Surviving a supermarket price war

The supermarket price war is an important contributor to the looming interest rate cuts. But that price war is also going to be a significant contributor to the transformation of the Australian enterprise supply chain. Most non-government enterprises will be affected.

If you are a service or goods supplier to a manufacturer, or you actually make things, this change will almost certainly affect you.

I strongly urge you to view these two videos – the first describes a culture of constant cost reduction that can actually be used in Australia (Cost cuts well done, April 2012).

The second describes how a food supplier is prospering in the new supermarket environment, with the productivity-boosting combination of flexible (albeit high paid) labour and a new plant (Operational efficiency: how one manufacturer is winning, April 2012).

Let me discuss the food supplier. Jackson Hewett and Jason Pallant analyse the remarkable Coles mailing campaign (Productivity Spectator: How to win a food fight, April 24; How many loaves of bread make an iPad, April 24).

Suffice to say at this stage that both Woolworths and Coles, through their loyalty programs, either know or are going to know exactly what customers are buying. So, like it or not, suppliers are going to have to work with them.

In previous decades a series of very weak managers of Australian food suppliers to Woolworths and Coles made agreements with the food unions that saddled their plants with inflexible labour and low productivity. That discouraged plant investment, further lowering productivity. They knew they could pass those costs on to the supermarkets, who dutifully passed them on to the public – and they all contributed to inflation.

Those days are rapidly ending, spurred by the supermarket price war and the high dollar. As a result, the successors to those bad managers must either bring the unions and workers together to change the game and lift productivity or, in time, close the plants. Both workers and managers will lose their jobs if they don't change the productivity game. It will almost certainly require investment in new plants.

In many cases the unions negotiated amazing payouts on closure, so the owners are hanging on – but it will not last.

Heinz is a typical company that rid itself of bad management and labour practices by going to New Zealand, where labour is cheaper and very flexible. Most of the international food processors in Australia who are suffering from bad past management will do the same because they can't stand the heat in the current kitchen.

Does that mean the end of Australian food processing? In some areas it will but if the Nationals come to power via a coalition with the Liberals they will turn up the Australian made burner in the supermarkets.

And so we come to the subject of our second video: Bread Solutions. Many of the major bread-making companies fit into the traditional food-processing pattern – bad work and management practices, older plants and low productivity.

In theory they should have done a "Bread Solutions” and installed modern plants and enlisted a flexible labour forces. But they didn't have the management able to do it. So Coles funded Bread Solutions to buy modern plant and take a segment of the fresh bread market. They will almost certainly fund more food processing so modern plant and work practices can be used to lift productivity.

Unfortunately, because they are as much to blame as the unions, managers of food processors rarely tell the whole truth to the public as to why they are closing a plant. As a result a great many communities will be very upset at plant closures – particularly when they take place in rural communities.

Many closures can still be avoided by using the Bread Solutions model. It's not easy and the high dollar can affect the sums. Nevertheless I hope the two videos will inspire managers and workers to wake up and have a try.