Case 2. Perdue Farms: A Vertically Integrated Supply Chain
† Old Dominion University, Norfolk, Virginia, USA; [email protected]
Products and Markets
PERDUE® is one of the quintessential icons in the American food industry. As one of the largest private companies in the United States,1 Perdue Farms is a leading international food and agriculture business. It has 14 food-processing facilities in 12 states, employs more than 20,000 associates, partners with 7,500 independent farm families, and produces about 2.7 billion pounds of chicken and turkey annually. Its operating subsidiaries provide quality products and services to retail, food service, and agricultural customers. Perdue Farms supplies chicken products in more than 40 countries to chain restaurants, national and regional foodservice distributors, institutions, and the travel industry.2
1 http://www.forbes.com/lists/2006/21/biz_06privates_Perdue-Farms_W8L7.html
2 Interviews conducted during a visit to Perdue Farms in 2005.
Perdue Farms has processing, further-processing, and cooking plants throughout the eastern half of the United States. Though best known as a poultry company, it is a major producer of agricultural products as well. Perdue purchases grain from more than 5,000 local farmers to supply its feed mills and market grain internationally. It also owns a fleet of barges, leased rail cars, and a deep-water port to export grain and agricultural products around the world.
Markets
Perdue serves customers domestically and internationally. It exports food products to more than 40 countries around the world and creates products that meet local preferences, including shipping Perdue products to U.S. military installations overseas. Perdue’s International Unit listens to customers and adapts ways of doing business to accommodate their special needs. Such needs include dual-language packaging, localized seasoning and breading preferences, certified processing to meet religious and local government standards, and portions prepared using local weights and measures.
Perdue has been a pioneer in many fields of the food industry. It has been the first to successfully brand and advertise select commodity products, the first to have the company leader become a celebrity advertising spokesperson, the first American company to produce retail fresh tray-pack chicken using a Chinese breed of chicken in China, and the first American company to market poultry products in Chile.
Food Products
Perdue’s chicken products include fresh, marinated, frozen, fully prepared, and delicatessen chicken products. Perdue chickens are the meatiest chickens in the foodservice industry with the highest meat-to-bone ratio. By going from the freezer to the plate in minutes, foodservice operators are saving time and money on America’s favorite appetizer or light entrée.
Through 80 years in the poultry business, Perdue has developed a stunning range of product offerings for the foodservice industry. Perdue Fresh Chicken has set the standard for freshness and quality for years. Further processed chicken products include roasted chicken, chicken fillets, breaded chicken, chicken wings, and more. Perdue upholds the values of product variety, consistency, and quality. Examples of its new further processed products include such items as Short Cuts Grilled Chicken Breast Filets, Char Grilled; Short Cuts Grilled Chicken Breast Filets, Honey Roasted; and Perdue Wingsters Split Chicken Wings, Buffalo Style. These fulfilling entrees are ready in only 8 to 12 minutes.
Agricultural Products
Perdue’s Grain & Oilseed Division buys domestic grain from local farmers and dealers for further processing, feed manufacturing and domestic and international merchandising. It produces feed-grade soybean meals and crude soy oils, and it refines edible vegetable oils and produces lecithin for food companies. Perdue also operates protein conversion plants that manufacture livestock and pet-food ingredients.
Venture Milling, a wholly owned subsidiary, blends protein-based feed ingredients for livestock industries. Products include Pro-VAAI, a bypass protein for the dairy industry. Perdue-AgriRecycle, a joint venture, converts surplus poultry litter into organic pelletized and granular fertilizer products for agricultural and horticultural customers. Heritage Breeders, LLC, a wholly owned subsidiary, sells Perdue broiler breeder stock to other poultry companies.
New Product Research and Development
Research and development is conducted at the Perdue Innovation Center. Through research and innovation, new food and agricultural products are created while setting the highest standards for quality, food safety, environmental stewardship, and poultry welfare.
Perdue has spent decades perfecting ways to add value to its chicken products, including making it easier for customers to prepare the products for the end consumer.
Vertically Integrated Supply Chain
Raw Materials: Eggs
Perdue is a vertically integrated company. It owns the production from the egg to the finished products. The entire supply chain starts from breeding eggs, hatching chicks, manufacturing processing, packaging, warehousing, and distribution. This gives the company total control of quality. It has its own breed of chicken to supply eggs to hatcheries.
Chickens are raised in temperature-controlled houses on family-owned farms by approximately 2,500 family farms that benefit from their relationship with the company. Birds are raised in houses that are designed to keep the birds as comfortable as possible. They are automatically fed with feed specially formulated for their age, and nipple drinkers dispense water with a push of a button. The birds reach processing weight in four to six weeks, depending on the needs of the processing plant in the complex.
Poultry feeds are manufactured in house, and they are carefully formulated to match the nutritional needs of chickens at every growth stage. The flock supervisors are backed by an advanced team of scientists and laboratory technicians working with the industry’s leading research and analytical equipment. Raising healthy birds and ensuring adherence to strict standards for food safety, poultry welfare and environmental stewardship comprise Perdue’s commitment to quality.
Perdue maintains quality control through its distribution network, including its own truck fleet, distribution and replenishment centers and dedicated cold storage and export facilities.
Manufacturing Processing
The manufacturing process includes two separate production stages. The first hatches chicks, and the second kills, cleans and packages the birds. The killing-cleaning process includes receiving and killing operations, inspection, removing the internal organs of the poultry, cutting and deboning, and packaging. Many of these operations are automated, while others are done manually. The manufacturing process is described in the next section.
Packaging
Packaging is the next step to get the processed poultry from Perdue processing plants to consumers. It is generally a two-part procedure. First, the bird or bird parts are placed in a bag or package. Second, the package is placed in a shipping box. Poultry is packaged in a wide variety of formats, depending on customer orders.
In general, there are four types of packaging: bulk packaging, individual packaging, bone-in products, and bone-out products. For the whole bird bulk packaging, birds are bulk boxed and sent to large users such as Sam’s Club or secondary processors. For the whole bird individual packaging, the bird is individually bagged and boxed for supermarket sale. Bone-in product are packaged and sold as consumer product or as bulk sale for large commercial users, as well as bone-out products. No matter how a bird is packaged, it is almost always placed in a large cardboard box for shipping. The general packaging steps include filling, weighing, and stacking these boxes.
There are a few “firsts” in the packaging process for which Perdue is proud. The company was the first to conduct research on a leak-resistant package, the first to package fully cooked chicken foods in microwaveable trays, and the first to use modified atmosphere packaging to ensure freshness.
Warehousing and Distribution
After the chicken is packed in its shipping container at the processing facility, it is moved from the processing floor to the storage area. If immediate shipment or placement in a warehouse is needed, the packed chicken is moved to a truck right away. It can also be shipped to Perdue distribution centers for storage until a customer needs it.
Perdue Farms has four distribution centers across the United States. The company equips its fleet of trucks with satellite tracking systems to ensure on-time delivery. A replenishment center is set up for retail customers. Perdue uses technology to communicate with customers, staying in touch via telephone, e-mail and video conferencing. Some stores have vendor-managed inventory control systems, which allow Perdue to track sales in real time.
The Manufacturing Process
Hatchery
On Perdue breeder farms, strict rules and precautions are followed to prevent the spread of diseases from other flocks. The eggs are collected and then sent to a Perdue hatchery. The hatchery usually hatches chicks four days per week, leaving one day for maintenance. Quality assurance starts at this point of the production process. Eggs are color coded with an account number. In case there are any quality-related issues, the problem can be traced to the root.
At the hatchery, eggs are put into incubators to start the growing process. For perfect hatching conditions, the temperature is set at 99.5°F and humidity is controlled at 86 percent. In the hatchery, the chicks are inoculated against disease right in the egg and are treated to prevent respiratory problems. The hatching process takes 21 days. After that, the chicks are carefully placed into Perdue trucks for their trips to family farms to be grown to processing weight.
At the family farms, when the birds reach processing weight in four to six weeks, depending on the needs of the processing plant, they are shipped to manufacturing processing facilities.
Processing
Receiving and Killing
The receiving and killing operation is largely automated, including receiving live birds, killing, defeathering, and removing feet. This operation includes the following tasks: (1) move the poultry cages from trucks to dumping areas; (2) unload live birds from the shipping cages to the conveyors; (3) manually take live birds from conveyors and hang them in shackles; (4) automatically kill poultry and manually kill any birds missed by the machine; and (5) automatically defeather the birds. Once the birds are defeathered, they are moved to the evisceration processing section via conveyor belt.
Evisceration
Evisceration processes remove the internal organs of the poultry. Hearts, livers, gizzards, and necks may also be cleaned and packaged in evisceration. This operation includes the following tasks: (1) automatically cutting the bird open; (2) cutting the neck; (3) cutting and removing the oil sack from the birds; (4) removing the viscera from the body cavity and arranging them for USDA inspection—every third person that inspects the viscera in the production line is from the USDA; (5) separating giblets and viscera; (6) removing and cleaning the gizzard; (7) washing and visually inspecting hearts and livers before they are sent to the bagging station; (8) placing hearts, livers, gizzards and paws into bags; (9) removing the lungs and the kidneys from the body cavity using a suction device; and (10) verifying that the carcass is eviscerated.
Cutting and Deboning
After a chicken has been eviscerated and cleaned, it is prepared for packaging as a whole bird, or bone-in products, or bone-out products. If the final products are bone-in or bone-out products, this involves one more step: cutting; or two more steps: cutting and deboning. (i) Cutting: In the cutting process, the wings, legs, and thighs are removed from the carcass and the back is cut away from the breast. At this point, parts such as wings or thighs can be packaged as a consumer product, bulk-packed for delivery to other processors, or shipped to other parts of the plant for further processing. (ii) Deboning: The deboning process involves cutting meat away from the bone and cleaning. The deboned parts such as the chicken breast are generally packaged as a fresh or flash frozen consumer product.
Food Safety and Quality Control
As a vertically integrated company, Perdue Farms is able to ensure quality at every step in the supply chain. Perdue Farms, Inc. is the only major poultry company with a unique proprietary breed of chicken. This ensures quality and consistency of the product. It is also the first poultry company to successfully implement a comprehensive “farm-to-fork” food safety program. The company has created a Food Safety Pledge to make sure that every associate has ownership of product quality and food safety.
At Perdue Farms, quality assurance managers are trained and are certified in Food Safety. In addition, each Perdue facility has a food protection manager, certified by ServSafe, the leading food safety education program. Quality and safety are stressed under the watchful eye of USDA inspectors. Each processing and further-processing facility has onsite USDA inspectors.
The quality program at Perdue Farms is meticulous at every phase. For example, the quality of products is ensured by inspections conducted by the company’s product lab, digital scales are used to assure and guarantee accurate box weights, satisfaction of products is guaranteed through providing consumers a money-back option and an accessible toll-free consumer hotline, and nutritional information is labeled on every package.
Every day, a clean-up crew comes into food process sites to wash every nook and cranny. After cleanup is complete, plant laboratory personnel check to see that the job has been done properly.
Creating an environmentally friendly alternative use for surplus poultry litter is an example of Perdue Farms’ commitment to environmental stewardship. The company invested $12 million to build a plant that converts surplus litter into organic, environmentally friendly fertilizer products for application where nutrients are needed.
Investment in Collaborative Planning, Forecasting, and Replenishment (CPFR)
Before investing in CPFR software, Perdue’s managers determined their production volumes by the “gut feel” of Perdue’s suppliers and customers, as well as the seasonal history of past consumption. It worked. However, with increasing competition in the food industry and higher demand from customers, Perdue seriously considers investment options in technology.
Since the late 1990s, Perdue’s CIO, Don Taylor, has led Perdue’s investment in technology to radically reshape the company’s supply chain infrastructure to implement CPFR and to provide high-quality products and incomparable service to customers. The $20 million investment in Manugistics, a CPFR software solution, enables Perdue to collaborate and share critical information on forecasting, point-of-sale data, promotion activities, inventory, and replenishment plans with its partners. Using Manugistics forecasting software and supply chain planning tools, Perdue has become more adept at delivering the right number of poultry products to the right customers at the right time.
The third week of November is usually Perdue’s busiest time of year. However, with the assistance of Manugistics, the company’s output does not change drastically. The big difference in November is the form that turkeys take. Most of the year, turkey is prepared for food parts and deli meats, while this time of year it is whole birds. Getting turkeys from farm to table is a race against time, so Perdue has turned to the CPFR technology solution to make sure its products arrive fresh. Each of its delivery trucks is equipped with a global positioning system that allows dispatchers to keep tabs on the turkeys en route from each of the company’s four distribution centers to their destinations. In case of mechanical failure (e.g. flat tires), a replacement will be sent to rescue the palettes of poultry. “We know where our trucks are exactly at all times,” says Dan DiGrazio, Perdue’s director of logistics.
Perdue collaborates with major food service and grocery companies such as Chick-Fil-A restaurants, Wal-Mart, and Sam’s Club for collaborative production planning, demand forecasting, and inventory replenishment. In implementing CPFR, Perdue assesses its production capacity and makes necessary investments to satisfy the expected demand level. In 2004, Perdue purchased a 500,000-square-foot plant near Perry, Georgia, from Cagle’s for $45 million. The plant processes up to 350,000 birds per week to meet the demand from Chick-Fil-A restaurants, and an additional 450,000 birds per week for tray-pack products sold at Wal-Mart and Sam’s Club.
Vision 2020
Perdue Farms is a rapidly growing company with a bold vision: “To be the leading quality food company with $20 billion in sales in 2020.” Perdue Farm’s vision of year 2020 is to increase sales volume to $20 billion from its current level of $2.7 billion.
The market needs for chicken are growing, as low-carb diets are becoming more popular. Perdue’s products are the answer for health-conscious customers, with less fat and fewer calories than other meat products. Perdue products are a good source of protein as well.
Tyson is a strong competitor of Perdue. In general, a grocery store carries three brands of uncooked chicken products. Many national grocery chains, such as Kroger, Farm Fresh, and K-Mart, carry both Tyson and Perdue brand products. Other poultry producers, such as Sanderson Farms and Gold Kist, are competing for third place.
Today, Perdue is further expanding its production facilities and product variety. Facing the market opportunities and competition, the management of Perdue is thinking about strategies and methods that will help the company to realize its Vision 2020.
Discussion Questions
1. Have you consumed Perdue Farm’s products? Which one of Perdue’s products do you like best? Which one do you not really care for?
2. Describe the production process at the chicken processing facility.
3. Is the vertically integrated supply chain that Perdue Farms operates the best option for Perdue? Why or why not?
4. Compare the poultry industry’s vertical supply chain model with Dell’s direct model that outsources most of its operations. Is this the best operations management/supply chain model for both industries? Why or why not?
5. Analyze the entire production lead-time, starting from eggs. How does lead-time affect production planning? Are there any risks and bottlenecks?
6. Discuss Perdue’s strengths, weaknesses, opportunities and threats. What new operational ideas and changes would you recommend to Perdue management to realize its vision 2020?
References
enVISION (2005). Manugistics Forum Keynote Speakers, Atlanta, GA. USA, retrieved August 30, 2005 http://www.manugistics.com/envision2005/speakers.html.
George, M., (2005). “Perdue to add cooking plant,” Houston Home, June 17, 2005, retrieved August 30, 2005, www.news.mywebpal.com/partners/963/public/news640284.html.
Lanter, Charlie (2004). Perdue Farms Executives Show Off Perry, Ga., Facility, American Stock Exchange, May 13, 2004, retrieved August 30, 2005, www.amex.com.
Luttrell, Sharron Kahn, Talking Turkey with Perdue’s CIO, CIO Magazine, Nov. 1, 2003, retrieved August 30, 2005, http://www.cio.com/archive/110103/tl_scm.html?printversion=yes.