The food supply chain has a number of unique processes that set it apart from other industries. For SAP users and administrators, adapting an SAP system to these processes can be a challenge. I take a detailed look at a number of these unique industry features, and pair them with appropriate SAP solutions.

Safety and Compliance

The ultimate aim of a food supply chain is a safe product delivered to the end customer. A number of entities play major roles. Food manufacturers need to design, develop, and make products that conform to specifications and are safe for consumers, logistics providers need to ensure that the products are stored in perfect condition and there is no contamination during transport, and finally retailers need to ensure the right storage condition so that there is no contamination in the retail store. These days food companies are regulated by the U.S. Food and Drug Administration and other authorities, as well as regulations that include:

• Hazard Analysis and Critical Control Point (HACCP)
• EU (Article 18 of Regulation 178)
• US (U.S. Bio Terrorism act of 2002)

HACCP is a system for analyzing production or product handling processes to detect hazards and risks of contamination within those processes. HACCP is increasingly recognized as the reputable and effective vehicle for ensuring food safety. It covers the entire food production process, from the purchase of raw materials through end use by the consumer.

SAP has a number of solutions to meet safety and compliance standards of the food industry. For example, the SAP Employee Health and Safety (EHS) suite includes the following: 

• Product safety solution to ensure safety during the entire product life cycle
• The Registration, Evaluation and Authorization of Chemicals (REACH) compliance solution to meet a set of compliance standards as enforced by different regulatory authorities around the world
• Industrial hygiene and safety
• Occupational health
• Global label management
• Waste management to ensure the safe handling of waste generated during the manufacturing process or at the end of a product life cycle

Product Traceability, Tracking, and Recall

Food products need to be tracked and traced from when they are produced to when they are consumed across the full life cycle to ensure a safe product is delivered to customers. Another capability food companies need is product recall in case there is a faulty lot. Food companies need to know which consumer possesses a particular product (such as a defective batch) and needs to have an efficient reverse supply chain process that can bring it back in the quickest possible time. Food manufacturers are using simulated recalls to check their capability in this area and are trying to establish processes to track items by unit instead of case and pallet, even if that has higher cost implications.

SAP Solutions

Product track and trace can be enabled by a number of technologies that vary in terms of cost and sophistication. SAP provides a wide variety of technology, from simple batch management for tracking within an organization to sophisticated automatic ID technology for end-to-end supply chain track and trace capability as the product moves from manufacturer to customer. Functions covered include:

• Batch management and shelf life: In this case every production lot of a particular shift or day can be tracked with details, such as when it is manufactured, at which factory it is made, and what raw materials are used. Tracking is possible from production to shipment and delivery. In the case of a faulty product, it is easy to identify the details about the lot and possible root cause of why things went wrong in that lot.
• Auto ID Infrastructure (AII): AII uses radio frequency ID technology for tracing and tracking of a product. While investment in tags, scanners, and related software makes this technology a more expensive option, it offers the safest and most robust track and trace framework.
• Reverse supply chain management: Food companies need to be able to bring back the product from market to their own premises in case of a product recall. Unlike the first two bullets, the SAP ERP solution supports this process.

Below is an example of how SAP best practices in the dairy industry support the batch management process:

Example of Global Best Practices for Dairy Batch Management

The entire milk procurement process is controlled through batch management. Milk is received in cans from farmers and transferred to milk tankers. One milk inspection lot is created per truck upon transferring the farmer-specific batches into the truck batch. Next the milk is transferred to silos from the milk tanker, and one daily milk inspection lot per silo is created upon transferring the truck-specific batch into the silo batch. At any stage, when a QM use decision is made, the values of the corresponding characteristics (such as milk fat or solid nonfat) are transferred from QM to farmer-specific batches. Examples of batch characteristics are fat content, protein content, bacteriology indicator, and cell count indicator.

Batch management helps in batch valuation, defect tracking, recall abilities, and shelf life expiration. It addresses challenges such as:

• Which batches should be consumed if their shelf-life expires soon?
• Which unrestricted batch stocks are there for a certain product group? With which attributes are the batches indicated?
• Which batch stocks exist in the area of responsibility of a certain material requirements planning controller?
• How are the stocks divided across alternative units of measure (product or proportion units of measure)?

SAP best practices support scenarios for the batch recall of suspicious batches for the dairy industry. This scenario enacts a batch recall for batches that have been stored within the suspicious batches folder. A defect batch is identified and must be recalled from customers who have received the batch. A program is executed to identify all customers who received a defect batch. The user then chooses the addresses of the appropriate contact persons. The system prints a standard letter to each customer with information about the recall. The subsequent activities for each customer are stored in the system. The scenario has the ability to analyze top down and bottom up traceability for defect analysis to enable targeted product recalls.

Handling Two Units of Measure in The Supply Chain

The food industry needs stock management with two independent units of measure (UOMs) in parallel (for weight products such as cheese, meat, or fish). Examples of two such UOMs can be piece and kilogram or pallet and piece. Here piece can be the base UOM and kilogram the alternate UOM. These two UOMs are needed for logistical processes (such as goods movement or storage of goods) and financial processes (such as valuation of inventory) in the food industry.

SAP Solution

SAP catch weight management (SAP CWM) handles two units of measures. It provides processes and functions to allow materials to be carried in two independent units of measure throughout the entire supply chain (sales and distribution [SD], purchasing, materials management, production, quality management, and logistics execution). SAP CWM also contains cost and inventory management functions and supports integration of Financial Accounting (FI) and Managerial Accounting (CO).

In the supply chain, it is possible (in addition to using a standard material) to work with a catch weight material that has two equal but independent units of measure: the base unit of measure and the parallel unit of measure. Within the value chain, you can choose whether the valuation unit of measure for the catch weight material is based on the base unit of measure or the parallel unit of measure. This enables you to perform inventory management and valuations in the areas of logistics and accounting.

You must define a material need in the material master as catch weight managed for SAP CWM. There are two units of measure in the material master:

• Base unit of measure (logistics unit)
• Alternative unit of measure

There is a planned conversion factor between base unit (e.g., piece) and valuation unit (e.g., kilogram). There is a fixed conversion factor between the base unit and alternate unit or base valuation unit and alternate unit. SAP CWM enables:

• Parallel update of inventory in two UOMs
• User interface for two UOMs in all goods movement-related transactions
• One UOM for transactions in which the actual conversion factor is not known or is not manageable

Managing Food Recipes

The term recipe is used to denote information about the products and components of a process, the process steps to be executed, and the resources required for the production. Food companies work with thousands of recipes for different food products. For certain food companies, a part of their manufacturing is process (in which food is manufactured) and another part is discrete (such as bottling or packing operations). This necessitates capabilities around the creation of new recipes, managing changes in the recipe, and managing recipe formulas.

SAP Solutions

Recipe management is supported in:

• Core SAP ERP Central Component (SAP ECC)
• SAP Product Lifecycle Management – Environment Health and Safety (PLM EHS)

Recipe management functions supported in standard ECC are:

• Change Management for Recipes in SAP ECC Engineering Change Management (ECM)
• Recipe classification in the SAP ECC classification system
• Assignment of documents to recipes in SAP ECC Document Management System
• Entering data for recipe quality inspections in SAP ECC Quality Planning
• Production version assignment to recipes in SAP ECC Production Planning for Process Industries basic data
• Entering of material data in formulas in SAP ECC material master
• Property tree and value assignments in formulas and value assignments in recipes in the SAP ECC classification system

Recipe management functionality supported in PLM EHS includes editing of formulas, a formula and recipe information system, and generating formula reports.

Recipe management is comprised of the following functions:

• Creating and editing of recipes: Used to create the recipe and link it to the objects relevant to the process description. This includes standard operating procedures, a formula with information about the products and components, processes and associated process elements (stage, operation, and action), equipment requirement data, and a production version (i.e., a master recipe and bill of material [BOM]). Classification is used to group similar recipes.
• Creating and editing formulas: All relevant information about the products and components of the process can be stored in formulas.
• Formula Information System: Helps in evaluation and preparation of formula data.
• Generating formula reports and formula data: Formula and specification reports can be created in the SAP EHS Windows Word Processor Integration (WWI) component. WWI helps in choosing the report layout as well.
• Change management for recipes: Using engineering change management, you can create, change, and manage different statuses of recipes.
• Authorization concept: Using the authorization objects of recipe management, recipe and formula data and statuses can be protected and unauthorized access and changes can be prevented.

Direct Store Delivery (DSD)

A large portion of the food and beverage market is catered by companies making soft drinks (concentrate producers and bottlers), bottled water, juice, beer, and spirits. DSD predominantly is a requirement for these companies. However, lots of other consumer goods and food companies are showing interest in DSD these days, including dairy and tobacco companies. In a typical DSD scenario, the process flows like this:

1. Order entry (order can be also entered through an interaction center or Internet sales)
2. Vehicle scheduling to deliver the order
3. Vehicle space optimization (VSO, which is optional)
4. Picking, packing, and loading of materials
5. Physical delivery of material
6. Route settlement
7. Billing to customer

SAP Solution

SAP DSD helps in:

• Route accounting and settlement (check-out, check-in, settlement)
• Transportation planning with possible interface to a vehicle space optimization package

DSD Route Accounting

DSD Route Accounting supports the complete process of outbound delivery and route sales by means of the check-out, check-in, and settlement transaction. It supports route transactions with handheld devices or manual entry. Route accounting begins after a vehicle is loaded and ends once all tour transactions have been posted.

If handhelds are used, then all relevant data that is required for a delivery process (delivery tour or sales trip) needs to be entered in a mobile device by the tour driver. When the tour is finished, the data is transferred to SAP ECC and is processed in the settlement cockpit. The system generates deliveries and plans transportation and tours on the basis of the orders that are received through the various sales channels, such as an interaction center or the Internet. If the component VSO is used, deliveries can be optimized, picked, and packed on the basis of packing proposals. Route Accounting can cover the following activities:

• Check-out
• Entry of distance and time data
• Entry of customer visit data
• Delivery execution on the basis of existing sales orders or without orders
• Billing
• Payment processing
• Sales order entry
• Check-in
• Transfer of tour data from mobile devices to SAP ECC by upload procedures
• Difference determination
• Final settlement run in which relevant SAP ECC documents (sales orders, deliveries, billing documents, and FI documents) are created or updated and settlement of open items take place.

Route settlement is the final process. It involves the processes that a delivery vehicle driver performs during a shipment between the transportation planning point and the customer. When the loaded vehicle leaves the facility premises, the route settlement can be started with a check-out. When the route is complete, a check-in is performed.

Empty containers returned by the driver, any full products and cash received from the customers, and all manually created documents (such as delivery notes) that customers filled out during the route are entered and edited in the system. There can be various control processes in this cycle that enable you to determine whether the route was completed properly. If any differences are discovered, they have to be traced and appropriate action taken.

DSD Transportation Planning

DSD Transportation Planning helps to schedule and organize tours, with the aim of grouping together all outbound deliveries into shipments and to optimize route planning. The solution supports dynamic transportation planning for creating shipments while taking into account visit lists, tour master data, and capacity criteria.

Transportation planning can be interfaced with the VSO software of a third-party provider. This software has a specific algorithm that allows planners to pack materials on pallets considering length, width, and height, and to load the pallets on the truck or trailer. The system calculates the optimum arrangement of the delivery items on packaging materials (such as pallets) in a shipment. The results of these calculations are the packing proposals from the VSO solution (also known as VSO packing proposals).

The system displays the VSO packing proposals graphically, including information such as height, width, length. The system can consider a variety of other requirements, such as gaps, overhang, preferred loading positions, loading direction, and other factors in the calculations. In the warehouse, the packing proposals can control the picking and loading activities. Packing proposals that VSO generates are dependent on parameters, such as an optimization profile for plant and shipment type, customer master for the customers receiving the deliveries, material master for the materials to be delivered, material master for the packaging material used, vehicle master, and stacking and packing instructions from vehicle space optimization.

Handling Perishable Products and the Cold Chain

Lots of food companies handle products that are perishable, such as dairy, fruits, vegetables, meat and fish, ice cream, and bakery items. For example, a dairy company’s business is based on milk that has a shelf life of fewer than 12 hours if left unrefrigerated. Often milk becomes sour, especially in the summer. This requires special handling.

Even packaged foods have a shelf life. This necessitates a cold chain that is at the heart of the supply chain for many food companies. Products need to be collected from farmers, processed in processing plants, packaged, and distributed, all in an environment in which a particular temperature needs to be maintained. Food companies and their partners have invested heavily in cold chains to reduce waste of products. The last decade has seen tremendous growth in specialized cold chain companies, especially in developing countries.

SAP Solution

Perishable product handling is a standard feature of SAP ECC. Even the SAP SCM solution ensures planning for perishable products, keeping their shelf life in mind. For example, a large food company implemented a separate planning solution for its chilled products. All the planning is done daily, whereas planning for other packaged foods (known as shelf stable products) is done weekly. The SAP Auto ID solution helps in monitoring the temperature of the product during its journey from the manufacturing location to the distribution center to the final customer.

Procurement of Agricultural Products

Procurement of agricultural products is different from traditional procurement for several reasons. The following conditions occur more in developing countries, but apply equally to developed countries that source from developing nations.

• Variability in raw material quantity and quality, which is common in this industry. In the auto industry, the daily supply needs to be exactly as per the delivery schedule quantity, and every component supplied by a vendor needs to be of an exact specification. However, a dairy company’s everyday milk supply by the same vendor can vary considerably with respect to material attributes, such as fat content and solids. Quantity of receipt also may vary on a daily basis. Vegetables or fruits supplied on a daily basis can be different in size, quality, and chemical properties. This brings complexity into an agricultural supply chain as daily production and all other downstream plans to a certain extent are driven by actual availability of raw materials on a particular day.
• Remote collection centers and different approaches to get data from them: Unlike other industries in which vendors supply materials directly to a manufacturer’s plants, it’s difficult for farmers to do so as their supply is small and often does not make a full truckload. This means companies need to set up collection centers for the materials. As some of these collection centers can be at remote locations without Internet connectivity and manned by people who are not necessarily tech savvy, food companies need to discover technology options to gather data from these locations. Countries in the third world and developing countries suffer from this issue more then others. These technology options need to be simple (operated by people with minimum computer literacy), to work on asynchronous mode (as some of these locations may be at places having no Internet connectivity), and to be able to handle volume transactions on a daily basis (each collection center may cater to hundreds of farmers.)
• On-the-spot quality and quantity checks: In the agricultural industry, supply from farmers needs to be inspected at the point of delivery for quantity attributes (for example, for fat content and solids). Payment is based on the actual value of these quality parameters. Sometimes these activities are done in collection centers. It can be different from a standard quality ERP inspection process as the quantity of expected receipts from individual farmers on a particular day is unknown.
• Pay on delivery: Food companies need to pay farmers as soon as delivery is made, mostly in cash. This is because in most cases the suppliers are small farmers who have liquidity problems, may not have a bank account, and lack direct access to financial institutions. There is generally no formal invoice from suppliers in this case. This is different from the traditional three-way invoice verification payment process as supported in most ERP solutions, in which payment can be made only after purchase order, goods receipt, and invoice are matched.

SAP Solution

SAP Dairy Best Practices supports some of the typical requirements of agricultural product procurement. While these best practices were first developed for the dairy industry, today they are adopted by several other companies for which farm products are the essential inputs, such as tobacco, tea, ready-to-eat food, and vegetables.

SAP best practices support automatic creation of a purchase order per farmer upon posting the goods receipt for agricultural products, Pricing conditions are automatically copied from purchasing info records into the agricultural product’s purchase order, and price calculation can be based on several characteristics (such as fat or solid nonfat). A goods receipt also automatically creates one QM inspection lot or batch per farmer upon posting the goods receipt. This also handles all the payment conditions for the farmer.

Managing Farmers and Co-operatives

Certain food companies work with a large number of farmers. One example is a company that collects six million liters of milk from approximately 2.12 million farmers each day. Its suppliers are mostly small farmers who provide milk twice a day in quantities as low as one to two liters. Managing farmers can involve:

• Regular transactions in terms of receiving goods, quality inspection, and payment
• Loans to farmers when needed and setting this against goods receipts
• Management of contracts in case the company enters into contract farming with farmers
• Support in terms of educating farmers about advanced farming technologies or  providing veterinary services

In certain cases, farmers are members of co-operatives and food companies need to work with these bodies. The trend is popular in certain segments of the food business – for example, farmers are part of milk cooperatives. These cooperatives help individual members in veterinary services, animal husbandry management, managing breeding, education programs, and loan management.

SAP Solution

While the traditional SAP ECC solution can be extended for managing farmers and all farmer-related transactions, a few food companies have kept it outside the SAP system because of the sheer volume of transactions. Take the company discussed earlier. Bringing farmers into its SAP system meant a huge increase in the vendor master (2.12 million vendors) and related transactions. Even two transactions per day means close to 4.24 million transactions.

Companies having a huge number of farmers as suppliers manage all farmer-related transactions in a third-party system outside their SAP system. From there, data at a consolidated level is transferred to the SAP system. For example, for a dairy company this may be data at the collection center level, such as total daily collection or the total amount paid on a daily basis to all the farmers connected with the collection center. However, some food companies with a limited number of farmers manage all their farmer data in the SAP system directly, and all farmers in these cases are treated as vendors.  

Collection of Agricultural Products and Related Transport Management

Agricultural products need to be collected from individual collection centers and brought to factories. For example, milk needs to be collected from different milk collection centers and taken to chilling plants. In most cases food companies and co-operatives manage this collection process as this allows for better vehicle use. Sometimes there are strict constraints on how long it takes from the time the product is collected to the point it is delivered to factory.

For example, the time between milk collections from a farmer to the point the collections reach the chilling plant should not exceed eight hours as that may affect the quality of milk. This requires advanced transportation planning capability for food companies in terms of daily route planning of transport vehicles and scheduling and handling transporter payments. Milk runs used in dairy companies for several decades are an efficient tool for route optimization. The vehicle starts from the chilling center, visits different collection centers, picks up milk, and finally goes back to the chilling plant. The route of the vehicle may change on a regular basis depending on the farmers to be covered and the farmers’ daily quantity of milk.

SAP Solution

SAP’s Dairy Best Practices for the collection of raw materials and managing transporters was first developed for dairy companies and now is used widely by many food companies that deal with perishable products. SAP Dairy Best Practices helps in the following areas:

• Providing the route list to the truck driver
• Planning milk producers covered in the route for procurement of the milk
• Determining the  transport vendor, truck number, truck capacity, and cost assigned to the route
• Paying freight vendors and carrier vendors based on purchase orders and goods receipts
• Calculating the transportation cost for milk procurement — both primary and secondary costs of transportation.
• Tracking vehicle movement time from milk dispatch and receipt (important for the short shelf life of the product)

This information is used to make various reports, such as route performance reports based on the quantity and quality of milk procured per day, vehicle use reports based on milk procurement in the route, total milk collected per day per vehicle, and transportation cost per day.

Managing Empties and Returns

Beverages are a large segment of food industry and this includes companies that make soft drinks (concentrate producers and bottlers), bottled water, juice, beer, and spirits. Empty bottles, cases, or pallets are a type of returnable packaging and an important component of the beverage supply chain. Monitoring, controlling, and tracking movements of these empties between vendors and customers is an important requirement. These returnable packaging items need to be accounted for and circulation needs to be monitored.

SAP Solution

The process for managing empties and returns is managed in SAP Industry Solution for Beverage (IS Beverage). It is an enhancement of the standard SAP ECC solution in the areas of SD shipping, FI deposit processing for vendors and customers, and empties account management for customers. It uses standard SD (Sales BOM – BOM Category 5) to assign the appropriate empties (such as bottles or crates) to a full product (such as beer). It supports functionalities such as:

• Tracking for empties: The system manages empties in the document items for all movements involving full products. This enables constant control of the empties flow both inside and outside of the company.
• Value-based grouping of empties: Grouping together of bottles (such as plastic and glass) is possible for empties that are levied with the same deposit amount.
• Stock-specific empties management: This enables management of empties stocks in different ways, including on a value or quantity basis, as fixed assets or current assets, or managing deposits on empties.
• Management of empties stock accounts: Manages and updates the empties stock accounts for the customers.

Handling returns is also an important capability of this solution. It supports a number of functionalities, including recording different types of returns (tax materials and goodwill material), documenting reasons for return, or creating return document.

Managing Rentals

At times, food companies provide crates and other items on rental to customers (i.e., distributors). These rentals need to be tracked, customers need to be charged based on the rental agreement, and action needs to be taken if the item is returned in defective condition. Agreements can be complex, such as rental based on an item or period. 

SAP Solution

The process for managing empties and returns is managed with SAP IS Beverage. This enables a company to track the flow and periods of all equipment rented out to customers by manufacturers and wholesalers. To support rental processes, standard SAP ECC is enhanced for the areas of order, delivery, and billing, and the standard sales order is enhanced with comprehensive stock overviews and an availability check. This provides capabilities for:

• Recording rental items and sales materials.
• The rental order is followed by returns order covering the return of the rented items.
• Prolongation orders can be created if materials are not returned as scheduled.
• If the items are returned in a defective condition, a subsequent debit order can be created to charge customer for these goods.
• The solution enables companies to trace each single rental item and to find out for how long it is being rented.
• It allows complex charging functionality, such as changing of rental time on an item basis, charging by rental time, and charging for defective or missing material.

Rajesh Ray

Rajesh Ray currently leads the SAP SCM product area at IBM Global Business Services. He has worked with SAP SE and SAP India prior to joining IBM. He is the author of two books on ERP and retail supply chain published by McGraw-Hill, and has contributed more than 52 articles in 16 international journals. Rajesh is a frequent speaker at different SCM forums and is an honorary member of the CII Logistics Council, APICS India chapter and the SCOR Society. 

You may contact the author at rajesray@in.ibm.com.

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