Category: Supply Chain

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Leadership Supply Chain

Prime Future 138: The future is fiercely collaborative.

This week we throwback to Prime Future 68 as a welcome to new followers & as the setup for next week.

There’s a local ranching family that’s been raising cattle on the same land for 7 generations. In that time they have not sold an acre of land, not one. They have withstood droughts, drug cartel activity, wildlife predators, market crashes, high interest rates. You name it, they’ve survived it.

Some years ago they got into a lil spat with the US government over the renewal terms for grazing permits on public land, so the federal government rounded up the family’s cattle that were on public lands and kindly delivered them to the sale barn.

Someone recently summarized the family’s mentality this way, “They are  fiercely independent, they just don’t trust anyone. Then again, that’s probably how they’ve survived and why they’re still ranching.”

This struck me. I have a deep respect for the challenges producers face and the resilience they embody….but I wonder if that fierce independence won’t actually work against producers in a rapidly evolving world where collaboration is rewarded more than independence. (And though this first example is a rancher, every segment of the value chain has players with a similar mentality, a transactional ‘us vs everyone else’ mentality.)

Collaborating raises new questions, new situations, new risks to manage…and new opportunities. If done thoughtfully and effectively, new collaborators can grow the pie (and it’s individual slices) in ways that independent actors cannot.

In today’s world, mastering the art of highly effective collaboration increases the probability of survival.

Let’s start with one of the most successful examples of a systems approach, one that has stood the test of time: McDonald’s. (If you aren’t familiar with the 3 legged stool model, here’s a good primer.)

Each supply category has a limited number of suppliers that are held to very high standards but rewarded with high volumes of business, typically on a cost plus basis. Suppliers do not float in and out of the system frequently, these are not transactional relationships – they are partnerships built for the long term.

Now contrast the McDonald’s system with two alternative structures that land in different places along the continuum of Transactional to Collaborative, the independent rancher and the contract poultry grower:

  1. Let’s assume the rancher sells weaned calves at the sale barn, the epitome of price taking at the market’s daily whims. The definition of transactional – the buyer is literally whoever is willing to pay the most on any given day.
  2. Let’s assume the contract poultry grower supplies the labor and facilities, then executes the management program prescribed by the poultry integrator. The grower is paid on a $.xx/lb produced with some level of base pay that is set, and the remainder of pay determined by how the contract grower’s live performance stacks up against the flocks that are processed that week (the lottery system).

Regardless of the business (weaned pigs, broilers, or hamburger patties), it seems there are 3 core drivers around engaging in collaborative ecosystems with dedicated partners:

  1. Profit. Maybe its about finding higher value races to the top of the value pyramid, rather than vice versa. Maybe it’s about cost plus arrangements that may not maximize revenue on a given transaction, but could look smart over the long haul and the ups & downs of market cycles.
  2. Predictability. Creating predictable revenue can radically impact business planning and operations. Some would prefer to make $.1/lb day in day out, some would prefer to make $1.00/lb on 1 load knowing they might lose $.90/lb on the next.
  3. Potential (long term growth). What’s the growth potential of the ecosystem? Is this a chance to grow the pie and grow your business accordingly?

Below is a rough analysis of how different systems compare – maybe these are over or under stated, but the big idea is that there are tradeoffs under each model.

🙂=sufficient. 😃=heck yeah. 😑=maybe? 😂=that’s funny.

Of course this doesn’t capture some of the intangible tradeoffs of collaborative partnerships, like losing some degrees of freedom. I think my real point is that there are increasingly more alternative ways to approach business models and these alternatives should be considered.

  1. What is the upside potential? Downside risk?
  2. What are the tradeoffs compared with the risks of the status quo?
  3. Are those tradeoffs bearable compared to the next best alternative?

The answer to those questions will always be situation/people/goal dependent.

And I’m no Pollyana – there are risks with entering partnerships where multiple parties are reliant on one another. The obvious caveat is that not all systems are created equal; not all partners are good partners, not all collaborations are worthy bets. Sometimes the business model isn’t right, sometimes the leadership isn’t right…or any other number of reasons that a system doesn’t work out.

One of the most practical pieces of advice came from my friend’s dad: when you create a plan to enter a partnership, create the plan for how you will exit the partnership.

(Those of you much more seasoned than me are probably nodding your head vigorously at that advice since you’ve seen the dangers of not preparing for partnership dissolution in advance. “Hope for the best, prepare for the worst” and whatnot.)

A great irony from a producer standpoint is that although it might be easy to reject taking on the risk of entering partnerships, the fewer strategic alliances a producer makes with customers, by definition, the more reliant the producer is on commodity markets where price takers have zero control which introduces…risk.

Maybe the real questions are around where you want control (price? management freedom?), where you want predictability, and what type of risk you are willing to accept or are more comfortable managing.

I recently saw a list of about 30 aligned beef supply chains in the United States, here’s a snapshot of one. ‘Run our program to help us deliver a better product to our customers and we’ll all win’ is the summary idea. If you read Prime Future you know I think we’ll continue seeing more of these:

The above examples focus on how producers might engage supply chains & customers, but what about managing suppliers? I recently heard of a producer who decided to double down on supplier relationships by choosing one strategic supplier for every major input category. They gave up the transactional, shop-around-for-the-best-price-on-this-transaction in pursuit of the best supply arrangement on the next 1,000 transactions. Another dimension of a collaborative approach.

What does collaboration look like in Agtech?

Now let’s talk about where a collaborative mindset can drive progress in agtech:

  • Among co-founders – its doable to be a solo founder but as someone who hit The Great Wall of Burnout trying this route, I can tell you it is HARD and there is not an ounce of virtue in trying to defy the odds by being a solo founder.
  • Among founders and venture investors – there are huge tradeoffs in choosing to bootstrap a business which typically means slow and steady growth versus raising venture capital and committing to the high growth model. Neither is right or wrong, they are just different models with different paths.
  • Among founders and early customers – That early feedback from first customers – and how founders respond – can set the entire trajectory of an early stage company. Ask any successful tech company and they will tell you about the early customers who made them.
  • Among big companies and startups – each brings something to the table in terms of successfully scaling innovation, figuring out how to get the best of each can unlock magic.
  • Among startups and startups – the punishment for tech forward producers right now is that every single hardware/software product tends to have its own login. What farmer wants to login to multiple systems to manage their business? Zero. But not every company can be THE platform. This will drive partnerships that may not be what every company wants, but will drive customer experience and <drumroll please> grow the pie of tech adoption.

The best summary of those last points came from a recent Future of Ag podcast interview with Jim Ethington, an early employee of Climate Corp who is now CEO of Arable:

“We could have said we can’t afford to give up a piece of this pie and we’re going to go it alone but that’s not the path that moves the industry forward. …we can all be good at our pieces and hey sometimes we compete, most of the time we can collaborate but that’s what moves the industry forward.…being able to put the puzzle pieces together where 1+1 = 3 for the customer.

What if they try to replace us? Come in with the assumption that a) it doesn’t matter because this integration is what the customer wants – start with the customer and work backwards, and they want one integrated system. …and b) when this plays out even at the largest companies in the world…guess what their roadmap is full. ….everybody’s roadmap is packed – don’t flatter yourself they aren’t going to go build your product. And if they do, they were probably going to anyway and your partnership didn’t do anything to accelerate it. I think you have to let go a little bit and go back to the customer problem, growing the pie, making this a better overall technology space….and put aside the natural fears of what risks does this pose to us. The benefits outweigh the risks because those fears usually aren’t as real as you think.”

Does an independence-at-all-cost mentality create the trajectory to thrive in the ag economy of the future?

There’s perseverance in independence that will get you somewhere.

But my hypothesis is that moving forward it will be the smart collaborators who channel that same perseverance for the sake of a larger business objective who will win; those who grow the pie in a way that creates long term value for every link in their chain.

…aka the spoils will go to the effective collaborators. The collaborative’ists, if you will.

“If you want to go fast go alone; if you want to go far go together.”

What a time to be alive 😉

Did you miss early editions of Prime Future?

Access an ebook with editions 1 through 81 here: Prime Future PDF

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Categories
Supply Chain

Prime Future 135: Value is in the eye of the (brand) beholder

In the last edition of Prime Future, we kicked off a deep dive into traceability & transparency, and all the complexity (& baggage) those terms carry. Here were my starting hypotheses:

Today we start by looking for more precise definitions. Which matter because it leads into a chicken or egg discussion of which one comes first. Which matters because the drivers are different for traceability and transparency. And drivers matter because they may help us think about how this could play out in the next 10-20 years.

It turns out that defining these two concepts is actually a difficult exercise. Partially because definitions seem to vary by industry and are context specific. Partially because the practical definitions don’t necessarily mirror the textbook definitions.

Consider this list of cross-industry supply chain leaders’ opinions comparing the ideas of traceability and transparency:

  • “Traceability is the ability to track an item and its associated activities as it progresses through the supply chain. Transparency is the ability to demonstrate this information to stakeholders, regulators, trading parties, and consumers.”
  • “Traceability is tracking what happened. Transparency is seeing it while it’s happening. Whereas transparency focuses on mapping the whole supply chain, traceability looks at individual batches of purchase orders as they progress through the supply chain. The data used in traceability allows more targeted recalls, reducing scale and cost.”
  • “Transparency is the full view of the supply chain network. Traceability is the view of the supply chain details, including data from sourcing to delivery, which essentially maps the journey of raw materials to finished goods.”

Yet to (much of) the (US) livestock (beef) industry, the contrast in practice is something like:

  • Traceability as a stick, transparency as a carrot.
  • Traceability as a likely cost, transparency as a potential premium.
  • Traceability as mandated, transparency as voluntary.
  • Traceability as an animal disease thing, transparency as an anything thing.

We’ll get more into the specifics by protein another day.

Today I want to focus on what these capabilities a-c-t-u-a-l-l-y mean, and I think it’s something like this:

Traceability is the industry capability; transparency is the supply chain capability.

An important point here is that traceability and transparency are capabilities that enable potential value capture, they are not forms of value in and of themselves. Nobody’s putting “this product is from a transparent supply chain” on a retail package and expecting consumers to care.

What they are doing is making a brand promise on a retail package, backed by some degree of information, that matters to an end consumer, such as grass-fed or grain-finished, cage-free or free-range, etc.

Which comes first, the chicken or the egg?

A twist in the definitions is that supplier data, required for transparency, could include product data, which could provide traceability. If a brand has the data infrastructure set up, suppliers are capable of supplying product-level data necessary for traceability, and the incentives are aligned, then a brand with supply chain transparency could also achieve product traceability.

Which raises the question, which comes first, traceability or transparency?

If 4 things could be true here…

  1. Transparency enables traceability.
  2. Traceability enables transparency.
  3. Traceability and transparency are independent capabilities and do not build on one another.
  4. Traceability and transparency are independent capabilities that indirectly support one another.

….which one is it?

Yes.

I wanted to reach a clear conclusion about whether traceability or transparency has to come first, and which one has more compelling drivers behind it. But my conclusions are that 1) either can be a starting point, and 2) in the end they likely converge and operate in parallel, at least by those who aggressively pursue competitive advantage.

These capabilities can be combined in varying ways across different proteins, different geographies, different degrees of government-mandated traceability, and in different markets with varying degrees of consumer willingness to pay for transparent supply chain claims about specific attributes.

And these capabilities can be applied to varying degrees of granularity and specificity, something that is likely to become an increasing point of differentiation as this trend continues.

Presumably, in some markets/proteins/geographies, industry-level traceability is or will be the foundation that transparent supply chains are built. In others, it is or will be the exact opposite.

This also seems to be a place where the role of export markets in an industry’s sales channel portfolio plays a starring role. Where export markets are a massive driver (e.g. Australia & New Zealand beef), mandatory industry-wide traceability is old hat. Traceability is the leading capability in these markets.

Whether it’s driven by government mandate or industry coalitions, nationwide traceability schemes seem to be the result of high-value export markets.

But I’m not touching the politics of traceability with a 10-foot pole, so I’ll leave it at that observation and move on.

In less export-focused markets, transparency plays the leading role. If transparency is a purely commercial activity, there are a few flavors of commercial benefits:

  1. Get more money per pound (premiums)
  2. Avoid getting less money per pound (discounts)
  3. Maintain or build market access (getting new customers, keeping existing customers, growing business with existing customers)

And these 3 drivers are ultimately driven by brand managers.

Take Horizon Organic milk, who announced last year that they would be carbon positive by 2025 by working with their 600 farmer suppliers.

Idk whether the brand manager doesn’t know that ‘carbon positive’ is the exact opposite of what climate-conscious consumers are interested in or if this was a strategic move to generate buzz around the brand because of the confusion but regardless…

A supply chain-specific carbon footprint is exactly the type of marketing outcome that a supply chain transparency capability enables.

There’s a third concept that could also be a driver of transparency initiatives, and its the concept of supply chain visibility. One explanation I read described transparency as an external-facing capability with commercial benefits, while supply chain visibility is the use of the same information for internal operational benefits.

Imagine doing the one thing (building the transparency capability) and unlocking value via topline revenue (either increased market share or increased price) and simultaneously decreasing costs. That’s a one-two punch to drive the bottom line…

…IF the marketing strategy is aligned with the supply chain strategy.

…IF supply chain participants are incentivized appropriately, meaning those commercial and operational benefits are shared fairly among supply chain partners. Whatever fairly means.

All that to say:

(1) Supply chain transparency, and/or voluntary product traceability, will have the highest adoption where it leads to commercial impact and operational impact for a supply network.

(2) The biggest barrier to supply chain alignment that achieves that commercial impact & operational impact is trust among the supply network, not technology.

(3) Value is in the eye of the brand manager. The tradeoffs around pursuing supply chain transparency, supply chain visibility, and supply chain-specific product traceability will be made at the brand level.

For beef and pork, this means there’s still a whole discussion to be had about whether transparency will get anywhere near the ‘mountain of meat’ of commodity production where there is no brand. Another question for another day.

What a time to be alive😉

Categories
Supply Chain

Prime Future 134: “Consumers want to know…”

Every livestock & meat conference the last 15 years:

“cOnSuMeRs want to know wHeRe their food comes FrOm.”

Like it’s the answer to all the questions. Like it’s easy.

Which consumers?

What do they want to know?

How do they want info presented?

How much are those they’s willing to pay for this add’l info?

Consider this week’s newsletter the tee-up for a deeper dive into traceability & transparency.

As one does in 2023, we start with ChatGPT:

Let’s accept those definitions and benefits as a reasonable 30,000-foot view summary. It’s all neat and tidy and rationale and obvious.

But zoom in to 29,999 feet or below and it quickly gets complicated & messy:

  • What capabilities <people, processes, systems, technology, pricing, business models> does it take to achieve traceability / transparency?
  • Where are the costs incurred and the value captured?
  • What can we learn from companies doing these things well? What did they learn the hard way?
  • What are the biggest bottlenecks to realizing these aspirations?
  • Are push (regulation) or pull (commercial) dynamics more likely to impact trajectory and long-term outcomes?
  • How much overlap is there between these two ideas and how can that overlap be leveraged? I’m guessing no, but are the ideas ever at odds with one another?
  • How do the dynamics differ across the different proteins?

One reason this whole topic is interesting is that implications span all the way from what happens at the farm to what happens in the board room of major processors/retailers/foodservice companies. And to ignore either end of the spectrum is to likely get it wrong.

Here are my starting hypotheses:

  1. Transparency or traceability? A distinction without a difference.
  2. No one cares until someone is willing to pay. Additional cost only makes sense if it creates additional value that can consistently be captured.
  3. In order for any variation of traceability/transparency to be a long-term sustainable thing, it has to create value for 👏🏽 every 👏🏽 single 👏🏽 part 👏🏽 of the value chain that participates.
  4. As premium brands push the boundaries of supply chain capabilities, there will be halo effects on commodity production.
  5. The limitations are market-based (trust, commercial terms) not tech-based.
  6. The right combo of product, production attributes, business model, supply chain alignment, people, processes, tech, and brand will create some very big winners as a result of transparency. It’s not for everyone tho.

As we explore some of the questions above, let’s see which of those hypotheses hold up.

What insights, hypotheses, or questions, do you have about these topics?

Categories
Meat Regenerative Agriculture Supply Chain

Prime Future 120: Game over, polyester.

I don’t know if I’m just noticing it more, or if there has actually been a serious increase in buzz around the topic of sustainability and the fashion industry in recent months. Either way, sustainability at the intersection of textiles, agriculture, and oil & gas industries seems to be a *super* complex topic.

I’m no expert in any of this, but all roads lead to livestock so here we are…learning out loud.

Spoiler alert: there are reasons to believe livestock could be a big part of the solution.

Let’s start with a summary of the fashion industry’s sustainability problem, according to Bloomberg:

“The fashion industry might not be the first that comes to mind as a superuser of fossil fuels. But modern textiles rely heavily on petrochemical products that come from many of the same oil and gas companies driving greenhouse gas emissions. Today, in fact, fashion accounts for up to 10% of global carbon dioxide output — more than international flights and shipping combined.

Eighty-seven percent of the total fiber input used for clothing is ultimately incinerated or sent to a landfill. Textiles are the second-largest product group made from petrochemical plastics behind packaging, making up 15% of all petrochemical products.

When it comes to the environmental impacts of the industry, fast fashion is often blamed. But high-end brands originate trends and generate demand for new styles, which are then mass produced by fast fashion companies for a fraction of the cost.

Polyester has overtaken cotton as the main textile fiber of the 21st century, ending hundreds of years of cotton’s dominance. The global market for polyester yarn is expected to grow from $106 billion in 2022 to $174.7 billion by 2032.

Polyester requires a large amount of energy to produce. In 2015, polyester production for clothing emitted 282 billion tons of carbon dioxide, triple that of cotton."

Or as this article framed it:

“Producing clothing and footwear leads to 8 percent of GHGs (greenhouse gases).

The first-mover innovators are guiding the industry out of its linear ‘make-sell-dispose’ approach towards business models that are more circular and eco-friendly. Business model innovations cover reduction, reuse, repair, recycling, and sharing. It transforms the way business is undertaken and value is generated by attempting to drastically limit the resources and material inputs required in the industry’s value chain and minimising the ecological impact of its activities. The new model adheres to the principles of sufficiency and a circular economy.”

Much of the fashion & sustainability “innovation” has centered around re-shaping buying habits, e.g. buying second-hand clothes or buying higher-quality pieces that last longer, with plenty of startups focused on changing how consumers shop for clothes more sustainably. And that drive to escape the fast fashion model makes sense.

But my original question when I started down this rabbit hole was, why is there not more focus on the actual materials used in manufacturing clothes? More specifically, why are natural fibers like wool not playing a central part in the fashion sustainability conversation?

Initial research led me to Woolmark, “the global authority on Merino wool and owns the Woolmark logo, a quality assurance symbol applied to more than 5 billion products.” According to their website, in 1955 ~95% of major textile fibers were natural (wool, cotton, cellulose) and 5% were oil based synthetics.

Today, it’s more like 30% natural fibers and 70% oil based synthetics. 😵‍💫

(Oh, and 10/10 recommend this 1-minute video from their brilliant campaign, “Wear wool, not fossil fuels.” The video is kinda weird but so well done.)

But where I geeked out is watching this 12-minute video about ALL of the potential fiber applications for wool, not just in fashion. Spoiler alert: there are a lot.

First of all, wool prices have been low for decades since they boomed with the Korean War (a lot of soldiers fighting in a cold region meant astronomical demand for wool uniforms to keep soldiers warm) and then bottomed with the post-Korean war erosion of demand for lamb meat AND the explosion of synthetic materials for clothing manufacturing, beginning with polyester.

In the video, the question is asked of what’s the advantage of wool and what are the advantages of plastics. The advantages of wool, among others, are that it’s biodegradable, fire retardant, and odor resistant. Meanwhile, plastics are….cheap.

Where the video gets really interesting is in the description of new technology to create pellets made of wool, Shear Edge, that can be made into thousands of products – basically any product that would otherwise be made from fiberglass. Shear Edge shows examples from kayaks to ice chests to pigments, which go into everything from cosmetics to industrial applications. Pretty wild stuff.

In a world obsessed with natural and renewable, how is a reversion to wool not an obvious mega trend in textiles manufacturing?

This will be interesting to see how it plays out. In 10 years, will natural fibers be at 40% of total textile fibers? 50%? Or are consumer purchase decisions not going to match what they say on surveys about sustainability as a driver of purchase decisions, and polyester maintains its dominance?

In the very real battle between what people say they want and what they are willing to pay for, which will win? TBD.

The most interesting question is, what innovations will drive wool costs closer to those of synthetic fibers to reduce or eliminate the price tradeoff?

Clothing mostly uses fine wool that is softer. Strong or course wool is what’s used for things like carpet, or used to be used for these more rugged or even industrial applications until plastic-based materials took off. And although higher quality meat characteristics tend to be correlated with stronger/coarser wool, that seems like the kind of problem that genetics companies must be tackling, right? Somebody(s) must be working on the beef x dairy equivalent for the sheep industry with meat x wool genetics?

The beauty of broadening applications for wool by applying new technology and processes is that it’s a classic example of using the whole buffalo, so to speak, with what seems like real potential to satisfy customer and consumer demand AND drive market value for farmers.

Or as the Woolmark guy put it “We are taking the waste of low-value wool, and deriving value for farmers with it.”

JR Simplot would be so proud.

And once again, what’s old is new? What a time to be alive 😉

This is obviously the tip of the iceberg so if you are working on any of these topics, please reach out – I’d love to learn more about what’s happening in this space and how and why. For all I know, I’m just a sucker buying the party line from an industry association because I want to believe livestock is the future of everything….

Categories
Leadership Supply Chain

Prime Future 90: The outset of a new era for meat packers & food retailers?

I’m part of a group chat titled “The Advisory Board”. We live in different parts of the country but we’ve all known each other since high school. Over the last several years this friend group has evolved into something you might call a mastermind group or peer group. We approach the world with equal curiosity, ambition, & bullishness on agriculture….and from vastly different perspectives.

This group is about helping each other get where we want to go, and encouraging each other in the journey. One guy in the group describes it as “just about becoming better, in every area of life”.

It’s part sounding board, part therapy, part financial planning, part business coaching…its every bit as ridiculous and awesome as it sounds.

I’m wrapping up a retreat with this group that was like a 3 day mental IV of motivation and courage from all the brainstorming and game planning amidst Montana mountain views.

As a result, for today’s Prime Future I’m throwing back to some thoughts on vertical integration that are the backdrop for next week’s discussion – stay tuned.

Someday I’ll write about the ingredients for a great retreat like this but an important one is good views

The outset of a new era for meat packers & food retailers?

(Originally published in 2021)

We tend to think of the livestock, meat & milk business as part of an inevitable march towards increased consolidation and increased integration.

(Note: those are 2 related but very separate concepts. Consolidation is when a company buys a competitor, vertical integration is when a company buys a supplier or customer.)

Along with many other processors, a poultry integrator recently announced increased wages for processing plant employees and truck drivers. Because poultry is so vertically integrated, I’ve just assumed that most poultry co’s own the trucks and trailers to transport eggs from breeder farm to hatchery, chicks from hatchery to growout farms, feed from mill to farms, and live haul to take birds from farm to plant.

However, what I’ve learned is that there is actually a shift away from company owned truck fleets because of the management and capital required to keep those assets on the books. While some truck drivers are still employed directly by the integrator, like for delivering chicks to farms, and some of the trucks and/or trailers are company owned, more and more of these activities are outsourced to third parties.

Interesting. Here is an example, albeit potentially small, of reducing vertical integration by outsourcing at least some portion of a reallly critical activity.

One data point may not indicate a trend, but the whiff of vertical disintegration in trucking & logistics for meat & poultry companies does raise some questions:

  1. Why are the integrators moving away from owning trucking capacity?
  2. How will truck driver shortages of 2020-2021 (and likely 2022) impact that trend?
  3. Is this a one off trend or a part of something larger? Are integrators divesting assets in other important-but-not-core activities?

More importantly, given the chaos in labor markets & truck driver shortages of 2020-2021 (and likely 2022), how will this impact the ownership model for integrators moving forward?

“There are only two ways to make money in business: one is to bundle; the other is to unbundle.” The tech industry loves that quote, and it’s usually used in the context of bundling & unbundling consumer products, e.g. cable TV vs Netflix. Sometimes it’s used in the context of bundling & unbundling companies to create shareholder value, e.g. GE of 1990 vs GE of 2021.

What if it also applies to how we think about supply chains? Such as, oh idk, commodity supply chains like meat, milk & poultry? We could even use the alternative phrases of vertical integration & vertical disintegration to describe bundling & unbundling.

Metrics: what financial metrics drive vertical integration?

An interesting example of vertical disintegration happened in the US beef business a few years ago as packers spun off their cattle feeding capacity. Why? Because feeding cattle is massively capital intensive and depending on where we are in the cattle cycle, can negatively impact Return on Equity, a key finance metric.

It’s not a direct corollary to meat, but here’s an interesting thread on that concept; replace ‘supply chain’ and ‘logistics’ with ‘meat’ and see if some of this doesn’t resonate:

Yet over the same time frame that packers divested their cattle feeding businesses, let’s call it the last 10 years, retailers have increased their degree of vertical integration in protein with examples like Walmart’s milk plants and Costco’s chicken plant. Also over the same time frame, packers have moved further downstream into further processing, e.g. case ready plants. Mixed signals, eh?

Cold storage represents another dichotomy in vertical integration.

According to the Global Cold Chain Alliance, cold chain operators see insourcing (customers building their own facilities for cold storage) as a top 3 threat to the business behind driver & workforce shortage and balancing supply & demand. Yet these same third party logistics providers in the cold chain space see that increased customer outsourcing represents a growth opportunity.

Which is it?

When is it which?

(Interestingly two other growth drivers for cold chain ahead of customer outsourcing were robotics & automation and growth of ecommerce…obvious but also 👀)

There are probably a million factors that can impact a management team’s decision to increase/decrease vertical integration, things like:

  • market conditions
  • company financial health
  • company ownership structure
  • company strategy
  • relative risk level
  • supplier structure
  • net cash position
  • cost of capital
  • competitive landscape

etc etc etc etc etc…..

My working hypothesis is that ultimately the two driving dimensions for vertical integration are:

1) risk vs control - what is the risk of not having control of this link in the supply chain?

2) reduced cost vs added value - will owning this link in the supply chain reduce cost or increase revenue?

….sometimes those two sets of dimensions are at odds with one another. But here’s the thing – that laundry list of factors above? Those are true or false at a given point in time, not in perpetuity. So the structure of the industry should have some ebb and flow over time with regards to the degree of vertical integration. Some hypotheticals:

  • If land prices fall 50% in the next 5 years, would poultry integrators decide to buy the farm ground to grow corn & soy themselves?
  • If fed cattle prices increase 60%, would beef packers get back in the cattle feeding game?
  • What would need to be true to cause pork processors to own their own cold storage instead of leasing capacity as needed?
  • What would need to be be true to lead pork integrators to divest their growout operations? Sow farms?

Or, is it possible that as packers/integrators increase their core business through consolidation, that it makes more sense to decrease integration? I’ll leave that one to economists and CEO’s.

Back to the original question, how will the current transportation crisis impact the future movement of livestock, meat & milk?

My hypothesis is that we could see a shift back to company owned logistics as a way to control risk, given the massive logistics & labor risk the last 18 months have revealed. At least until autonomous trucking becomes a thing, then we should see more business model innovation unleashed…

…because, keep in mind, this whole discussion about the future of supply chain & logistics is set against a backdrop of not only how rapidly the tech is accelerating but how that technology is enabling new business models, like the one mentioned last week of the WeWork model for freight warehousing. (If you’re not familiar, WeWork is a startup that takes long term leases on commercial office buildings and sells short term leases for customers wanting flex office space. WeWork is also a deliciously disastrous startup trainwreck story for reasons other than their business model.)

Use WeWork or Uber or Airbnb or whatever other consumer business model you want, but the question is, how will those sharing-economy type business models drift into asset heavy, large scale, B2B manufacturing/disassembly businesses? The options used to be either lease or buy the asset, but having more variations in both of those options could change the risk/reward calculus of owning or outsourcing certain parts of the process involved in getting meat, poultry & milk to end customers.

Alternatively, having more predictability could change the calculus. Another example from last week was the idea of freight tech companies that are moving all the pen & paper or Excel based processes to digital, and improving not only visibility of information but of actual cargo in transit. How will those moves towards digitization reduce the risks that integrators perceive, ultimately enabling them to have high confidence in those suppliers to do the activities that need doing but without the integrator having that capability on their own books? Not just in trucking either.

On a final note, consider this perspective from Seizing the Middle: Chess Strategy:

Rockefeller’s strategy was part of a wider transition to a new type of industry, beginning in the 1840s and ending with the crash of the 1920s. Businesses started “seizing the middle” and taking control of the resources they depended on. A single company could take charge of everything from the natural resources required to make a product to the transport systems necessary to deliver it to customers. The implications of this were dramatic.

…the change in business practices allowed managers to start thinking like chess players: a few moves ahead. Being able to anticipate and plan had the undeniably significant effect of allowing companies to invest more in research and development because they could forecast where current trends headed:

“In allocating resources for future production and distribution, the new methods extended the time horizon of the top managers. Entrepreneurs who personally managed large industrials tended, like the owners of smaller, traditional enterprises, to make their plans on the basis of current market and business conditions. . . . The central sales and purchasing offices provided forecasts of future demand and availability of resources.”

To control the game, one tries to control as much of the board as possible. At the outset, using your pieces to seize the middle of the playing field is a great strategy, because it gives you the widest possible vantage point from which to control the movement of the other pieces.

But maybe that word ‘outset’ is the key here. The above description of Standard Oil (and many other businesses across many commodity segments) was reflected in principal in how the meat industry organized itself at the outset….but we aren’t at the outset of the meat business anymore – it’s an old, established business.

So perhaps we are at the outset of a new era. One with new alignments and new business models and new considerations that will inform how ‘vertical integration 2.0’ shapes up across meat, milk & poultry.

What a time to be alive!

Categories
Supply Chain

Prime Future 74: Vertical Integration 2.0

Along with many other processors, a poultry integrator recently announced increased wages for processing plant employees and truck drivers. Because poultry is so vertically integrated, I’ve just assumed that most poultry co’s own the trucks and trailers to transport eggs from breeder farm to hatchery, chicks from hatchery to growout farms, feed from mill to farms, and live haul to take birds from farm to plant.

However, what I’ve learned is that there is actually a shift away from company owned truck fleets because of the management and capital required to keep those assets on the books. While some truck drivers are still employed directly by the integrator, like for delivering chicks to farms, and some of the trucks and/or trailers are company owned, more and more of these activities are outsourced to third parties.

I find this really interesting. We tend to think of the livestock, meat & milk business as part of an inevitable march towards increased consolidation and increased integration. (Note: those are 2 related but very separate concepts. Consolidation is when a company buys a competitor, vertical integration is when a company buys a supplier or customer.)

Yet here is an example, albeit potentially small, of reducing vertical integration by outsourcing at least some portion of a reallly critical activity.

One data point may not indicate a trend, but the whiff of vertical disintegration in trucking & logistics for meat & poultry companies does raise some questions:

  1. Why are the integrators moving away from owning trucking capacity?
  2. How will truck driver shortages of 2020-2021 (and likely 2022) impact that trend?
  3. Is this a one off trend or a part of something larger? Are integrators divesting assets in other important-but-not-core activities?

More importantly, given the chaos in labor markets & truck driver shortages of 2020-2021 (and likely 2022), how will this impact the ownership model for integrators moving forward?

"There are only two ways to make money in business: one is to bundle; the other is to unbundle."

The tech industry loves that quote, and it’s usually used in the context of bundling & unbundling consumer products, e.g. cable TV vs Netflix. Sometimes it’s used in the context of bundling & unbundling companies to create shareholder value, e.g. GE of 1990 vs GE of 2021.

What if it also applies to how we think about supply chains? Such as, oh idk, commodity supply chains like meat, milk & poultry? We could even use the alternative phrases of vertical integration & vertical disintegration to describe bundling & unbundling.

Metrics: what financial metrics matter?

An interesting example of vertical disintegration happened in the US beef business a few years ago as packers spun off their cattle feeding capacity. Why? Because feeding cattle is massively capital intensive and depending on where we are in the cattle cycle, can negatively impact Return on Equity, a key finance metric.

It’s not a direct corollary to meat, but here’s an interesting thread on that concept; replace ‘supply chain’ and ‘logistics’ with ‘meat’ and see if some of this doesn’t resonate:

Yet over the same time frame that packers divested their cattle feeding businesses, let’s call it the last 10 years, retailers have increased their degree of vertical integration in protein with examples like Walmart’s milk plants and Costco’s chicken plant. Also over the same time frame, packers have moved further downstream into further processing, e.g. case ready plants. Mixed signals, eh?

Cold storage represents another dichotomy in vertical integration.

According to the Global Cold Chain Alliance, cold chain operators see insourcing (customers building their own facilities for cold storage) as a top 3 threat to the business behind driver & workforce shortage and balancing supply & demand. Yet these same third party logistics providers in the cold chain space see that increased customer outsourcing represents a growth opportunity.

Which is it? When is it which?

(Interestingly two other growth drivers for cold chain ahead of customer outsourcing were robotics & automation and growth of ecommerce. 👀)

There are probably a million factors that can impact a management team’s decision to increase/decrease vertical integration, things like:

  • market conditions
  • company financial health
  • company ownership structure
  • company strategy
  • relative risk level
  • supplier structure
  • net cash position
  • cost of capital
  • competitive landscape

etc etc etc etc etc…..

My working hypothesis is that ultimately the two driving dimensions for vertical integration are:

1) risk vs control - what is the risk of not having control of this link in the supply chain?

2) reduced cost vs added value - will owning this link in the supply chain reduce cost or increase revenue?

….sometimes those two sets of dimensions are at odds with one another. But here’s the thing – that laundry list of factors above? Those are true or false at a given point in time, not in perpetuity. So the structure of the industry should have some ebb and flow over time with regards to the degree of vertical integration. Some hypotheticals:

  • If land prices fall 50% in the next 5 years, would poultry integrators decide to buy the farm ground to grow corn & soy themselves?
  • If fed cattle prices increase 60%, would beef packers get back in the cattle feeding game?
  • What would need to be true to cause pork processors to own their own cold storage instead of leasing capacity as needed?
  • What would need to be be true to lead pork integrators to divest their growout operations? Sow farms?

Or, is it possible that as packers/integrators increase their core business through consolidation, that it makes more sense to decrease integration? I’ll leave that one to economists and CEO’s.

Back to the original question, how will the current transportation crisis impact the future movement of livestock, meat & milk?

My hypothesis is that we could see a shift back to company owned logistics as a way to control risk, given the massive logistics & labor risk the last 18 months have revealed. At least until autonomous trucking becomes a thing, then we should see more business model innovation unleashed…

…because, keep in mind, this whole discussion about the future of supply chain & logistics is set against a backdrop of not only how rapidly the tech is accelerating but how that technology is enabling new business models, like the one mentioned last week of the WeWork model for freight warehousing. (If you’re not familiar, WeWork is a startup that takes long term leases on commercial office buildings and sells short term leases for customers wanting flex office space. WeWork is also a deliciously disastrous startup trainwreck story for reasons other than their business model.)

Use WeWork or Uber or Airbnb or whatever other consumer business model you want, but the question is, how will those sharing-economy type business models drift into asset heavy, large scale, B2B manufacturing/disassembly businesses? The options used to be either lease or buy the asset, but having more variations in both of those options could change the risk/reward calculus of owning or outsourcing certain parts of the process involved in getting meat, poultry & milk to end customers.

Alternatively, having more predictability could change the calculus. Another example from last week was the idea of freight tech companies that are moving all the pen & paper or Excel based processes to digital, and improving not only visibility of information but of actual cargo in transit. How will those moves towards digitization reduce the risks that integrators perceive, ultimately enabling them to have high confidence in those suppliers to do the activities that need doing but without the integrator having that capability on their own books? Not just in trucking either.

On a final note, consider this perspective from Seizing the Middle: Chess Strategy:

Rockefeller’s strategy was part of a wider transition to a new type of industry, beginning in the 1840s and ending with the crash of the 1920s. Businesses started “seizing the middle” and taking control of the resources they depended on. A single company could take charge of everything from the natural resources required to make a product to the transport systems necessary to deliver it to customers. The implications of this were dramatic.

…the change in business practices allowed managers to start thinking like chess players: a few moves ahead. Being able to anticipate and plan had the undeniably significant effect of allowing companies to invest more in research and development because they could forecast where current trends headed:

“In allocating resources for future production and distribution, the new methods extended the time horizon of the top managers. Entrepreneurs who personally managed large industrials tended, like the owners of smaller, traditional enterprises, to make their plans on the basis of current market and business conditions. . . . The central sales and purchasing offices provided forecasts of future demand and availability of resources.”

To control the game, one tries to control as much of the board as possible. At the outset, using your pieces to seize the middle of the playing field is a great strategy, because it gives you the widest possible vantage point from which to control the movement of the other pieces.

But maybe that word ‘outset’ is the key here. The above description of Standard Oil (and many other businesses across many commodity segments) was reflected in principal in how the meat industry organized itself at the outset….but we aren’t at the outset of the meat business anymore – it’s an old, established business.

So perhaps we are at the outset of a new era. One with new alignments and new business models and new considerations that will inform how ‘vertical integration 2.0’ shapes up across meat, milk & poultry.

What a time to be alive!

Categories
Supply Chain

Prime Future 73: Never let a (supply chain) crisis go to waste

“If you think about it, the breakout moment for Fintech was the financial crisis of 2008-2009. It forced banks and financial institutions to do things differently. There was backlash against big institutions, we had new regulations like Dodd-Frank.

While what’s happening in supply chain is a little different, for our industry this is our moment of taking our crisis and building the next generation of tech and services. What’s happening around freight tech is very similar to what we saw in fintech in 2008-2009, so the great next decacorns (companies valued $10B+) that come out of venture capital will be associated with some element of supply chains and supply chain technology.”

When you see all the activities & excitement  & naïveté born by founders and skepticism born by incumbents, this is very similar to where financial services were. We will see some companies emerge from this part of the cycle that go on to be the great leaders of tomorrow. “

That’s a quote by Craig Fuller, founder of Freight Waves, a company who’s content has been my go to resource in learning about what’s happening with logistics right now.

Craig Fuller grew up in a family that was all about the trucking business. Craig started his career in fintech before starting Freight Waves. Here’s how he explains that company:

“If ESPN and Bloomberg had a baby in the back of a truck, it would be Freight Waves. The impetus behind Freight Waves was to create a real time information source for the global supply chain industry.

We originally started to create a tradable instrument based on trucking and trucking rates. We saw a massively volatile market and no way to hedge or offload that risk onto a third party. We actually launched a tradable instrument but that wasn’t very successful and a lot of that had to do with the lack of information in the market. It was an opaque market, there wasn’t a real time data service that provided information so people could trade off of it, and there wasn’t uniformity in the freight market. We’ve tried to focus on all 3 of those things.

A byproduct of creating a failed product is that you find what customers do want, if you have enough capital to survive. The Freight Waves playbook was taken from financial services. Bloomberg’s business model is what we tried to emulate.”

My chat with Craig was one of the most eye opening conversations since I started Prime Future-ing. You can listen to the full audio here (and I totally recommend it):

Now back to Craig’s big thesis about freight tech having its moment, let’s put that in perspective. Fintech is the darling of venture capital  investors these days, with 1 in 5 VC dollars invested going into the category and 65+ privately held companies valued at >$1B.

So why would Craig think the tiny little logistics space could catch up to financial services in terms of tech investment? Here’s why:

“This is a massive category, let’s not forget that we’re talking about 12% of global GDP. Financial services & insurance are 7.5% of domestic GDP. Supply chain & logistics represent 8.5% of GDP in the US and 12% globally, so we’re talking about an industry that is bigger and more nuanced than financial services.

It’s also easier to trade information which is essentially what a fintech platform is. But what we’re talking in supply chain is the physical movement of goods. You have this massively fragmented set of  decisions, set of parties, set of activities which make it much broader than what you see with fintech. It is so fragmented and so many activities that take place inside the industry, which means it’s ripe with opportunity.”

Here are a few of the many subcategories of freight tech, as Craig sees them:

“(1) Movement of freight – everything around DTC & ecommerce, how do you interact with the big parcel carriers. There are companies that consolidate shipments or create API’s or consolidated workflows.

(2) Warehouse automation services.

(3) Flex warehouse space –  The two most successful are Stord and Flex who are doing this with on demand warehouse space with short term agreements instead of long term agreements.

(4) Ocean cargo – ocean booking systems, electronic contracts.

(5) Air freight – Flexport is the most successful forwarding organization that does both ocean & air.

(6) Trucking brokerage – arbitrage, managing freight on behalf of shippers. Companies like Convoy and Transfix doing this.

(7) Visibility – how do I know where all of this freight is and how do I have information about where its going? What’s my eta? Companies like Project 44 and Four Kites are playing here.”

As an aside, you may have seen in the last few days how the CEO of Flexport unleashed the power of Twitter with some semi-simple ideas on how to start unlocking the bottleneck at the ports in CA. I recommend the whole thread here:

Twitter avatar for @typesfastRyan Petersen @typesfast

Update: The city of LB just announced it has temporarily suspended container stacking limitations. Thank you everybody who called the governor and the mayor to request. They got the message, you can stop now…

Ryan Petersen @typesfast

Yesterday I rented a boat and took the leader of one of Flexport’s partners in Long Beach on a 3 hour of the port complex. Here’s a thread about what I learned.

October 22nd 2021

1,334 Retweets

Ok so anyway, of course I had to ask Craig about the role of autonomous trucking because to us outsiders, that seems like the almost-ready technology likely to disrupt logistics. If there’s an 80k+ truck driver shortage that’s only expected to grow, isn’t autonomous trucking the answer? Here’s what Craig had to say about it:

“Automation and autonomous trucking are great, it all plays well and broader media loves it. The reality is that autonomous trucking is not going to happen as quick as people believe it will in the mainstream. This stuff is 10-20 years out. It will be massively transformative of our economy, but it’s not going to happen overnight. Autonomous trucking is getting all the attention but what I’m really excited about is all the pipes and mechanics of movement of cargo, money and info.

Ports have been early adopters (of autonomous trucking). The Port of Rotterdam has had a semi autonomous, closed loop environment for years. You’ll see these closed loop environments maybe around an airport or a warehouse where you’re shuttling trailers or containers from one door to another, that happens a lot. Those applications will see autonomous first. But I don’t think we’ll see autonomous trucking  services in the US before we see it in other parts of the world – places like Japan that has major demographic challenge and are very tech forward. They have a labor problem and its different than ours than ours because of their elderly population.

You have to remember that in order to have full autonomous trucking you need the federal, state and local rules and laws to correspond. Imagine the difficulties of that. When talking about autonomous trucking, you have a situation where the #1 job in 29 states is truck driver. And that is in states that are traditionally pro-business, so it creates a lot of difficulty to expect that technology to be adopted quickly.

The reality is that we are in the very early days, but there is so much opportunity.”

I also asked Craig, what should us normies know about the logistics industry?

“People don’t realize how BIG the industry is. 8 million people are employed by logistics in the US, 100 million across the world. So it’s a massively important segment. This is the physical economy. You can’t sell agricultural products unless you can transport them, and transportation costs impact the overall cost of finished goods.

People are waking up to the fact that supply chain is so prone to disruption and weather and geopolitical events. The reality is we’re now aware of it. I use the analogy of your power company – no one thinks about the power company until the power is out and then it’s ALL you think about. No one thinks about how product gets from point A to point B until the product doesn’t show up. At the end of the day the market has always worked this way and there’s always been issues but we’ve never had so much freight in the economy at a time when so few people were willing to drive trucks and work warehouses. So its created this massive bottleneck.”

“No one thinks about the power company until the power is out and then it’s all you think about. No one thinks about how product gets from point A to point B until the product doesn’t show up.”

Here’s what Hill Pratt, Managing Director of the Transportation Business Unit for Dairy.com, had to say about the tech that will enable the future of logistics in milk hauling:

“The dairy industry increasingly recognizes that it is in a competition for qualified drivers against all other industries.  A high volume of local moves and consistent year-round shipping activity provides some advantages.  But, there are negatives as well… Cows don’t take any holidays, so Sundays, Thanksgiving, Christmas and Easter are regular workdays for dairy haulers.  Also, some plants are notorious for excessive wait times and denying detention pay.  It doesn’t take very many incidents of drivers missing family dinners or their kids’ sporting events before they start looking at want ads from other industries offering predictable hours and fat signing bonuses.

Therefore, the industry is increasingly focused on resolving the causes of long and unpredictable plant waits and developing consistent, automated detention programs.  Technology is at the center of these solutions. Specifically, real-time shared integrated scheduling/trading and transportation platforms are essential to developing and coordinating plans that keep wheels moving and inventory turning.  Also essential is integrating these platforms with real-time load tracking/GPS platforms, so that:

(1) Real time bottlenecks and delays are identified and resolved earlier.

(2) Accurate load-level historical wait time data is captured, enabling business intelligence tools that sit on top of these massive datasets to help supply chain managers identify delay patterns, develop solutions, and create business cases to justify process change, staff adds, and capital investments.

(3) Provide accurate plant in/out time data to power automated detention tracking and payment approaches—so that haulers get what they deserve without the headache of creating detention invoices, and, plants are accurately charged for detention.  Automated detention relies on integration of scheduling, load arrival and load departure data—so plants don’t get dinged if haulers arrive early or miss an appointment times, but haulers are compensated accurately when plants hold them up.”

On a very related note, James Turner, General Manager of M2X US, added this context around the gap between current state and future state:

“In the United States, agricultural products are the single largest user of freight services comprising 24% of the share across all loads by tonnage. While agriculture products hold this position of significant overall volume in the US supply chain, its logistics network lacks technology facilitating communication and efficient transportation within the industry sector. Generally, the agriculture supply chain to date is tightly bound to lagging information communicated through paper, phone calls, emails, and more often than you could bear to imagine in this era, handwritten documents.

Additionally, with the ever-growing demands on industries to find more sustainable methods of producing goods, the agriculture supply chain has a unique opportunity to adopt smart technology which, through optimization, can reduce empty miles driven while also reducing costs. This results in higher profit margins for carriers and lowers costs for shippers all the while significantly reducing the overall carbon footprint of the agriculture supply chain.”

(What is M2X? From their website: “M2X was founded with the vision to improve the efficiency and sustainability of livestock transport across New Zealand. We now offer TMS solutions for carriers and enterprise customers across many industries including livestock, milk, forestry, bulk and agricultural products, and general freight. Our integrated Platform approach enables carriers and enterprise companies to work together to achieve and share the benefits of digital efficiencies and optimisation.”)

James’ carbon comments also lead us to ship technology. A few weeks ago I subscribed to a newsletter on ship technology (cleverly called Ship Technology), and its staggering how many of their stories have to do with ship companies launching new types of ships that have a carbon / emissions improvement angle. These are not announcements of investors putting money into these projects, these are announcements by customers of the technology which signals its much closer to reality. Here’s one that even mentions carbon capture:

Image

What a fascinating time in supply chain as today’s supply chain crisis intersects with abundant capital and rapid tech developments. Winston Churchill said it best:

“never let a good crisis go to waste”

Previous installments of this supply chain series

(1) Love Me Tenders: a supply chain story (link)

“Supply chain talk is e.v.e.r.y.w.h.e.r.e these days so I’m kicking off a series on how supply chain disruptions & dynamics are impacting livestock, meat & dairy. To start, we look at 2 macro concepts, what’s happening in milk hauling, and a chicken supply situation at the fictitious fast food chain, Love Me Tenders.”

(2) Sea cowboys & flying sheep (link)

“Meat isn’t the only thing exported, live animals are also exported. The global annual value of live animal exports is $24 billion. Put that in perspective – that’s roughly the equivalent of the entire US swine industry. It’s also a tiny little speck of the ~$800B global meat business. But every day there are five million head of livestock criss crossing the oceans of the world. That seems like something worth looking into for curious people like us…”

Categories
Supply Chain

Prime Future 72: Sea cowboys & flying sheep

Livestock Carrier Shipping Vessel - Fremantle - Australia

I love the messiness & complexity & massive scale of the global animal protein business, that there’s always something to learn, new corners of the industry. Today’s topic is definitely an obscure little corner of the industry. We usually look at big picture accelerating trends in Prime Future but this one is both tiny picture and a trend that is, at best, unlikely to grow. But it’s interesting, so here we go 😁

In exploring how feed, livestock, and meat move around the world I stumbled on a post WW2 story of some church groups who wanted to take livestock to regions where the local livestock population had been destroyed in the war. These ‘sea cowboys’ as they were called, put livestock (and themselves) on ships to deliver the animals to war ravaged parts of Europe. Turns out, the sea cowboys were the origin of Heifer International, the non-profit who’s model is built around creating long term economic sustainability through livestock.

From a trip with Heifer International to Zimbabwe to see their model in action…and some local wildlife. (Don’t worry, Mom)

Why are we talking about sea cowboys in the midst of a series on how supply chain chaos is impacting livestock, meat & dairy?

First, let’s generalize the flow of livestock related stuff (at least within the US):

  • Feed ingredients shipped primarily via rail to feedmills, then feed is shpped via truck to producers
  • Animals shipped primarily via truck from point to point, ultimately to processing plants
  • Meat shipped primarily via truck within the US, before being put on ships for export outside of North America

Shipping chilled or frozen meat around the globe is it’s own complex thing that we’ll come back to at some point because cold chains might be one of the highest impact innovations of all time. But meat isn’t the only thing exported, live animals are also exported.

The global annual value of live animal exports is $24 billion. Put that in perspective – that’s roughly the equivalent of the entire US swine industry. It’s also a tiny little speck of the ~$800B global meat business.

Being from Arizona, when I hear ‘live animal exports’ I think about feeder cattle from Mexico brought into the US but there’s a whole world out there beyond. In fact, every day there are five million head of livestock criss crossing the oceans of the world. That seems like something worth looking into for curious people like us…

Who’s shipping livestock where?

Ok, so that $24B global ‘live animal export’ includes the mundane, like live cattle import from Mexico into the US or live pigs exported from Canada to the US, a combined ~$2-3B. It also includes a lot of movement of live animals across borders within the EU, ~$10B. Those animals are put on a truck and moved to their new country, and outside of additional regulations, it’s no different than moving pigs from Minnesota to Iowa or some other interstate movement within the country. So that’s not super interesting, let’s set all that aside.

A large portion of the remainder of animals represented in that $24B, are moving via water, or even air(!), from country A to country B. Now that’s interesting.

Let’s call this segment the Plane & Ship Animals. It seems to be worth about ~$10B globally annually, a rounding error in the grand scheme. Maybe I’m alone in this intrigue, but that rounding error of a supply chain of live animals moving via ships & planes is not a supply chain I’ve spent much time around. I have some questions…

Who: who is shipping animals to whom?

The Plane & Ship Animals are largely moving from Australia and the EU to the Middle East & northern Africa.

After the US (with imports from Mexico & Canada), China is the largest importer of live bovines. After a trade deal struck a few years ago, Australia has a growing live export to China of both beef cattle for feedyards and dairy heifers. That growing export to China pales in comparison to Australia cattle exports to Indonesia.

(Interestingly, dairy heifer exports to China is one of the reasons that the beef-on-dairy genetics strategy is much more challenging to implement in Australia than the US right now – the math on ‘next best alternative’ is very different in the two countries.)

There is also a large & established trade of slaughter ready sheep shipped from Australia to the Middle East. Here’s a numeric look, according to Trade Map:

How: how are live animals shipped by air and sea?

Let’s start with export via water, enabled by cargo carriers converted to livestock carriers. One livestock carrier is equipped to handle 75,000 sheep or 18,000 cattle. (Cruises are my nightmare, this is now my meta nightmare🤢)

Here’s how an Australia industry group describes some of the mechanics:

  • “Desalination equipment produces fresh drinking water from sea water. Additional water supplies are carried on board together with spare parts to quickly repair the system and maintain water supply in case of a mechanical breakdown.”
  • “Fresh air is continuously circulated by a powerful ventilation system. This is constantly monitored and alarms alert the crew to any changes. Additional electrical generators and spare parts enable air circulation to continue in case of a mechanical breakdown.”
  • “A ship may have two engines or additional generators in case of a mechanical breakdown, to ensure continued operation of ventilation, lighting, water desalination, feed and water distribution, and refrigeration systems.”
Photo cred to the Australian Livestock Export Corporation

Ok so obviously I know shipping animals across the world’s ponds isn’t new, but I didn’t realize the scale of it today. But think about the shrink on a load of cattle moving 100 miles…that has to be miniscule compared to the shrink on livestock shipped on a livestock carrier ship, right? So then it’s not hard to imagine that higher value animals are much more likely to be transported by plane than ship.

Here’s what Live Air Australia says about exporting animals via plane:

  • Livestock are contained within crates and can be transported in the lower bellyhold of passenger flights or on freighter aircrafts.
  • Each animal is transported in a specifically designed crate for the animal type. Allowing room for the animal to move freely, good ventilation and specifically designed flooring to keep the crates and aircraft clean from livestock excreta.
  • Livestock can be transported to Asia within 24 hours or Europe within 36 hours. Ideal for pregnant livestock or  accessing global destinations that have climatic challenges or new markets.
  • With numerous departure dates and locations,  air transport is a viable alternative for land locked areas for all types of animals, no matter how many livestock are required.
photo cred to Livestock Air Australia

(It turns out that Houston-Bush Intercontinental Airport has a Livestock Facility, so there’s some helpful holiday dinner trivia.)

I do not know the cost comparison of shipping livestock via ship vs plane, but it does raise some questions about what ‘high value’ means in this context and when plane travel pencils out, like for high value dairy heifers.

Why: what’s the business rationale for shipping live animals on planes & ships?

The real question is, what are the operational and market contexts that make exporting live animals the better option to exporting meat?

There are 3 potential markets live animal exports are destined for: breeding, feeding, and slaughter. I couldn’t find any good estimates breaking down the % of each of the total live animal export, let alone those percentages within the Plane & Ship Animals (the ~$10B). So we’re in hypothesis territory now.

The animals intended for slaughter are largely sheep headed to the Middle East for local slaughter for religious reasons. It’s not an economic question of whether it’s more cost efficient to ship carcasses/primals or to ship live animals. The customer demand is for live animals, so that’s what the market delivers….where there’s a market, there’s a way. ✅

Of the Plane & Ship Animals (ignoring the trade within North America or the EU), the animals being shipped to then be fed to market ready weights seem likely to be driven by regions where demand for meat is outpacing production capacity. I’m surmising that those same regions are also building up their breeding herds as well, so shipping breeding animals is either about expanding quickly or expanding better through improved genetics, or both. Whether due to re-population after disease outbreaks, or extended droughts, or any other cause of a previous herd reduction trend that needs to be reversed. Or simply the rapid rise of a middle class ready to level up their diet with animal protein, e.g. China.

But that raises the question, in an era of vastly accelerating technology to accelerate genetic progress, why would a producer import bulls instead of semen? Or heifers instead of embryos? Some version of ‘speed to offspring’ seems to be the likely answer?

As you can imagine, there is enormous animal welfare pressure around live animal exports (all variations, but especially shipped via livestock carriers) and when trying to find info on this space there is way more perspective available from activists than from industry (shocking, I know). The debate seems to be whether animals intended for slaughter should be shipped, or only animals intended for breeding and everything else going in carcass form. Regulations vary from country to country and fluctuate, like New Zealand’s ban on live animal export for slaughter a few years ago.

One thing the live animal export industry has going for it? While ports are backed up waiting to unload cargo ships, livestock carriers dock and unload at designated facilities so they aren’t impacted by the current dynamics wreaking havoc in the rest of the shipping sector. Although, I suppose you do need labor to unload livestock….

Live animal export is a tiny slice of the global protein industry pie but high value niches can make non-obvious operational decisions look obvious…like flying first class sheep across the world.

If you’re geeking out & need to see a bit more…

Here’s a video of Jersey heifers prepping to leave North Carolina for Qatar:

And this one takes a look at the process for sheep, cattle, swine, and goats leaving Australia (Planes & Ships):

Categories
Business Model Innovation Supply Chain

Prime Future 71: Love Me Tenders: a supply chain story

“There does not seem to be any relief on the horizon.”

Supply chain: the red headed step child of business school disciplines; the silent function that just effortlessly does its thing; the heartbeat keeping blood (stuff) moving through the body (economy) without a second thought required.

Or at least that’s how it seemed until we started seeing signs like “due to supply chain shortages, we are out of guacamole and Ford F-250’s.”

Supply chains are in the spotlight now, as they have been since toilet paper-gate began in March 2020.

As we kick off this series on how supply chain disruptions & dynamics are impacting meat & poultry and how this could play out in the future, today we’ll look at 2 macro concepts, what’s happening in milk hauling, and a chicken tender supply situation.

Supply Chain Inception

Every company buys stuff to make stuff to sell stuff, which is a simplified version of Wikipedia’s definition of a supply chain as “a system of organizations, people, activities, information, and resources involved in supplying a product or service to a customer.”

So we start with Company A’s supply chain, who buys inputs from Company B who buys inputs from Company C and so on and so on. Suppliers are dependent on their suppliers to provide inputs; customers are dependent on supply chains to function. The layers keep pulling back like some sort of supply chain inception:

Supply Chain Inception

Sometimes the supply chain inception is called The Global Supply Chain, a generic term being thrown around a lot right now that may or may not be relevant. No one cares about THE supply chain, they care about disruptions to MY supply chain.

In theory vertical integration solves some of this, but not entirely. More on that in a moment…

Supply Chain Chaos: The Bullwhip Effect +

“The bullwhip effect is a supply chain phenomenon describing how small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw material supplier levels. The effect is named after the physics involved in cracking a whip.”

The big idea is that with a small demand increase, the further upstream you go the bigger the impact.

For a lot of companies, the 2020 demand increase didn’t start until a little ways into the pandemic, maybe even after the first stimulus check. But for meat companies it was immediate in March as the ~50% of total meat sold through foodservice shuttered and shifted to retail, where grocery store shoppers stocked up for what felt at the time like the looming apocalypse, emptying the meat case day after day after day.

Simultaneously, getting enough employees to run the plant went from challenging to existentially difficult. I cannot remember a single livestock or meat industry conference that didn’t discuss labor as a critical issue – labor as a challenge is not at all new….what’s new is the severity of the issue.

As we know the 2020 Bullwhip effect created huge and harmful waves upstream to livestock producers, especially as it was compounded with a supply constraint and labor shortage. We basically had supply and demand shocks competing with one another, compounded by labor shortage. I picture the hypothetical equation looks something like this:

It’s not hard to imagine this wild combination of competing & simultaneous dynamics will go in supply chain textbooks as the COVID effect…and the effects continue playing out. Truthfully, we don’t actually know how it ‘ends’.

While this isn’t the place to hypothesize on labor impacting policies or the root origins of the labor shortage, the fact is that in the United States there are 5 million fewer people in the workplace today than in April 2020. That labor shortage is felt in two key ways:

(1) Labor to transport goods. If trucking is a “job of last resort” in a time where people don’t need to resort to their last and worst option, well….here we are. Truckers are required in order to move product from Point A to Point B at every transaction, and some in between. The red arrows are red because those are now high risk potential bottlenecks:

(2) Labor to do the making. If you don’t have labor in the manufacturing plant, you won’t have anything to transport. The red boxes are red because those are also high risk potential bottlenecks:

Plants have struggled to keep the fabrication floor staffed up, often at the expense of further processing capacity which means selling more bone in hams rather than higher value boneless hams, as one example. The Daily Livestock Report provided this commentary on the recently increased volatility of the pork cutout in the US:

“While one can point to a number of factors driving this day to day volatility, we think a major issue has been the widening spread between bone- in and boneless items. The wide spread reflects the impact that limited labor has had on the ability of packers to run boning and trimming lines, be this for hams, loins or other products.”

….and that’s nothing compared to the situation in the UK. According to Bloomberg:

“U.K. farms have begun the daunting task of destroying pigs as worker shortages leave 120,000 animals with nowhere to go, meaning livestock could end up as pet food instead of pork. A worker crunch — driven by Brexit and the pandemic — has seen processors cut slaughter rates by as much as 25% since early August.”

People tend to, uh, get grumpy when impacted by shortages, delays, price hikes, or (more likely) some combo of all 3 effects caused by supply chain bottlenecks. Managers & owners want to maximize profit, which they can’t do without being sufficiently staffed. Buyers want predictability of price and availability, which they don’t get on non-existent or delayed goods. Sellers want commissions, which they don’t get on product unavailable to sell.

How is the driver shortage impacting milk hauling?

Hill Pratt, Managing Director of the Transportation Business Unit for Dairy.com provided these astute observations:

“The driver shortage has become the limiting factor in getting dairy loads moved.  Since June of this year, short-notice and weekend loads have become difficult (and at times, impossible) to cover and spot hauling rates have shot up to the highest levels we have ever recorded.

Covid has impacted many haulers and some haulers report large numbers of parked trucks due to lack of drivers. Hauling companies have added pay and (especially) benefits to attract drivers and are working hard to accommodate driver lifestyle preferences.  Many dairy haulers feel that drivers are simply not available—at any pay level—in their market areas.  Owners of smaller and medium-sized hauling companies are often back to driving trucks on a fulltime basis and see no way to replace drivers who leave.

Nearly all hauler input costs—drivers, equipment, parts, tires, insurance and fuel—have spiked in the last couple of years.  To avoid maintenance headaches, hauling companies had begun replacing trucks earlier, but with delivery on new trucks ordered today delayed until 2023, hauling companies are forced to keep old trucks in service longer—driving up maintenance costs and downtime (given the shortage of replacement parts).”

On how this situation might evolve in the future, Hill said this:

“There does not seem to be any relief on the horizon.  If anything, the capacity crunch that hit the industry this summer may become worse as milk production increases this winter (if it follows typical seasonal patterns.)

Whereas plant processing capacity has historically been the limiting factor (which has caused instances of “dumped milk”), the industry faces the prospect of dairy hauling shortfalls causing milk (and milk components) to build up beyond the capacity to store them.  This may force dairy companies to cease production, dump milk products and/or miss/delay orders.”

Ouch.

Love Me Tenders

To continue pulling this thread, let’s take the POV of the head poultry buyer at a fictitious fast food chain, Love Me Tenders. This chain has 10 distribution centers and 2,000+ stores across the country where they sell air fried chicken tenders (and accept only cryptocurrency as payments, but that’s a topic for another day).

The buyer’s responsibility is to manage 3 variables while procuring chicken tenders:

  • Quality – everything coming into the DC & the stores must meet company specs.
  • Availability – the product HAS to be there or else the company can’t make the stuff to sell the stuff to the people who pay the money.
  • Price – responsibly managing COGS.

(There’s a whole discussion to be had about how different procurement organizations think about the prioritization of these 3 variables relative to their business model. For today let’s assume that our buyer ranks them in the order above.)

So our buyer calls their 3-5 strategic suppliers. Our buyer has negotiated long term agreements with suppliers in order to manage the 3 priorities above but hey, its 2020-2021 and its the wild west out here…hard to say how well suppliers will be able to fulfill their commitments on time. Because these are large poultry integrators, each of our buyer’s suppliers will source product from 2-4 different processing plants within the company but because our buyer only buys the tender, each of those processing plants has to balance their other customers who buy the rest of the bird.

Two truths about the poultry supply chain (pictured here):

  1. Things have to move. For meat & milk supply chains to work, trucking capacity is an existential necessity at multiple points. Every arrow above represents the movement of one physical thing from one step in the supply chain to the next (eggs, chicks, feed, birds, meat). Until localized bullet trains for birds get built, this trucking thing is a big deal.
  2. Things have to move on time. Every step in a supply chain with live animals has its own ‘turkey timer’ so to speak. Chicks have to come out of the hatchery once they hatch and they have to go to a farm, they can’t hang out in the chick trays at the hatchery. Placement numbers in a broiler house are calculated based on density targets by the end of the flock, so birds have to leave the farm at a certain time which means they have to be processed within a very tight window. And once the birds are processed, fresh meat has to move or else it has to be frozen which is a value destroyer. Everything has to happen on time in order for the supply chain to work.

Ford pickups and John Deere tractors can be parked while manufacturers wait on chips to arrive from Taiwan before being shipped to customers in Iowa, but live animals (or milk) can’t be parked in the side lot for days or weeks.

The buyer at Love Me Tenders is reliant on so many supply chain elements to go right, the vast majority being out of the buyer’s control. Which should mean the buyer is signaling to management that we probbbbably need to create some additional back ups for our additional back up plans that were busted to bits over the last 18 months.

The idea of supply chain resilience is everywhere, “the capacity of a supply chain to persist, adapt, or transform in the face of change.” But supply chain leaders will tell you that being prepared for any contingency has always been a core objective, tho perhaps the degree of ‘change’ to be prepared for is increasing in scope/severity.

We’ll continue exploring the complexity around supply chains & the current chaos over the next few weeks but needless to say, there are no easy answers for the Love Me Tenders of the world…or anyone else in meat, poultry & milk supply chains.

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