First Choice

Geopolitical Supply and Demand Requires “Category Management” Expertise

When America’s nightly news anchors tell us the price of crude oil overseas has dropped another $5 or $10 a barrel, Lynn Lorenc makes a little note of it in the back of her head.

As Vice President of Global Procurement for Rich’s anchor U.S./Canada Region, Lorenc knows such fluctuations might very well have serious implications down the road for the food and beverage industry, which, of course, is Rich’s bread and butter.

“For example,” Lorenc (pronounced “Lawrence”) points out, “less than a year ago, we were sitting at $100 a barrel for crude, and now it’s down to $40 or $50 a barrel.  Nobody really saw that coming, but we still need to understand how such a decrease can influence the food and beverage business.  With lower gas prices, does the increase in disposable income mean increased consumer demand?  Will people be consuming more?  Will they be dining out more frequently?”

Such considerations are just one part of the procurement function, which helps fulfill demand by acquiring the right quantities of all the essential raw materials – agricultural commodities, ingredients, packaging, etc. – needed to keep Rich’s various food products flowing to its customers in the most-cost-efficient manner possible.  As a leading supplier to the global foodservice, in-store bakery and deli, and retail marketplaces, Rich’s manufactures more than 2,000 products across 112 countries.  To produce all these food items, the company utilizes large volumes of commodities such as flour, domestic oil, eggs, dairy products, meats, etc., many of which have experienced volatile marketplace pricing in recent years.  It is the job of Lorenc and her team to keep those costs down.

America’s corporate procurement function in general has experienced a paradigm shift recently, says Lorenc, who has more than 15 years of experience working within Rich’s procurement operations.  Gone are the days when procurement simply meant buying commodities from the lowest bidder, placing purchase orders and securing on-time deliveries.  Twenty-first-century procurement, she explains, means you need to be a master not just of strategic sourcing, but also of “category management” – a complicated proposition made even more complex at Rich’s, due to the company’s broad product lines and global territory.

“The concept of category management, which has gained a lot of traction, revolves around viewing your raw material categories holistically,” Lorenc says.  “It means really delving into all the specifics of a given category, as well as into the idiosyncrasies between markets and the competitive supply base.  You have to build up your knowledge of the category’s industry and all the components within it that affect the pricing of each item going into your finished product.”

Success in the procurement practice these days means taking on the mindset of an economist, she suggests.

“In our supply chain management, we touch the whole process – identifying the raw materials needed, researching those industries, identifying suppliers, negotiating contracts, and ensuring ongoing support from those providers.  To manage any category effectively, you need to understand the economics behind your raw materials and their supply-and-demand fundamentals, and then do the analytics,” Lorenc advises.  “You run the numbers like you’re in finance, so you can decide on the optimal amount of materials to buy and the number of markets to be in, while identifying both the financial risks and the cost-saving opportunities.

“While our procurement team handles numerous behind-the-scenes tasks that are critical to productive supplier relationships, we’ve built our competencies around financial risk management.  We challenge our internal procurement associates to think creatively about how to manage their categories, their costs, and their joint process improvements with suppliers, to arrive at innovation that can help drive more value for Rich’s customers.”

Not to say that this inventive approach won’t be jolted from time to time by outside developments, such as a change in the price of oil or, as a more-specific example, the recent strife in Ukraine.  “The Ukraine counts for six percent of the world’s wheat,” cites Lorenc, “so if the ports along the Black Sea are shut down, that can impact our price of wheat, because it affects availability.”

“On a macro scale, it’s amazing how geopolitical events and the reactions to them can move a market,” she observes.  “What we see on the nightly news does have ramifications around the globe for the food and beverage industry.  Everything is always ebbing and flowing, and as we handle our normal, day-to-day procurement processes, we’re also trying to manage within a sense of geopolitical supply and demand.”