A surprising number of supply chain factors can affect when, how and at what price contracted food purchase decisions are made.
In the restaurant business, as in one’s personal life, timing is everything. That goes for refreshing a menu, scheduling a promotion or kicking off an ad campaign. And it’s especially true in supply chain procurement planning when management is making decisions that may affect the price and availability of key ingredients—and a brand’s menu profitability—for months or even years into the future.
To everything there is a season
Supply chain managers use specialized tools and insights to identify where key commodity prices may be heading, then employ customized strategies for how and when to capitalize on that knowledge. And while most operators are aware of the broad commodity forecasts that are released each year, fewer are familiar with the annual and seasonal cycles that often drive those forecasts, or which indicate the best time to take advantage of them. Some of these cycles affect the supply side and are weather and agriculture-related; others involve various kinds of demand in retail, foodservice and import/export markets.
“You have to time your buys,” letting out contracts well in advance of predictable demand patterns, says Bryce Anderson, Senior Director of Category Management for SpenDifference.
As an example, he explains that retail grocery demand for ground beef and steaks typically peaks in the summer, driving prices up and making that the worst period for putting out restaurant contracts for these items. “Many specific cuts of beef, pork and other protein have their own seasonal cycles at different times of the year,” he adds.
Procurement specialists closely observe other factors as well, such as average cattle herd sizes and feed price trends, which can have longer-term effects on center-of-the-plate protein costs. “If you need to buy on the spot market, cattle weight variances can also be a factor,” Anderson says. “Typically they are heavier in the winter, but in a cooler, wetter summer, weights will not drop as much as usual and will increase supply.”
An exercise in constant refinement
Grain and dairy markets follow their own cycles. Demand for dry nonfat milk from China can mean lower butter prices in the U.S., for example. The release of spring planting reports in June and July are watched carefully as trend indicators, notes Amy Smith, another senior category management director who specializes in these areas at SpenDifference.
“We follow data like planted acres of corn and soy, whether crops went in early or late, how weather is affecting field growth along with other factors that affect expected yield,” she says. Such information is combined with data like beginning grain stocks, estimates of import and export demand, ethanol market demand.
Sometimes “we see a lot of market noise when the big USDA reports are released,” Smith notes, indicating that single reports are only one part of a complex picture. Updates and price forecasts are constantly being refined until harvest, even as speculators jump in and out of the market, complicating demand and price forecasts.
Winter wheat follows different cycles, with fall planting and spring harvests. Grain production in South America, at the opposite time of the year of that in the U.S., is another factor. And in the course of a year, the spot and forecast prices of some commodities can vary significantly as the specifics in international supply and demand become known. Such factors are very hard to predict as “countries like China and Russia are quite savvy about keeping their own internal production numbers close to the vest,” says Smith.
Cycle disruptions and risk factors
Category managers also carefully evaluate how large meat and other processors are reacting to the same trends: for example, the percentage of their feed grain purchases that are contracted for in advance vs. the percentage to be bought on the spot market as a potential price hedge.
There are also external factors like the current international “tariff wars” or the spread of swine fever in Asia that can disrupt traditional cycles, as is happening right now with pork demand patterns from China and Mexico, Anderson says. That often means trying to evaluate the direction in which prices and supplies are going before a trend is completely clear.
While it may seem that pricing trends are firmly established for the coming year when broad category supply and price forecasts are released, the truth is that these are constantly moving targets with significant variations that occur all year round.
When the timing and price are right
So, how does one know when to make purchasing commitments? Expert supply chain trend forecasts can help answer this question, but they are most useful in the context of strategic relationships developed with key suppliers, Anderson says. “In most cases, they are looking for large volume commitments that can help them with their own planning.”
Then, depending on whether a market is forecast to go up, down or remain flat, buyers will negotiate the best terms given a chain’s specific needs and market strategy. That can mean block buys by quarter, by year, month-to-month using trailing price averages, or other terms. Operators need to know that at any given time during that year, spot prices may be higher or lower than the contracted level. There is risk in over commitment and in under commitment, Anderson adds.
Ultimately, “It’s critical to work with supply chain management well in advance and on a regular basis, so potential risk levels can be understood and managed as well as possible,” says Liz Longstreet-Darr, Vice President of Client Solutions for SpenDifference. “Brand management needs to understand where prices are headed and what the possible variations are.” Regular reviews allow brand management and supply chain management to optimize the timing and strategy for major buys.
“That helps chain management know where they can take pricing and where they can’t,” she adds. “Such understandings can have major implications for menu items that are critical to the brand, as well as those that may be key to promotions offered throughout the year.”
To see firsthand how a supply chain partner like SpenDifference can get the timing right for planning out new menu items, read How a Commodity Sourcing Forecast Sets the Stage for a Top-Grossing LTO. Or to speak directly with an expert at SpenDifference, please contact us.