Demand & Supply Risk Management With A Six Day Perishable Supply Chain

Scott Komar

Executive Vice President, Operations

Fresh Express

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Our company started in 1926 as Bruce Church, Inc.

Salinas, CA and Yuma, AZ growing regions

Iceberg (Crisp Head), Cantelope, Romaine, Watermelon

Grow, Pack, and Ship “commodity” company

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– Launched in 1989

– “The child that became the parent”

– Acquired by Chiquita in 2005

Fresh Express Value Added Salads

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$1.1 billion sales in 2006

Fresh Express GrowthFresh Express Growth

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Seed to Stomach Supply Chain

Food Safety

Quality / Freshness

Service

Efficiencies

6

z

Seed to Stomach Supply ChainSeed to Stomach Supply Chain

Cooling Raw Transit Processing

Transport

34o ~ 38o

34o ~ 38o

Highly Integrated Cold Chain – Superior Food Safety

Growers Harvest

Store/ShelfCustomer DCDistribution Consumer

4 hrs

1.2 billion pounds of raw product sourced

30,000 loads to the Plants

120 million cases produced

70,000 loads delivered

48% of national market share

Plants in Salinas, Chicago, Dallas and Atlanta

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Supply Chain Speed (Measured by Hours)Supply Chain Speed (Measured by Hours)

Fast Field to Finished Goods

Salinas

Atlanta

Chicago Campus

Greencastle FDC

GrandPrairie

Mexico

Yuma

12 Hrs

90 Hrs

70 Hrs

50 Hrs

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Innovations Requires Specialty Manufacturing

Salinas

Atlanta, Carrollton

Chicago Campus

Grand Prairie

NE Regional Network

Avoterla, Mexico

YoCream

YUM

Chipotle

HEB

Frozen Smoothies

Guacamole

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CLOSE LOOP FRESH FULLFILLMENT NETWORKCLOSE LOOP FRESH FULLFILLMENT NETWORK

Sun Rich (Vancouver)

Salinas

Atlanta

Chicago Campus

GrandPrairie

Canteen

Sioux CityDeli Stars

NE RegionalNetwork

Avoterla, Mexico

YoCreamPetersenApples

Frosty Fresh

Sun Rich (LA - Corona)

Sun Rich(Toronto)

River Ranch

Atlanta

Chicago Campus

GrandPrairie

Mexico

Canada

Salinas

Atlanta

Chicago Campus

GrandPrairie

Mexico

Canada

Salinas

OneForecast

One Manufacturing Network One Logistic Network

Consumer

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3

Vendor Managed Inventory

1

4

Demand Management

5

6

One Order Fulfillment

Innovations Fruit Retail Salad Foodservice

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Demand and Supply Uncertainty

Tools for Matching and Mitigating Exposure

Value Added Risk Management Hedging

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Demand and Supply UncertaintyDemand and Supply Uncertainty

Timing Forecasting Business Driver

0 – 14 days OperatingOrder Fill, Plants, Harvest,

Transportation

2 – 12 weeks TacticalSupplies purchasing

(corrugate, condiments)

12 months rolling Business Growing contracts, capacity

Forecasts Generated

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Supply Events

Demand Events

1. Promotions (ours, competitors)

2. Weather (buying behavior)

3. Peak Weeks (January, May)

1. Pest (grasshoppers, aphids)

2. Disease (mold, mildew)

3. Weather (heat, freeze, hurricane)

Demand and Supply UncertaintyDemand and Supply Uncertainty

Duration

1 – 3 weeks

1 – 4 weeks

3 – 7 weeks

Network Impact

+/- 5-15% per Plant

+/- 5-20% per Plant

+/- 25-30% system wide

Network ImpactDuration

1 – 2 weeks

2 – 4 weeks

2 – 10 weeks

- 5-20% of supply

- 5-30% of supply

+/- 10-50% of supply

Major Events That Impact The Forecast

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Forecasting Results

Step 1. Create An Agile Network

Customer Forecast Accuracy(7 Days Advance)

40%

45%

50%

55%

60%

65%

70%

75%

80%

Retail

Food Service

GOAL

Advance Planning (S&OP) – over communicate

Supply Chain synchronization every Mon, Wed

Network Balancing throughout the week

Demand and Supply UncertaintyDemand and Supply Uncertainty

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Crop Management

Push / pull in the field (up to six days flex) Outside Sales

Sell Raw Product (better food safety and quality)

Result = 0.7% of sales dumped / donated

Step 2. Create Flexibility on Both Ends of the Supply Chain

Salinas

Atlanta

Chicago Campus

Greencastle FDC

GrandPrairie

Mexico

Yuma

12 Hrs

90 Hrs

70 Hrs

50 Hrs

Demand and Supply UncertaintyDemand and Supply Uncertainty

Diversions

While the truck is in transit, change the destination

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Step 3. Build Capabilities for TEMPORARY Supply & Demand Matching

Risk ManagementRisk Management

Raw Product Risk

Iceberg and Romaine represents 56% of total commodity pounds consumed (675 of 1,200 million total pounds)

From the start of the salad program in 1989, up to 2001, the open market for iceberg and romaine was typically at, or below, contracted growing rates. As such, Fresh Express utilized an “under supply” growing/planting plan to leverage this situation

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TEMPORARY Risk Management Tools and Process

Risk ManagementRisk Management

At times during the year, when Mother Nature would disrupt the crop supply, we would have to adjust our operations

Over the years, Fresh Express has developed an array of tools to manage volatility of supply and demand

Demand Management Supply Management

Modify promotion volumes by switching to other products or canceling ads

Hold customer orders to 10-week averages

Implement a price increase (surcharge) with Food Service & Retail customers

Prorate orders

Change recipes, through MRP bill of material mix, to shift commodity usage

Push / pull timing of harvest in the fields

Reduce/eliminate, for a short period of time, procurement of the commodity

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Spot Market Purchases

Risk ManagementRisk Management

Raw Product Risk

Two significant events occurred in the 1998 – 2002 time frame that changed the game:

1. Fresh Express doubled in sales

2. A significant percentage of growers, seeking greater price stability, aligned with contracted growing agreements, thereby dramatically shrinking the available open market pounds

1999 2000 2001 2002

70% increase

24¢

14¢

19¢20¢

Supply 2,746 2,532 2,253 1,787 35% decrease

Source: USDA Market News

Open Market Iceberg Prices ($/Lb.)

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USDA Pricing History Prices over $20: 0 times in 48 months 1998 through 2001,

3 times in the 24 months of 2003-2003 or greater than 10% of the time.

- Highest risk around September at the end of Salinas season – 3 of the last 6 years over $10.

Iceberg Monthly Average USDA Price1999 through 2003

including 5 year average

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1998

1999

2000

2001

2002

2003

AVERAGE

Risk ManagementRisk Management

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Variable planting to cover high risk monthsIncremental plantings range from 105% to 120%

Raw Material Plantings as percent of Requirements

95%

100%

105%

110%

115%

120%

125%

Weeks

Perc

ent o

f Req

uire

men

ts

Value Added HedgingValue Added Hedging

Demand Hedge Supply

Food Service requires uninterrupted supply for their menu items (McDonalds, Subway, Taco Bell, etc.)

Pricing is adjustable, to a large degree, during market conditions (but the Franchises go crazy)

Sell the value of uninterrupted supply, at much more predictable costs, and higher food safety assuredly

Charge an “over supply fee” based on a cost/pound rate

Fee is a savings compared to incremental costs of spot purchases

Form a commodity desk to sell excess supply in the field

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Results Thus Far

Risk ManagementRisk Management

Spot market pounds purchased significantly reduced from 2002

Open market pricing dropped dramatically

Currently there is too much supply … we now have to adjust downward

Spot Market Lbs Purchased in 000's 28,838 56,861 40,929 9,627 - $ of Spot Purchases in $000's 2,343$ 19,570$ 13,505$ 3,031$ -$ $/Lb of Spot Purchases $0.08 $0.34 $0.33 $0.31 $0.00

2001 2002 2003 2004 2005

8¢

11¢ 10¢9¢ 8¢