I’ve had a particular interest in the digitization of supply chains after working on an investment in a supply chain design software company during my prior job. The company we invested in essentially provides software to large manufacturers that need help with logistics visibility and integrated planning and execution (two important aspects of the supply chain digitization revolution occurring now).
After thinking through which industries and associated companies will be most influenced by tighter supply chain integration, I’ve come to a view that the large meat processors, and Tyson Foods specifically, will be affected significantly by these trends. Tyson Foods is one of the world’s largest protein producers, and operates a number of vertically-integrated production processes. Founded in 1935, the Company has a market capitalization of ~$28Bn and has LTM revenue of ~$38Bn.1 Supply chain visibility (through IoT, Big Data, etc.) should be a major concern for Tyson management because protein is highly perishable, and slight improvements in inventory management can have substantial effects on the bottom line. The cost of the meat as a raw material is the main input of the product, meaning long-term planning is crucial to ensure balance between the supply of meat, production and sales (buying lead times vary from 18 weeks to 3 years)2. The meat industry is also highly regulated, with numerous public relations issues and scandals occurring in recent years because of inadequate controls over meat suppliers, tainted meats problems, etc. Increasingly, the digitization of supply chains enables exchanges of information between producers and suppliers.3 These coordinated supply chains fit well with the logistical requirements of modern protein markets, especially those for processed perishables.
To stay competitive in the meat processing industry and keep up with increasing consumer demand for protein, Tyson Foods management will need to invest heavily in supply chain design software, IoT technology solutions (sensors, etc.) and generally make its supply chain increasingly efficient. The Company is currently in the process of implementing a new Enterprise Resource Planning (ERP) system4. In conjunction with this process, Tyson is using SAP’s integrated business planning solutions to further digitize its supply chain5. This helps streamline data collection and tighten collaboration between marketing, operations, and manufacturing functions at Tyson Foods.
As a more medium-term strategy, Tyson is using technology to connect with supply chain partners end-to-end. This includes end-consumers, intermediate customers, and partners / suppliers. Forming long-term partnerships in which technology is exchanged and data is linked will allow for a more efficient supply chain process across the stack. This is something we learned in the TOM Beer Game challenge, given that teams perform better with more information / increased transparency. John Buckley, Senior Director of Process and Systems at Tyson, believes that visibility into suppliers’ operations is very important. As an example, “chickens grow at different rates as the temperature fluctuates, so if Tyson knows that certain suppliers are experiencing a heatwave, they can make more informed decisions.6” This tighter integration with suppliers is an important aspect of Tyson’s current medium term digital strategy.
While Tyson Foods management has begun to implement some of the basic software solutions necessary to digitizing its supply chain, I don’t believe they see the enormous opportunity in front of them to be at the forefront of the meat processing industry. Given how important inventory management is for perishable food companies, I believe Tyson should be doing many of the things Amazon is doing regarding innovations in logistics. This includes experimenting with predictive shipping, real-time production-capacity feedback, autonomous shipping, smart warehousing, and robotic transport, among others7. While it will take a number of years for some of these initiatives to provide any payback, the future gains in productivity and automation will be well worth the investment.
Currently, Tyson Foods only has $10Bn of debt and generated $4Bn of EBITDA (a proxy for cash flow) in FY2017A1. This relatively low Debt / EBITDA leverage ratio of 2.5x indicates the Company has ample room to safely borrow funds for additional R&D investment activity to spur supply chain innovation. Additionally, Tyson only spent $113M on R&D in FY2017, or 0.3% of revenue4. This is a very low amount of investment in technology initiatives, and Tyson should plan to allocate a larger portion of the budget to R&D in both the short and medium terms. This aligns with a greater corporate emphasis on supply chain efficiency. My vision is for Tyson to essentially become the Amazon of meat processing.
In regards to my open questions, please see below:
How do you think advances in artificial intelligence will impact the manufacturing industry generally, and meat processing companies more specifically?
Within highly competitive industries with relatively low margins, how should companies weigh the costs and benefits of investing in digitization at the expense of short-term profits?
1 Data sourced from Capital IQ as of 11/14/17.
2 Refrigerated & Frozen Foods Magazine (digital). https://www.refrigeratedfrozenfood.com/articles/90787-sales-forecast-software-helps-meat-supplier-meet-growing-supply-chain-demands. Accessed 11/14/17.
3 A study on the Digitization of Supply Chains in Agriculture – An Indian Experience. http://journal.magisz.org/index.php/jai/article/viewFile/287/287. Accessed 11/14/17.
4 Tyson Foods Inc. (NYSE: TSN) FY2017 Annual Report (10-K) – Risk Factors (page 8).
5 DC Velocity web article. http://www.dcvelocity.com/videocasts/?videocast_id=82. (September 2016). Accessed 11/14/17.
6 Digitizing the Supply Chain: Which Comes First, Data Or Collaboration? Written by John Buckley from Tyson on 1/23/17. https://www.manufacturing.net/blog/2017/01/digitizing-supply-chain-which-comes-first-data-or-collaboration
7 Schrauf, S. and P. Berttram, Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused, PWC Strategy. (2016).