CHOICE CHAPTER 3 - National Food Service Management · PDF fileNATIONAL FOOD SERVICE MANAGEMENT INSTITUTE 30 CHAPTER 3 A general breakdown in communication between school ... Food

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NATIONAL FOOD SERVICE MANAGEMENT INSTITUTE

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CHAPTER 3The Market Place Environment

Practice

The private conversations of manufacturer and distributor sales staff canteach school purchasers a lot about the failed communication process betweenschools and our business partners. The conversations below are typical:

"Our brand is not approved. We can't bid."

"It's discouraging to work on this bid.It's hard to tell what they want, and Iknow our brand is better than our competitor's."

"There really isn't a lot of difference. Allof the steps are the same, except theyhave to issue formal request for pricesbecause they are spending tax dollars."

"Maybe we will get lucky and they willget mad at that vendor."

"Go on and bid. They won't notice."

"Why does doing business with schools have

to be so difficult? Why can't they be like

restaurants?"

"There's no reason for us to waste our time

filling out this bid. They are going to

purchase from the same vendor they

always use."

"But next time they'll get mad at us, and

we'll lose the business."

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CHAPTER 3

A general breakdown incommunication between schoolpurchasers and the business communityhas caused a lot of confusion aboutschool business. Both schools andemployees of our business partnersmust make an effort to understand eachother.

InformationThe food distribution chain has

become increasingly complex over theyears. To make wise decisions a schoolpurchaser must understand the role ofeach player who has an effect on thequality of the product or service. Anunderstanding of the players who takeownership of and liability for productshould be considered when makingpurchasing decisions. The four playersin the center of the chart below mostoften own the product. The flow chartshows the place of all of the players.

Food distribution chain from grower to school

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THE MARKETPLACE ENVIRONMENT

Grower is the individual, corporation,or partnership that actually grows theproduct. The location where theproduct is grown can affect the productquality.

Manufacturer or processor is the firmthat converts the raw product to afurther processed state. Severalmanufacturers or processors may beinvolved in converting to the formpurchased by schools. Packer is anotherterm for the manufacturer or processor.

Government agencies protect the safetyof the food supply. The Food and DrugAdministration (a branch of the USPublic Health Service), the USDA, andthe Environmental Protection Agencyare among the regulatory agencies. Seethe chapter on the regulatoryenvironment for a discussion of theircritical role. These agencies work incooperation with industry tradeassociations to establish generallyaccepted manufacturing practices.

Broker or sales representative is theperson or firm employed to sell themanufacturer or processor's products tothe distributor. Manufacturers may hirean employee to sell their product to adistributor, or they may hire abrokerage firm as their salesrepresentative. A broker will representor sell the products of severalmanufacturers. The broker ormanufacturer's sales representative alsomakes sales calls on school districts,restaurants, or other distributorcustomers.

The broker is paid a fee by themanufacturer, based on the dollar valueof products sold. The actual sale of theproduct is from the manufacturer to thedistributor. A broker's activities usuallyinclude:

� Selling product to the distributor

� Assisting distributors in obtainingprices and contracts for products

� Placing or tracing orders

� Assisting with problem resolutionbetween the manufacturer/processor, the distributor, and theend user of the product (that is,the school)

� Providing training for thedistributor's sales force

Distributor buying groups/corporateheadquarters are purchasing groupsformed by independent distributors orcorporate groups. These groupsmaintain a private label for identitypurposes, provide product qualitycontrol support, marketing, and otherassistance to local distributors.

Distributor, wholesaler, jobber, ordealer is the company that purchasesproduct, sells it to customers, anddelivers the product to schools. Adistributor is a professional at foodpurchasing, warehousing, sales, anddelivery of a perishable product.Distributors can be classified in thefollowing categories:Full or broadline means that they carryalmost all food, supply, and equipmentitems necessary to operate a kitchen.The typical distributor can carry in

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inventory (stock) in excess of 7,000products.

Broadliners account for $73.9 billionor 48% of the $154 billion in 1999 foodservice distributor sales.

The ten largest distributors had salesof $41.1 billion or 31.4 percent of thetotal distributor sales.

Specialty wholesalers are companiesthat specialize in a particular productcategory. Some examples of specialtywholesalers are meat companies,produce companies, paper companies,and dry grocery companies. Milk andbread companies are specialtydistributors and manufacturers.

Special breeddistributorsare companiesthat deliverproducts tonationalrestaurantchains on arigid structure.These specialbreeddistributorsdelivered morethan 13percent of theoverall $154billion in foodservice salesin 1999. Theten largestindependentsystemsdistributors

had sales of $14.25 billion. Specialbreed distributors are discussingdiversification of their customer base.When a restaurant chain sells or filesfor bankruptcy, the special breeddistributor may lose a significantportion of its business volume. Schoolsshould be aware of special breeddistributors as potential new vendors.

Supermarket or wholesale clubs are inevery community. Many smallresidential centers participating in theNational School Lunch and BreakfastProgram purchase product at theselocations. The disadvantage is thatpurchases are cash and carry. However,the product is not delivered, so theprice is competitive.

School/district purchasing co-opadministrator is the chief operatingofficer for a group of school districtsthat formed a purchasing cooperative.School districts form cooperatives formany of the same reasons thatdistributors formed cooperatives.

End user is the school district thatpurchases and serves the product to thefinal customer, the child. An end useralso can be a cooperative purchasinggroup, representing the memberschools.

A little bit of history Food distribution has become a

sellers' market. Understanding how thiscame about will help purchasersevaluate their purchasing process.

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Vendors or distributors serving theschool market were originallyestablished to provide supplies forwagon trains journeying westward. Thatmarket dried up, but meanwhilefamilies began to grow less of theirfood. As they purchased more foodfrom the local grocery, the vendorsdeveloped this emerging market.

In 1946 when the National SchoolLunch Act was passed, schools becamethe first major wholesale customer fordistributors. Early distributors servedboth the retail (grocery store orsupermarket) and the wholesalebusiness. Following the end of WorldWar II, two major changes affected thefood distribution business:

1. Major national chains bought theretail stores that were originallylocal "mom and pop" operations.These chains built warehouses andoperated their own fleet of trucks.This change decreased thedistributor's customer base.

2. For the next 20 years the eating-away-from-home index (peopleeating out in restaurants andpublic facilities) grew rapidly. Thischange boosted the professionalfoodservice distributor's customerbase.

As the restaurant and health caremarket base increased, the productsnecessary to service these accountsbegan to change. In the late 1960s andearly '70s distributors began tospecialize in either retail or wholesalecustomers. Today it is unusual for adistributor to sell to both retail and

wholesale customers.In the early '80s corporate mergers

and buyouts gobbled up many smalldistributors. Though less common,mergers continue to change the face ofthe food distribution business. Thespecialty and independent distributorsdon't have high visibility, but theycontinue to deliver as much as 50percent of the food sold to wholesalecustomers.

During the '50s schools were theprimary customer of wholesaledistributors. Schools represented asmuch as 75 to 80 percent of theavailable customer base; it was abuyers' market. In the business climateof the early '60s and '70s distributorsunderstood the value of schools ascustomers.

The business climate has changed.Schools that learn more about how theother customers do business will havethe edge. The current customer baselooks something like this:

The specialty andindependent distributorsdon't have high visibility,

but they continue to deliveras much as 50 percent ofthe food sold to wholesale

customers.



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Restaurants . . . . . . . . . . . . . . . . . .40%Convenience stores (C stores) . . . .10%Hotels/lodging . . . . . . . . . . . . . . . .10%Other commercial . . . . . . . . . . . . .10%Health care . . . . . . . . . . . . . . . . . .10%School foodservice . . . . . . . . . . . . .10%Colleges and universities . . . . . . . . .4%Correctional foodservice . . . . . . . . .4%Other non-commercial . . . . . . . . . .2%

The figures show that schools nolonger enjoy the luxury of a buyers'market. In a sellers' market, schoolsmust compete with other customers andtheir methods of purchasing. Schoolscan sell themselves to potentialdistributor vendors, based on thefollowing points:

� Schools are not sold nor isbusiness lost through newownership.

� Schools do not file for bankruptcy;payment is guaranteed.

� Yes, schools have to obtaincompetitive prices, but will workto make the process fair.

� Schools prefer delivery early in theweek whereas commercialaccounts demand the later part ofthe week.

� Schools do not require deliverieson major holidays; vendoremployees get the day off.

Although it has become a sellers'market at the distributor's level, itremains a buyers market at themanufacturer's level. The manufacturerdoes not have to deliver small

quantities of product on a frequentbasis. Schools can request pricing frommanufacturers based in all fifty states.To take advantage of the competition atthe manufacturer level a school must belarge enough to purchase in truck loadsand have a mechanism for delivery.

Successful purchasing depends onunderstanding business partners'perspective. Read a distributor-directedpublication such as ID: The Voice ofFoodservice Distribution. A distributor'srepresentative will have a current copyyou could borrow to preview. Thispublication is free to employees ofdistributors, but there is a charge toothers. The January 2001 subscriptionrate was $105.00. They can be contactedat P. O. Box 1254, Skokie, IL 60076-9201,or by phone at 847-647-7987, or [email protected]. The web page can beaccessed@ http://www.restaurantbiz.com/id/index.shtml.

Distributor vendor evaluationSchool districts can better

understand their potential distributorvendors if they visit the warehousefacilities and review operatingprocedures. The review should coverthe following areas:

� Product line

� Physical facilities

� Delivery equipment and truckloading procedures (includingtruck loading software)

� Financial history

� Service levels

� Accounting practices

� Performance at pre-bid conferences



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Appendix 1 contains a form forreviewing a potential distributor'soperation. Information on evaluatingmanufacturers during the brandapproval process will be discussed inChapter 8. Some purchasingprofessionals review vendors after thebid is awarded. Others claim thatresponsible purchasers should knowsomething about the potential vendorbefore making a recommendation. Manystates do not have laws that requireroutine inspection of distributors'facilities. A school district has aresponsibility to determine that productis coming from a clean storage facility.

School district profilesDeveloping a school district profile is

one method that will improvecommunication with the businesscommunity. A purchasing profile tellsvendors how your school district runsits purchasing. The profile will helpvendors know how to work with you.

Organize the purchasing profile in ashort, easy-to-read format. Thepurchasing profile should contain fivemain elements:

� Statistics about the district

� Request for prices

� Facts about how products arescreened

� Sales call policy

� Special requirements for foodproducts

A blank form for developing a profilefor your school district is in Appendix 2.

Technical information sourcesSince distributors typically stock

7,000 plus items, the sales staff canonly have a general knowledge of thestock. The best source of descriptions ofprocessed food products is the foodmanufacturers' technical staff.

This is the communication chain:The school is the distributor's customer.The distributor is the manufacturer'scustomer. Manufacturers cannot godirectly to the schools without cuttingthe distributor out of the chain, riskingdamaging professional relations.However, the school can requestassistance, and the manufacturer willgladly provide access to their technicalstaff.

To avoid increasing themanufacturer's operating cost, schooldistricts can identify products on whichthey need assistance, and make onerequest. Schools can work cooperativelyon product comparisons withoutactually forming a purchasingcooperative.

If this is your firstattempt to access themanufacturer's technicalstaff, how do you start?

1) Make a list of those products onwhich you need assistance.

A school district has aresponsibility to determinethat product is coming from

a clean storage facility.

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2) List the manufacturers who makethis product.

3) Attend a trade association show tomake contact with a manufacturer.

4) Request technical assistance fromthe manufacturer in writing.

Communicating with vendorsControversy often develops as you

try to maintain a balance between freecompetition and what is best for thechild. Communication with the vendorcommunity is essential to success. Youmust structure requests for prices so allvendors have an opportunity tocompete, but not at increased cost or atthe expense of quality. Case historiesexplain the types of controversy inwhich schools get involved.

A school district decided to serve children the best food available within budgetconstraints. Applying the philosophy to product quality, the school district specifiedwhole fillets of fish, rather than a chopped and formed product.

One local manufacturer of fish products had an excess inventory of choppedand formed product. This manufacturer decided that the local school system wouldbe a good place to sell this product. When the Child Nutrition purchaser told theprocessor that the district had decided to serve only solid muscle product, themanufacturer demanded to know who had the bid. As the bid award is publicinformation, the school district allowed the manufacturer to review the product andprice information. The rather aggressive sales person informed the district that itwas wasting taxpayers' money purchasing solid muscle product for $1.75 perpound when he could sell them the chopped and formed product for $1.05 a pound.The school district tactfully thanked him for the information and reinforced theirdecision for product quality.

This aggressive sales person escalated the disagreement to the schoolpurchasing department. The Child Nutrition purchaser explained the rationale forthe decision, and the school purchasing department supported the decision. Theescalation moved to the school board. Once again the Child Nutrition purchaserexplained and actually served the school board both types of product. The schoolboard supported the decision of the Child Nutrition office.

The vendor then decided to report this "waste of taxpayers' money" to thestate auditor. The facts became somewhat twisted, and the state agency had toinvestigate. The school district maintained its position, and the state determinedthat the district had the right to make quality decisions and had made a fairdecision. It would have been easy for the Child Nutrition purchaser to give up.School purchasers must be prepared to face such situations and do the right thingfor the children.

CASE 1: A QUALITY ISSUE

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Conducting a market areaanalysis

On the next page is an example of amarket area analysis for a school districtwith 20 food preparation sites and anannual food budget of $1 million.

A school district was getting fewer and fewer price quotes, and the cost of foodwas rising. The food service director decided that conversion to a bottom line bidaward would guarantee vendors a cost-effective drop size. With this change morevendors agreed to offer prices.

A small specialty distributor heard "through the grapevine" that he would nolonger be able to bid. The food service director was prepared for this controversyand communicated with the vendor, using the market area analysis as shown inAppendix 3. The vendor agreed that the district was making the responsibledecision for the children. He saw that he still had an opportunity to compete forthe business.

CASE 2: QUOTES DOWN AND COSTS UP

A school district was considering purchasing pre-cut fruits and vegetables. Thefood service director and staff met to discuss the pros and cons of purchasingready to eat product. Food safety was the biggest concern. They decided ainspection of the distributor was a necessity. In this particular case, the vendorwas also the manufacturer of the produce. Did the vendor have a HACCP plan?What controls were in place to monitor appropriate temperature? Was the facilityclean and sanitary? Using the HACCP Supplier checklist in Appendix 1, and thePhysical Audit form in Appendix 23 the food service director was able tocommunicate the needs for a safe and wholesome product to his vendor.

CASE 3: VENDOR EVALUATION

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When conducting a market areaanalysis for the purpose of convertingto a bottomline bid it is not necessaryto consider the broadline vendors.Broadline vendors can offer prices on

any items you may need. Groupingproducts is important to them only todetermine the drop size, guaranteeimplied.

Market Area Analysis WorksheetClassify potential distributors as broadline or specialty. Check with nearby schools

or districts to locate potential additional vendors.

1. Broadline vendor

2. Specialty Vendors

3. Review specialty vendors' history of sales to the school district



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Time saving tip: The totalfood budget, minus milk,ice cream, bread and freshproduce provides a fast,reasonable estimate ofthis number.

Discuss with eachpotential vendor thenumbers obtained in steps2, 3, and 4. Show vendorthe prior year sales to theschool district. Explainthat you want to group thenew bid to allow vendorsto compete for morebusiness than they havereceived in the past, butthat they may not be able

to bid on every item that they stock.The purpose of conferring with vendorsis to find food groupings that give theschool the most competitive price,makes the business attractive to morevendors, and allows vendors theopportunity to compete.

4. Determine the potential dollar value of the products on which broadline and specialty vendors might offer a price = $990,000.

5. Determine which vendors have common product lines

The purpose of conferring withvendors is to find food groupings thatgive the school the most competitiveprice, makes the business attractiveto more vendors, and allows vendors

the opportunity to compete.



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During the conference to discusssteps 2, 3, and 4, obtain a copy of theproduct list from each vendor.Determine the common productsstocked by all vendors in eachidentified category. Estimate thepotential dollars of business using thequantities projected and the currentprice.

7. Determine the dollars left unclassified

a. Record the total potential dollarvalue from #4 above: $990,000

b. Subtract the potential dollar valuefor specialty distributors =$(you complete)

8. Make the final product grouping decisions

All groups should representapproximately one third of the total inorder to provide the most cost effectivedelivery "drop" size to each potential

bidder. If the numbers for your schoolare typical the dollars in the meat groupwill be the largest. It may be necessaryto move some meat/frozen items to thegroup that only the broadline distributorcan bid on.

Allowing the meat/frozen vendors tobid on everything they stock at theexpense of the cost paid for theremaining items is the point at whichthe school must balance the needs ofchildren against the open and freecompetition issue. If the numbers foryour school are typical this vendor willprobably have the right to compete formore business than he has received inthe past and should therefore beaccepting of the grouping.

Communicating with specialtydistributor� The purpose of the conference is

to develop product groups that willserve the best interest of theschool district.

6. Determine the dollar volume estimate for vendors with common product lines



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� An individual conference witheach vendor will be more effective.

� Do not tell the specialty distributorhow the final proposal will bestructured.

� Request the cooperation of thespecialty distributor in determininghow to group items so that hewill be able to bid, and at thesame time protect the interest ofthe school children and taxpayers.

� From the report above share withthe specialty distributor thefollowing numbers:1. Total anticipated dollar value

of the proposal2. Total dollar volume of

business with this distributor in the past year

3. Average dollar volume per delivery during the past year for this distributor

� Discuss the current cost perdelivery and mention that it isyour understanding that the

industry average is between $50and $100. Mention at this costlevel that it would take a $500 to$1,000 order for them to realize aprofit. Show the specialtydistributor what they can expecttheir total dollar volume to be,based on your suggested productgroups.

� Discuss the implications on theprices for the remaining items ifthey are allowed to select the itemson which they bid.

� Compare the previous year's salesto this year's potential sales basedon the school district groups.

� Inform each specialty distributorthat when all conferences havebeen completed a managementdecision will be made as to finalproduct groups. Tell distributorsthat you will advise them of thefinal decision and will seek toarrive at a decision that will bemost beneficial to all concerned.

Summary

The food distribution chain has become increasingly complex over the years. The situation has changed from a buyers' to sellers' market. Schools are no longer the dominant market segment and must learn to sell themselves as customers.

Communication failure is the major source of controversy between the vendor community and the schools. Vendors and schools must make extra efforts to understandthe demands of each other's role. Schools must adapt where possible to the methodsused by the commercial segment.



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Notes

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CHOICE CHAPTER 3 - National Food Service Management · PDF fileNATIONAL FOOD SERVICE MANAGEMENT INSTITUTE 30 CHAPTER 3 A general breakdown in communication between school ... Food