Revamping retail supply chain can boost the fresh food value chain

27 October 2016

Food waste is a global problem, from wasted resources and unnecessary environmental damage to the social cost of food not reaching people. According to a new report, a large portion of food waste in the retail supply chain comes down to choices made by the management of retailers. They find that by re-evaluating a number of key decisions in the value chain, from strategy to operations, has the potential to both reduce waste and improve margins.

In a new report from the ECR-Community Shrinkage & On-shelf Availability Group, performed by the Technical University of Eindhoven and funded by grants by Checkpoint and Oliver Wyman, the phenomenon of food waste at food retailers is considered in light of key choices made by management. The report, titled ‘Sell More, Waste Less: Increasing sales and reducing waste in the fresh supply chain’, considers a number of relationships between waste and product availability, as well as additional factors that influence the relationship.

The research aims to support companies develop a strategic plan for limiting food waste across their value chain, not only to reduce the phenomenon of unnecessary waste and the social, environmental and reputational damage resultant, but also as a means of improving margins. The key message from the report is that food waste in the retail supply chain is a choice, and that through careful management, large reductions in waste can be achieved.

The analysis is based on modelling the relationship between waste and the availability of stock at 27 supermarkets that participated in the research. Across the 27 participants, a product portfolio of around 17,000 items was mapped in terms of median daily sales, pack size, store shelf life and which category they belonged to, including convenience (fresh pre-prepared food), fresh meat and fresh veggies. These three categories represent around 50% of food waste. This was then used to derive a number of relationships, as well as a number of variables whose manipulations resulted in decreased waste.

Using efficient frontier to find the right mix between OSA and %waste

Food wasted

Food waste is a global phenomenon, with up to 1.3 billion tons of food being discarded each year, valued at around €850 billion. In developed economies public opinion against food waste has become more divisive, with public uproar at the practice of dumping large amounts of viable food. Outrage has resulted in regulator efforts, including French laws that sees food earlier earmarked to be spoiled, passed on to charities or made available for dumpster diving. Aside from not reaching people in need of food, food waste is also an environmental problem; with the considerable resources required to grow the food essentially wasted and the wider externalities not factored into the price, such as GHG gas emissions, antibiotic overuse and runoff, that also cause damage.

Food waste is not merely a social and environmental issue, there also is a strong business case to be made for reducing food waste. Margins on food sold by food retailers tend to be relatively low, at 3% on average. Shrinkage, food lost to waste etc, typically stands at around 2% of total sale value. Assuming a reduction of shrinkage to 1.5% through various efforts, total net income could increase by up to 17% for retailers – which is a considerable margin.

Efficient frontier for three fresh food categories

On-shelf availability vs waste

To understand the choices that lead to shrinkage, the authors developed a model of the relationship between waste and on-shelf availability (OSA). OSA in effect stands for the product being available to a customer in line with expected demand. Given the unpredictability of demand, or customer focus on what is freshest, higher levels of OSA result in increasing waste as older stock to meet potential demand spoils. There is therefore a trade-off between OSA and waste, the higher the availability the more likely that there will be corresponding waste.

The research highlights that the level of correspondence varies considerably between product category type. For fresh meat and convenience, higher OSA (efficiency frontier) causes considerably higher levels of wasted food, while for fruits & vegetables, OSA standards could be considerably higher for waste levels comparable to those of meat and convenience.

Considerable variation however exists between items within categories, with more difficult to utilise items (often culturally dependent), more likely to spoil than more everyday used items. Differences between store types, from large supermarkets to corner stores, also affects the OSA to waste relationship.

Implementing an improvement project implies shifting the Efficient Frontier

Reducing waste

The key argument from the research is that waste is in essence a strategic choice from management, either consciously or out of ignorance. Higher OSA results in more waste and shrinkage costs, while low OSA results in lower availability (potential for out of stock), lower customer satisfaction and lower turnover. Getting the relationship ‘right’, is, according to the research a balancing act.

Leveraging the relationship provides a means to better quantify the balancing act to derive at an optimum efficiency curve that will reduce waste, increase margins from lower shrinkage and still meet most customers’ expectations.

However, the report notes that, while striking the right balance between OSA and waste results in improved outcomes, there are other ways in which to change the efficiency curve for products. These strategies manipulate the variables affecting the relationship between OSA and waste. One such move is to make the supply chain more efficient by reducing item pack sizes sent from distribution centres – lower items per package means that the minimum number of spoilable items sent to a retailer can be achieved, thereby reducing the chance of being overstocked due to the pack size variable. Another move is differentiating OSA between sub-product types, particularly for those that spoil easily, which can improve margins and reduce waste while limiting customer dissatisfaction. Furthermore, the efficiency frontier can be moved by increasing the efficiency of the value chain to increase shelf life by one day, and finally, de-list items with high levels of waste can reduce overall waste.

Related: Consumers waste less if retailers sell fresh more less.