Beyond Industry Solutions

By Jim Prevor, Editor-in-Chief, Produce Business

Transportation is a vexing issue for the produce industry. It is not uncommon for transportation to cost more than the product itself. Frequently, orders go not to the shipper with the best price or best quality — but to the guy who can get it where it needs to be when it needs to be there. The slightest familiarity with standards set by large buyers indicates it is easier to meet quality requirements than to have a product at the distribution center when it needs to be there.

What is not as clear, however, is that we really have a transportation problem that is amenable to industry solution. It may well be that we have a new set of realities that require changes in the business organization.

National issues such as drug testing, hours of service, insurance and fuel prices impact the availability of trucks and drivers. The produce industry must be part of coalitions to address these issues. But the produce industry is a relatively small portion of the national economy. It is unlikely any “produce position” on these issues will carry great weight.

PMA’s Transportation Task Force is desirable and might help, but trade associations, almost by their nature, have to represent the industry as it exists now — a problem when identifying problems through focus group-type research. Pressures felt by individual businesses tend to be identified as industry problems.

If you read the proceedings of U.S. produce trade associations as retailers began to buy direct, you will find task forces, seminars, discussions — all hoping to solve this “problem.”

But this was not just an industry problem. There were new realities such as an interstate highway system, the growth of supermarket chains with their own distribution centers and the replacement of refrigerated boxcars with the over-the-road truck and piggyback-style rail services that enabled people who could never handle a full rail car to buy direct.

These changes altered the nature of what was efficient and what was not. Companies that adjusted to the new realities survived and thrived. Those that waited for the “problems” to be “solved” are mostly history.

When people complain about getting over-the-road trucks to handle LTL orders, that may be the voice of today’s industry members expressing unhappiness that their ways of doing business are becoming expensive, difficult or impossible to continue. It may just be those new ways of doing business that better conform to these realities will arise.

There are signs, for example, that wholesaling is on a revival course. Unlike the old model where wholesalers in a terminal market bring in wares without a home and then job them out to small buyers — a model that still thrives in many places — the new wholesaling model involves a tripartite segmentation:

One model is a wholesaler being contracted to supply certain products. Although this is often perceived as a “direct buy” and many of these vendors have farming interests, the reality is more complicated. In many cases, the actual product delivered to the retailer, whatever label it carries, did not grow on the same farm. To meet quality and availability requirements, it came from elsewhere.

Even if the product did come from the vendor’s farm, that is an incidental reality to the business structure. On many products, the most efficient way to meet a buyer’s demand for quality, timely delivery, and zero out-of-stock situations is to have a facility in the same area as the distribution center where the product will be delivered. Once that local facility is established, that vendor tends to have a competitive advantage in bidding for the business of other buyers in the area.

Put another way, a local wholesaler, who is able to accept full trailer or railcar deliveries and then sell to multiple local customers, is often more efficient when everything including the danger of out-of-stock situations is considered than direct sales and shipping.

A second model is substantial chains allowing outside organizations to handle procurement, warehousing, transportation, and logistics. When Bruno and Bi-Lo were sold, the buyer elected to have C&S Wholesale Grocers handle the warehouses and logistics. When A&P divested some divisions, the company announced it would also have C&S handle these matters for the remaining company.

More than transportation is involved in these decisions, but transportation is crucial and, specifically to the issue of LTL freight, these arrangements allow consolidation of orders and thus less need for LTL freight.

A third model is a decision by many large shipping and importing organizations to develop regional sales, forward distribution and repacking or processing facilities, an acknowledgment that business realities dictate having a ready supply of product close to customers. In effect, these local distribution centers are local wholesalers who have exclusive relationships with particular shippers.

Wholesalers even help resolve transportation issues such as rejections. A retailer needs only one type of product. A rejected product has to find another home. Wholesalers tend to have a more diverse clientele; they can accept delivery and sell it elsewhere. Rather than a truck wandering in search of a new buyer, the resolution may be a quick allowance or an agreement by the wholesaler to sell the product on consignment or a price-after-sale basis.

To those unwilling or unable to change and adapt, there is a massive problem. To others, it is a massive opportunity.

It is true that the way the produce industry treats truckers should be addressed, and it will be interesting to see if the PMA task force has the stomach to address tough issues such as the PACA Trust provision. If a buyer purchases a load of produce and owes $5,000 for the produce and $5,000 for the transportation, if that buyer goes broke and has $5,000 in assets to pay for his debts, under current Trust provisions the produce vendor gets paid in full and the trucker gets the shaft.

Nothing is to be lost with task forces. These are important industry issues that need study and thought. We should remember, however, that some complaints are the growing pains of an evolving industry. Research is very good at identifying the complaints of today’s players and particularly bad at identifying who will be playing tomorrow.