifications to sourcing and procurement methods. These sudden shifts may have an impact on product quality and availability, since some companies may experience supply chain problems when rapidly moving to reduce production in some areas while ramping up production in others. Performing operational risk assessments will effectively identify areas where change can have a positive or a negative impact on business operations. Risk assessments are essential for good performance. Companies must use risk assessments proactively through multiple layers of management, down to the front-

line supervisor and across business When groups and suppliers. Doing so will performed identify areas of possible concern regularly, before they’re a problem, facilitating assessments effective contingency planning. Risk as- connect sessments make connections between processes, seemingly unrelated processes and ac- products, tivities that will cause problems when suppliers and the business environment changes. customers When performed regularly across to help locations, assessments connect companies processes, products, suppliers and stay customers to help companies stay several several steps ahead by identifying the weakest links to monitor and capturing, steps analyzing and reporting early stages of ahead.” incidents before they get out of control. Ultimately getting the proper resources allocated to preemptively fix problems will identify opportunities due to change that competitors will miss because they are too busy reacting. Steven Minsky is CEO of LogicManager and author of the RIMS Risk Maturity Model.

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APRIL 2018 | FOOD LOGISTICS

4/4/18 12:58 PM

FOOD (AND MORE) FOR THOUGHT

BY EDDIE YOON

Ground Beef Is at Risk of Disruption

B YOON

loomberg recently reported that meat consumption per capita was at its highest level since 2004. The implications being: first, there has never been a better time to be in the meat business, and second, while plant-based meats are growing in popularity, this trend doesn’t appear to be making any impact on the traditional meat business. However, those implications unchallenged could lead to a massively costly capital expenditure, poor marketing decisions by executives, and terrible investment decisions by boards and investors.

Digging into the numbers, you see a few common traps when it comes to interpreting statistics like “all-time high” and how three different tools can actually help you improve your vision, see the truth and make vastly better bets. Specifically, you need a microscope to dig deeper, a telescope for a wide-angle

lens and a mirror to bring in emotion and consumer experience. Applying these three lenses help us uncover the truth behind the recent highs in meat consumption at 222 pounds per capita per year. Looking deeper via the microscope, we see several problems with this claim. First, this number is how much meat was produced, not what was consumed. The number is inflated by exports, which rose from 2 percent of beef in 2004 to 10 percent in 2015. Factoring out exports, meat consumption per capita is actually lower than 2004, so the core premise is incorrect. But the real issue is when you step back and use the wide-angle lens separately for chicken and beef you see a tale of two cities. Chicken consumption per capita has risen for four decades from about 50 pounds per capita to over 90 now, while beef per capita has declined from 90 pounds to the mid-50s. And here’s the real ah-ha; the truly disruptive plant-based meats like Impossible Meats and Beyond Meat are not focused on chicken, but are fundamentally aiming to replicate beef, particularly ground beef. Ground beef is very much at risk of disruption. One might imagine it’s hard to replicate a steakhouse quality filet mignon—but how about a burger? How about meatballs? Both are beef items that many consumers eat loaded up with

Eddie Yoon is the founder of EDDIEWOULDGROW LLC, a think tank and advisory firm on growth. Prior to this, he was a partner at The Cambridge Group, a strategy consulting firm that helps Fortune 500 CEOs drive growth by unlocking consumer demand. Yoon is also one of the world’s leading experts on finding and monetizing superconsumers to grow and even create new categories. He is the author of the acclaimed book, “Superconsumers: A Simple, Speedy, and Sustainable Path to Superior Growth.”

FOOD LOGISTICS | APRIL 2018

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sauces, condiments and toppings. Plant-based innovators have gotten really close on texture and moisture to ground beef. Here is where the third lens, a mirror, is critical. Do Americans love meat? Yes. Do they love beef? Absolutely. Do they love ground beef? This is where the answer becomes dubious. If Americans truly loved ground beef, there would be ground beef houses, just like there are steakhouses. The truth of the matter is Americans love the versatility of ground beef. You can buy it once a week and make multiple meals out of it—from spaghetti, burgers, tacos and so on. But they do not love ground beef in and of itself. The taste of ground beef alone does not generate passionate demand from consumers. It is convenient, yet the packaging does not remove the “ick” factor some have when handling meat. This makes the ground beef market truly ripe for disruption. Plantbased ground beef alternatives can likely compete on taste with ground beef. What happens if they make major upgrades to the packaging to not only solve for the ick factor, but also make it safer to ship via e-commerce? What happens to grocery trips when meat can be delivered and maybe subscriptionized like Netflix? What happens when meal kit companies realize that their offerings may be too high-end for middle class consumers, and they would be better off tailoring their menus to appeal to how most American children eat? In this context, I would be willing to bet on the likelihood that plantbased burgers, meatballs, meatloaf and tacos are ready to pose a major disruption to the ground beef industry. www.foodlogistics.com

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