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Demand & Supply Risk Management With A Six Day Perishable Supply Chain

Demand & Supply Risk Management With A Six Day Perishable Supply Chain. Scott Komar Executive Vice President, Operations Fresh Express. Our company started in 1926 as Bruce Church, Inc. Salinas, CA and Yuma, AZ growing regions Iceberg (Crisp Head), Cantelope, Romaine, Watermelon

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Demand & Supply Risk Management With A Six Day Perishable Supply Chain

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  1. Demand & Supply Risk Management With A Six Day Perishable Supply Chain Scott Komar Executive Vice President, Operations Fresh Express

  2. Our company started in 1926 as Bruce Church, Inc. • Salinas, CA and Yuma, AZ growing regions • Iceberg (Crisp Head), Cantelope, Romaine, Watermelon • Grow, Pack, and Ship “commodity” company

  3. Fresh Express Value Added Salads • Launched in 1989 • “The child that became the parent” • Acquired by Chiquita in 2005

  4. Fresh Express Growth $1.1 billion sales in 2006

  5. Seed to Stomach Supply Chain • Food Safety • Quality / Freshness • Service • Efficiencies

  6. Processing Growers Harvest Cooling Raw Transit Distribution Transport Store/Shelf Consumer Customer DC Seed to Stomach Supply Chain Highly Integrated Cold Chain – Superior Food Safety 4 hrs z 34o ~ 38o 1.2 billion pounds of raw product sourced 30,000 loads to the Plants Plants in Salinas, Chicago, Dallas and Atlanta 34o ~ 38o 120 million cases produced 70,000 loads delivered 48% of national market share

  7. Supply Chain Speed (Measured by Hours) Fast Field to Finished Goods 70 Hrs Chicago Campus Salinas Greencastle FDC 12 Hrs Yuma Atlanta 90 Hrs Grand Prairie 50 Hrs Mexico

  8. Innovations Requires Specialty Manufacturing YoCream Chicago Campus Salinas NE Regional Network Chipotle YUM Atlanta, Carrollton Grand Prairie Frozen Smoothies HEB Guacamole Avoterla, Mexico

  9. CLOSE LOOP FRESH FULLFILLMENT NETWORK 6 Demand Management Consumer One Forecast Innovations Fruit Retail Salad Foodservice 1 Vendor Managed Inventory 5 2 3 4 One Order Fulfillment One Manufacturing Network One Logistic Network

  10. Demand and Supply Uncertainty • Tools for Matching and Mitigating Exposure • Value Added Risk Management Hedging

  11. Order Fill, Plants, Harvest, Transportation 0 – 14 days Operating Timing Forecasting Business Driver Supplies purchasing (corrugate, condiments) 2 – 12 weeks Tactical 12 months rolling Business Growing contracts, capacity Demand and Supply Uncertainty Forecasts Generated

  12. Demand and Supply Uncertainty Major Events That Impact The Forecast Demand Events Duration Network Impact • Promotions (ours, competitors) • Weather (buying behavior) • Peak Weeks (January, May) 1 – 3 weeks 1 – 4 weeks 3 – 7 weeks +/- 5-15% per Plant +/- 5-20% per Plant +/- 25-30% system wide Supply Events Duration Network Impact • Pest (grasshoppers, aphids) • Disease (mold, mildew) • Weather (heat, freeze, hurricane) 1 – 2 weeks 2 – 4 weeks 2 – 10 weeks - 5-20% of supply - 5-30% of supply +/- 10-50% of supply

  13. Demand and Supply Uncertainty Forecasting Results Step 1. Create An Agile Network • Advance Planning (S&OP) – over communicate • Supply Chain synchronization every Mon, Wed • Network Balancing throughout the week

  14. 70 Hrs Chicago Campus Salinas Greencastle FDC 12 Hrs Yuma 90 Hrs Atlanta Grand Prairie 50 Hrs Mexico Demand and Supply Uncertainty Step 2. Create Flexibility on Both Ends of the Supply Chain Diversions While the truck is in transit, change the destination Crop Management Push / pull in the field (up to six days flex) Outside Sales Sell Raw Product (better food safety and quality) Result = 0.7% of sales dumped / donated

  15. Risk Management Step 3. Build Capabilities for TEMPORARY Supply & Demand Matching Raw Product Risk • Iceberg and Romaine represents 56% of total commodity pounds consumed (675 of 1,200 million total pounds) • From the start of the salad program in 1989, up to 2001, the open market for iceberg and romaine was typically at, or below, contracted growing rates. As such, Fresh Express utilized an “under supply” growing/planting plan to leverage this situation

  16. Risk Management • At times during the year, when Mother Nature would disrupt the crop supply, we would have to adjust our operations • Over the years, Fresh Express has developed an array of tools to manage volatility of supply and demand TEMPORARY Risk Management Tools and Process Demand Management Supply Management • Modify promotion volumes by switching to other products or canceling ads • Hold customer orders to 10-week averages • Implement a price increase (surcharge) with Food Service & Retail customers • Prorate orders • Change recipes, through MRP bill of material mix, to shift commodity usage • Push / pull timing of harvest in the fields • Reduce/eliminate, for a short period of time, procurement of the commodity

  17. Risk Management Spot Market Purchases Raw Product Risk Open Market Iceberg Prices ($/Lb.) • Two significant events occurred in the 1998 – 2002 time frame that changed the game: • Fresh Express doubled in sales • A significant percentage of growers, seeking greater price stability, aligned with contracted growing agreements, thereby dramatically shrinking the available open market pounds 70% increase 24¢ 20¢ 19¢ 14¢ 35% decrease Supply 2,746 2,532 2,253 1,787 Source: USDA Market News

  18. Risk Management USDA Pricing HistoryPrices over $20: 0 times in 48 months 1998 through 2001, 3 times in the 24 months of 2003-2003 or greater than 10% of the time. - Highest risk around September at the end of Salinas season – 3 of the last 6 years over $10.

  19. Value Added Hedging Variable planting to cover high risk monthsIncremental plantings range from 105% to 120% Demand Hedge Supply Food Service requires uninterrupted supply for their menu items (McDonalds, Subway, Taco Bell, etc.) Pricing is adjustable, to a large degree, during market conditions (but the Franchises go crazy) Sell the value of uninterrupted supply, at much more predictable costs, and higher food safety assuredly Charge an “over supply fee” based on a cost/pound rate Fee is a savings compared to incremental costs of spot purchases Form a commodity desk to sell excess supply in the field

  20. Risk Management Results Thus Far • Spot market pounds purchased significantly reduced from 2002 • Open market pricing dropped dramatically • Currently there is too much supply … we now have to adjust downward 11¢ 10¢ 9¢ 8¢ 8¢

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