[SOLVED] As his plane landed at Port Columbus

As his plane landed at Port Columbus International Air- port, Adam Warren, Chief Supply Chain Officer for Sup- ply Chain Operations and Services, (SCOS), switched his phone out of airplane mode and waited for cellular service to resume and the messages he had received during his flight to load. As Adam’s phone began to reveal a flurry of missed calls and text messages, he knew today would be anything but normal.
Adam quickly focused his attention on a series of messages from Nadia Bolton, CEO of Morning Star Dining (MSD). MSD was a major restaurant chain for which SCOS managed purchasing and supply chain services. Adam recalled hearing that several large, well-known restaurant chains and grocery stores had announced plans to transition to 100 percent cage-free eggs in the coming years. However, he hadn’t heard anything about MSD’s customers wanting cage-free eggs in their meals, and the SCOS, the co-op had been sourcing theirs from the largest of these suppliers, Del Rey Foods. Del Rey Foods in turn operated hen houses and/or contracts with farmers (often called “growers”) to secure supply.
Before 2015, Del Rey would typically seek to negotiate 2- to 3-year contracts with customers for egg purchases. However, as the restaurant industry has moved toward cage-free eggs, they have been seeking 5- to 7-year contracts. This reflects the insistence of the growers who supply Del Rey on 10- to 15-year purchase con- tracts for cage-free eggs.
“What?!” asked Adam, after Annika had walked him through this. “Why such long contracts?”
“Well, think of it from the farmers’ perspective,” replied Annika. “They are taking on enormous expense in order to convert their existing hen houses to cage-free operations. In addition, they’re having to build whole new facilities in order to keep up with demand. You can’t have as many chickens in a cage-free house as when they’re caged. So even if they converted all of their houses, they would still have to build more space in order to house the same number of birds. And on top of that, if people keep eating the same number of eggs as they do today, they’ll need even more houses as the population grows. All this presents risk, and the farmers don’t want to move forward with con- version unless they know demand is going to be there for a long enough time and at a high enough price for them to cover their investment.”
“Interesting,” replied Adam.
“Well, it gets even trickier for the farmers,” Annika continued. “Over the last several years, their flocks took a huge hit from Avian Flu. Millions of birds were lost, which reduced supply. This got regulators worried–not only was the supply of a staple food item in jeopardy, but prices of eggs rose to historic levels. As a result, new laws were passed which forced farmers to reduce the density of birds in their houses. Many farmers had just finished installing new battery cages, small wire cages linked together, to meet guidelines when this surge in demand for cage-free eggs took off. Who wants to completely renovate their facilities when they just replaced their old equipment with cages that were sup- posed to last 20 or 30 years? Plus, prices are beginning to come back down as flocks recover–that and the price of feed is way down.”
“Is that the largest operating cost for these farmers?” asked Adam.
“Yes,” replied Annika, “though that cost is pretty volatile. Labor costs in the houses and veterinary service are also significant costs though, as is buying new birds, which are about a buck a piece. Conventional or cage free, the birds are only at peak productivity for about 2 years. They crank out an egg every 1.3 to 1.5 days for right around 20 months, it seems like my uncle told me. After that their production starts to slow and it’s time for new ones.”
“What happens to the old ones?” asked Adam.
“Well, it’s not much of a happy ending,” said Annika. “There are no retirement homes for chickens. They’re typically just euthanized.”
“Can’t they be used for meat?”
“No, there’s a world of difference between a meat chicken and a laying chicken.”
“Wow, so they’re just wasted?” asked Adam.
“Pretty much,” said Annika. “The life of a laying chicken isn’t always pretty. The males are killed right after hatching, while the females get the tip of their beak trimmed off before being sold and heading to the barn. It doesn’t hurt, and it’s for their own good. It’s just the tip and it’s so they don’t peck each other to death. Believe it or not, chickens are pretty aggressive and naturally establish a strong hierarchy in their flocks. The weaker ones often get relentlessly bullied even to the point of being killed. Ever heard the term ‘pecking order’? Now you know where it comes from.”
“So how do you stop them from pecking each other?” asked Adam.
“The best way is to keep them in cages,” said Annika. “This is what farmers started doing between the 1930s and 60s to keep their birds safe, and healthier too. They weren’t getting foot rot from walking in their own manure, trans- mitting diseases to one another, or being eaten by other animals while they wandered around by day or varmints that snuck in at night. There’s even a recent scientific study that shows how much worse off chickens are in a cage- free system. The Coalition for Sustainable Egg Supply, or CSES, just released it a year or so ago. Isn’t it ironic that 60 years after putting chickens into cages for their well- being, people are now calling for them to be let out for the same reason. It makes you wonder how much people really know about chicken farming.”
“I know I had no idea about any of this,” said Adam.
“Well, I guess it doesn’t matter much. If people want cage-free eggs, that’s what we’ll give them, at least until they change their mind again and come up with some new way they want things done. Maybe luxury apartments for chickens?”
“Yeah, speaking of giving people cage-free eggs,” said Adam, “what’s it going to take to get them from our supplier?”
“Well,” Annika replied, “we should probably let them know right away that’s what we plan to start buying when our existing contracts expire. There are a lot of companies committing to buy them and not a lot of supply, so they will probably appreciate the heads-up. It will help them with planning. Then it will just be a matter of negotiating a new contract for cage-free instead of conventional.”
“What’s the status of our existing contract?” asked Adam.
“We just inked it last year for a three-year term. That means we’re locked in to conventional eggs for another two years, unless they’re willing to renegotiate. We’re currently paying $0.51 per liquid pound, which is a pretty good price given only about a penny of that is profit for Del Rey. And while I’m sure we could do some bargaining, I’ve heard the going rate in today’s market is about $0.81 a pound for liquid cage-free.”
What Annika also knew, but which she did not convey to Adam, as he had probably heard enough by now, was that for U.S. farmers, a conventional barn for egg production costs about $500,000 to construct, lasts 15–20 years, and can house around 100,000 hens at a time. A cage-free aviary costs around $4 million to build, and can house around 50,000 birds. To retrofit a conventional barn to a cage-free operation costs about $3 million.
Adam pondered all that Annika had told him later in the day as he sat in his office scrolling mindlessly through his Instagram feed on his phone. Two years left on the contract? Nadia Bolton at MSD seemed adamant that they move now. But most other companies, McDonald’s for example, weren’t committing to be at 100 percent for another seven or eight years from now. He wondered if MSD could simply commit to a similar timeline and fall in with the herd (or “flock,” in this case, he supposed). Protesters likely wouldn’t single out MSD if they were doing the same thing everyone else was, would they? But then, could there be the capacity issues? MSD used a lot of eggs; would their supplier be able to meet MSD’s entire demand within eight years? And what about the cost? Cage-free was quite a bit more expensive. Adam decided he should probably do a little research on the cage-free industry from the production side.
Required:
1. What recommendation should Adam give to Nadia regarding cage free eggs?
2. What steps should MSD take to address the situation immediately?
3. What steps should they take over the next few years?

Question: As his plane landed at Port Columbus