CONTRACTING FRESH PRODUCE

BENEFITS OF CONTRACTING

• Consistent quality and yields of commodity
  • Nationally
    Priorities for most national chains include maintaining a consistent flavor profile for all their restaurants nationwide and achieving consistent maximum yields from each commodity.
    
    To achieve these goals, procurement decisions (like research and development decisions) are best made at the corporate level. Procurement decisions made at the unit level can jeopardize the flavor profile if, for example, the unit manager buys an alternative variety of a commodity. Perhaps the prescribed salsa recipe calls for fresh Roma tomatoes. A local produce distributor offers the unit manager gas green tomatoes at $2.00 a box cheaper than the Roma's. If the manager buys the Roma's, the unit saves $30 but changes the flavor profile and the density of the salsa.
    
    Procurement of produce involves numerous variables. Some commodities, such as lettuce and mixed-leaf commodities are easier to implement on a national basis because of standardized packaging and the California/Arizona growing conditions make this the only real choice for most chains. Although Colorado produces lettuce, Florida produces lettuce, green-leaf and romaine, because of the short growing season, lightweights, and other variables, most chains spec leaf green-leaf, and romaine off the West Coast.
    
  • Regionally
    Other commodities, such as Zucchini, bell peppers, tomatoes, and soft fruit, generally are procured on a regional basis of different packaging methods and weights on the East and West Coasts. For example, a Georgia distributor normally procures medium, ½ bu. (20lb.) lugs out of Florida and the East Coast growing areas. A distributor located in Arizona pulls medium in 5/9th bu. (24-26 lbs.) out of Mexico and California because to pull from the east involves increased freight costs and logistic complications. Therefore, specking some commodities is best done regionally to prevent increasing food cost 10-40%.
    
    Most chains use industry standard yielding guidelines for each commodity to determine food cost and recipe implementation. Insuring industry-standard or above industry-standard yields is imperative in these challenging economic times.
    
    Most restaurants follow pre-established recipes that outline ounce requirements per ingredient. It is important when figuring food costs that all the restaurants achieve consistent maximum yields.
    
    Contract participation and continuing education at unit level is necessitated for numerous reasons. For example, a unit manager can unwittingly increase food costs by procuring a less costly commodity then what is specked. Most chains project an average weight of lettuce to be 48 to 50 pounds per case with a yield of 60%, thus producing 30lbs. of usable product. In this scenario a local distributor offers a price lettuce, which the unit procures. The cheaper lettuce is out of California yet Oxnard or Santa Maria, not Salinas, and only weighs 44lbs. The less expensive case of lettuce costs more per usable produce. It's possible than that the price lettuce costs more per usable ounce than the costlier heavy lettuce.
    
• Availability
  • During transitions
    Most commodities transition 3 to 7 times a year. Example: yellow onions are produced at the first of the year in the Northwest (Idaho, Oregon, Washington) then move to Mexico/Texas, then to California, then to Arizona, back to California, then back to the Northwest. Generally, transitions from one growing region to the next cause shortage of supplies. Allowing the unit manager or your local distributor to make procurement decisions during a commodity's normal period could be costly. Contracting and anticipating the possibility of shortages during transitions with outlined contingency plans helps maintain availability while controlling quality and yields.
  • Anticipating weather-related problems
    Mother Nature is unpredictable. Last year, for the first time in 100 years, snow in Mexico froze a good portion of the tomato crop. Last March, romaine and green leaf reached abnormally high fobs due to the effects of El Nino.
  • Implementing alternatives
    Know in advance possible alternatives for each commodity that you are contracting. For example, say you are contracting salsa type tomatoes for the East Coast, and a hard freeze damages 60% of the crops. If you are knowledgeable concerning alternative growing regions such as the Nogales season, you can
    
    Hopefully ensure availability and/or make a decision to possibly switch to romas versus a #2 or #3 gassed green tomato.

• Cost Control

  Contracting provides the ability to more accurately project food costs months, even quarters in advance.

  When done correctly, contracting generally generates monetary benefits that fall to the bottom line.

• PREREQUISITES FOR SUCCESSFUL CONTRACTING
  • Identify your high-volume commodities
    
    Volume has its privileges and you must consider each regional commodity contract independently. Your required volume in a given region determines whether or not you can successfully contract a given commodity.
    
    Generally speaking, 5 to 7 commodities of most end users make up 60% of the total purchases. Therefore, concentrate contracting those 5 to 7 commodities.
    
    Shippers usually require two to three pallets per drop. LTLs (less than loads) and costly, and the complications of controlling the truckers make delivery windows difficult to achieve.
    
    
  • Chart seasonal transitions by commodity
    
    This is a two-step process. First, research your average fobs by week or month for the previous 3-5 years. Then outline national and regional growing areas by commodity.
    
    
  • Outline by unit location the optimal growing region for each commodity
    
    Geographically pinpoint the location of all restaurants to determine the highest density areas and then identify the optimal growing region for each area. Give prime consideration to availability, logistics, and distribution variables.
    
    
  • Identify each commodity's incurred costs
    • Tomatoes
      • Conditioning
      • Palletization
      • Pre-cooling
    • Green Onions
      • Top icing
        
        
  • Identify grower/shippers best suited to your goals.
    
    Once you understand the concept of regional purchasing, distribution is a key factor. To select the best source for a given commodity, ascertain whether a candidate can meet your outlined goals.
    
    For example, is their facility AIB or Cook & Thurber certified? Do they have a HAACP program in place and operating? Do they have a structured recall procedure in place?
    
    In addition, determine whether the shipper has transportation or logistic support to ensure distribution to your predetermined areas of geographical density.
    
    
  • Identify and consolidate distributors regionally
    
    First, determine each distributor's capabilities beforehand.

    Do they buy direct or through brokers? Or do they buy from the terminal market?

    Do they buy on a FOB or on a delivered basis? Do they arrange their own freight? Do they arrange freight based on mostly freight markets, or do they have fixed contracted rates seasonally?

    What labels do they currently stock? Most shippers offer a first and second label.

    Which shippers and growing regions do they use? Do they procure Salinas's lettuce or Santa Maria/Oxnard grown lettuce.

    Once you've consolidated distributors, there are considerations to contracting that must be thought through. One important consideration is that the volume of each contracted commodity determines whether particular distributors will be able to participate in a regional or national contract.

    It would be difficult to demand that a distributor pull from a specific Salinas based mixed-leaf shipper if the distributor needed less that one pallet per week. To ensure quality, a distributor must pull at least twice weekly, three times preferred for mixed leaf. Freight carriers generally charge your distributors from $35-50 per stop. So if you are contracting fifteen California commodities and require your distributor to stop their truck at seven pick-up spots, then your and their freight costs will increase.
    
    

  • Outline the impact of distributor's freight cost

    Freight is a significant part of all contracting decisions since it accounts for 15-40% of produce distributors' delivered cost. Thus you must determine freight cost by commodity from each of the growing regions to each of your distributors.

    Freight fluctuates almost as much as the mostly fob markets. For example, in the winter months, freight from Salinas to New Jersey can generally be achieved for $3800/4000, but in the summer you will find it could cost up to $5500.00.

    Freight rates change seasonally and by growing area, increasing the difficulty of determining the freight allowed from each growing area to each distributor. A 3-5 year freight history is a general needed to do this successfully. Tracking the freight-rate changes monthly for each commodity is often painstaking, though it usually proves monetarily beneficial.

    A related topic concerns carriers. Carriers generally run specific lanes, i.e., from California to the upper North East (New York, Connecticut, Maine.) Expect your program distributors to work within your outlined freight costs or you might also contract out with specific freight lines or brokers to handle your freight needs for each commodity.

STEPS TO ENSURING QUALITY

Quality is best defined as VALUE

• Determine the best commodity option and specification for your application or menu.

  Consider, for example, potatoes for fried potato skins. One might use a US #1 140-ct. Idaho Russet Burbank in 50-lb.cartons. Another alternative might be using a Burbank Stripper out of local growing regions. Choosing to buy a stripper vs. a 140-ct. from local growing regions will equate to a $3-5 difference per case.

  If you want a baked potato, the russet variety is recommended over centennials. Burbank russets specifically have a thicker epidermal peel and a lower concentration of moisture that generally produces a better-baked potato.

• Write detailed specifications, listing the grade, preferred growing region, variety, size or count, and package weight.
  • Grades:

    Your application will determine the grade requirements. Quality is the main prerequisite for determining grade. Additionally, there is generally a wide variance of costs between grades. Generally your R&D would outline the specific grade for each commodity you contract. Generally, you would specify a fancy grade for fruit used on the center of the place. However, you could use a choice grade orange for applications where the appearance of the epidermal peel is not a factor.

    Once implementation of contracting has started, it is inevitable that from time to time you will deal with quality issues at either the distributor or unit level. Therefore, it is recommended that you know and understand the USDA's specifications for grades by commodity to ensure that your grower/shippers as well as distributors adhere to PACA guidelines.

  • Growing regions
    
    If you do not have to use Idaho potatoes and prefer a lower cost, then you have more options: In the Northeast you would look at Wisconsin, Delaware, Minnesota, Maine, Canada and even Nebraska. In the Northwest you would consider Washington or Oregon and even Colorado as possible options. Knowing the growing season and growing area is needed to plan out the entire year.
    
    For example, an end user might write a specification for zucchini as med. Zuc, ½ diameter, by 6 to 8 inches in length. This spec can be achieved but the West Coast ships zucchini in 5/9 bushel out of southern and northern California and Mexico. These cartons weight from 24 to 26 lbs. The East Coast ships the same grade and size requirements in half-bushel cartons in 18 to 20 lbs. weights. The East Coast will usually pull from southern and northern Florida, Georgia, Michigan, and the Northeast.

  • Variety:

    There are many varieties of most commodities, i.e., potatoes varieties include russets such as burbanks, norkotas, etc. Many believe that Idaho has the most fertile soil and thus produces the best burbanks. Idaho is relatively easy to implement nationally into a system because you have russet burbanks generally 9-10 months of the year and Norkotas the other 2 months. Idaho is also perceived by some to be the most expensive.

  • Size or count:

    Specific size ensures consistency on a national basis. It is recommended that you know and understand by commodity whether to spec by count or by size (weight/length). For example, russet burbank potatoes should be procured by count, as large as 40-ct. or as small as 140-ct per 50-lb. carton. Yet sweet potatoes, because of their tubular, irregular shape, should be specked with sizing guidelines such as 12-14oz. sweet potatoes in 40lb. cartons.

  • Package weight:

    The produce industry has yet to implement national standardized shipping containers from all growing regions domestically as well as imported. Ensure that you specify the stand shipping cartons for each growing region and know that many commodities are shipped in different sized containers from different growing regions.

  • Types of Contracts:

    Option could include fixed fob monthly and even annually, Hi/Low fob by week or by growing season, as well as contracting on a delivered basis. Many variables for each commodity determine what is best for you based on your knowledge and goals.

    One might contract out fob at shipping point while others may prefer delivered pricing to your distributor, i.e., naked lettuce would be FOB at shipping point, and shredded carrots would be a delivered price to your distributor from a local processor.

  • Do you use a fixed FOB or a Hi/Low FOB formula? This varies by commodity, and each shipper offers different opinions.

• Negotiating the Contract:

  Remember contracts should be positive for the grower/shipper and be a win-win situation for all parties involved. One factor helping you would be to educate yourself and determine what shippers' raw costs are. The idea behind contracting is to negotiate a small, competitive controlled profit for a specified period of time. No one stays in business selling below cost for any length of time. A shipper who loses a lot of money may not want to participate in up coming years. Work with your shippers, know their costs, be a partner if your true desire is long-term relationships.

  In conclusion, for successful contracting, you have to work as a facilitator and mediator concerning many issues. Outline the requirements and expectations from you grower/shippers as well as your distributors. It is recommended that you monitor distributor participation as well as grower/shipper performance on a monthly basis.

  Support your shippers. When your contracted fob price is higher than the mostly market fob, some distributors slow down and reduce contract participation. This is not playing fair. In addition, when your contract price is way under the mostly market fobs, distributors should not be allowed to pull additional product unless pre-authorized by the contracted grower/shipper.

  Remember, supporting your grower/shippers increases the likelihood of future participation and long-term programs.