A RAFT of important questions remain about the complexity and challenges surrounding the proposed industry-wide roll out of DEXA objective carcase measurement technology, an independent report commissioned by the Australian Meat Processor Corporation and the Australian Meat Industry Council has found.
EY (formerly Ernst & Young) on Friday released its final report detailing its independent review into Meat & Livestock Australia’s proposed $150m investment in DEXA technology.
In February, AMPC and AMIC commissioned EY to undertake an independent review of MLA’s proposal to roll-out DEXA in up to 90 Australian meat plans, announced at last November’s MLA annual general meeting.
The review considered the strategic, financial, technical, commercial, governance and implementation aspects of what has been proposed through the introduction of objective carcase measurement technology in the red meat processing industry via MLA’s Project 150 concept.
While EY’s consultations indicated that there was general acceptance across the industry about the need for, and benefits of, objective measurement, including objective carcase measurement (OCM), and that the adoption of OCM would, over time, potentially enable greater trust in commercial relationships and potentially lead to an uplift in productivity across the value chain.
“However it is clear from our consultations, research and analysis, that questions remain and that there is no alignment of views at this point,” the report said.
“The OCM technology solution advanced in the Project 150 proposal is not yet proven, at least not for beef, in a commercial setting.”
“While some key stakeholders agree with the specific OCM technology solution advanced in the Project 150 proposal, it is not yet proven, at least not for beef, in a commercial setting.”
“Evidence should be developed, based on trials and risk assessments, as to whether it is the right technology, and whether it is commercially viable,” EY’s report said.
“In addition, some stakeholders believe that an increasing focus on Lean Meat Yield as a key supply chain ‘signal’ may inhibit industry diversity and specialisation, which may have unintended and detrimental impacts to industry competitiveness, particularly in export markets.”
“The Review agrees that the potential benefits of the collection and use of data derived from OCM technology appear to be significant and valuable, both to individual companies and to the industry as a whole. This is consistent with the experience of many other industries and companies.”
“However, there are questions as to whether, and how, this can be achieved on an industry-wide basis.”
There had also been questions raised about whether the proposed widespread installation of high cost capital equipment, owned by a RDC, at the post-slaughter stage of processing plants, was an activity that should be undertaken by RDCs. The review noted that one stated rationale for the Project 150 proposal was to enable the collection of datasets to enable further research and development.
“It is clear that there are major questions about data collection, ownership and use, and intellectual property.”
“It is clear that there are major questions about data collection, ownership and use, and intellectual property. Some stakeholders have commented that uptake of such technology should only be at the request of processors; the review notes this is consistent with the proposal’s offer of a voluntary roll-out.
“Our research concludes that all the potential impacts on producers, processors and the wider industry have yet to be fully identified, explored and considered.”
“The review believes that a significant amount of industry-wide change management activity and stakeholder engagement is necessary, so that all stakeholders are clear on the potential implications of the proposal, not only for the broader industry but for their specific businesses as well.”
EY’s review leader Andrew Metcalfe said his team had adopted a consultative and evidence-based approach to formulate its observations and recommendations.
“We have engaged extensively with major industry bodies, independent experts, and directly with a number of large and small producers and processors. We strongly recommend that these initiatives are taken forward as consultatively and collaboratively as possible, given the significant transformational change that is being considered by the proposal,” Mr Metcalfe said.
AMPC, AMIC responses
In statements this week, both AMPC and AMIC welcomed the many findings and recommendations of the independent report.
“The red meat industry has spoken – with both producers and processors seeing many exciting benefits that OCM technologies could bring to our industry,” AMPC chairman Peter Noble said.
“The primary purpose of this review was to provide a fact-based assessment of the proposed DEXA rollout by MLA. By commissioning this review, we wanted to hear from a cross section of stakeholders engaged in the red meat supply chain about what DEXA and objective carcase measurement would mean to them.
“EY has successfully delivered on this task, and we stand ready with industry to provide the research, development and education in support of their voice and to answer the many questions raised by the review,” Mr Noble said.
Since the report was commissioned, MLA has announced plans for a smaller $10 million roll-out of DEXA projects in four processing plants, funded by individual processor companies with matching Government contributions. The matching Government funds are delivered through the MLA Donor Company, not producer levy funding through MLA.
“EY’s independent review, along with these $10 million pilot installations, will help provide the industry with the fact base and greater certainty that the red meat industry requires to make important investment decisions supporting widespread adoption of DEXA technology,” Mr Noble said.
Australian Meat Industry Council chairman Lachie Hart said AMIC reiterated its continued support for the utilisation of technology for Objective Carcase Measurement.
“This has been specifically endorsed through Strategic Recommendation 1 of the report” Mr Hart said.
“Our aim, with AMPC, was for the report to provide a fact-based assessment of the proposed DEXA rollout by MLA, and understand from a cross-section of stakeholders engaged in the red meat supply chain about what DEXA, and objective carcase measurement (OCM), means to them,” he said.
“In the spirit of supply chain collaboration, AMIC also supports the report recommendation that industry governance arrangements, relating to technological developments, should be revitalised. This would allow industry to work harmoniously towards outcomes that suit the whole supply chain.”
Mr Hart said AMIC also supported the report’s comments regarding industry Research and Development Corporations (RDCs) working with AMIC and its members to understand how the potential benefits in an industry-wide data-base of key objective measures could be achieved.
“AMIC continues to support its member’s concerns regarding issues in relation to data integrity, and more importantly, control and protection of commercial intellectual property,” he said.
“AMIC endorses the recommendation that either through the ALMTech structure, or in some other way, MLA and AMPC work with AMIC, and our members, on these sensitive commercial areas to then develop an outcome suitable for the whole supply chain.”
AMIC said it plans to form a specialised OCM/DEXA committee from within its beef and sheep/goat policy groups to manage progression of the technology within industry, and provide direction to AMIC executive on responses, positons and partnerships regarding OCM/DEXA.
The Review’s key insights and observations
There is recognition of the identified industry needs and support for objective measures. However greater clarity on how DEXA performs as a solution would be beneficial. The strategic need for OCM has been prioritised consistently across industry strategic plans, where there exists strategic alignment of key industry issues. Conversely, there is less coverage in the strategic plans when it comes to the need for cultural change solutions, which if addressed, would likely drive increased trust between supply chain participants.
Furthermore, there are differing views and priorities when it comes to what objective measures would be of the most benefit to the industry including LMY, Saleable Meat Yield (SMY) and Eating Quality (EQ). The value placed on the various characteristics of a carcase is strongly influenced by the end market to which processors are providing products. As such, individual objective measures and the ways in which they can be prioritised, is based on their differing importance to supply chain participants.
There are several factors which are considered with the overall value of the carcase, with LMY being but one input. Therefore, the impact of the specific OCM technology installation on the direct uplift in prices paid for carcases, will depend on the way in which LMY is weighted in the pricing grids determined by individual processors. However, the long term increase in quality of stock as a result of data feedback influencing herd development is likely to increase prices paid, aligned with the increase in quality. OCM data output will enable products to be better matched and processed according to consumer preferences in domestic and international markets.
In the context of The Proposal and based on the information available to The Review, it remains unclear as to the whether other solutions, including non-technology solutions, were considered. This is particularly the case for addressing grading concerns, whereby the recommendations made by the ACCC to increase frequency of grading audits and the publication of audit results could be considered.
Furthermore, consultations with the industry suggest a considerable portion remain unconvinced that a technology investment of this size is the right solution to meet the needs of the industry at this time. Should the consideration of possible solutions be undertaken and provided to the industry, it would provide them the opportunity to participate in the decision making process on how best to meet the needs, opportunities and challenges which may or may not require a large technology investment.
In the consideration of alternative OCM technologies, The Review sees that DEXA, on the basis of current research, is potentially one of the most suitable technologies in meeting the technical requirements of the industry. However, an industry-defined criteria, if developed, would have been beneficial to further evidence that DEXA is the most suitable option based on accuracy and other factors which enable standardised measures industry-wide. DEXA can also be prioritised over EQ technologies, which are less advanced and not as pertinent given the current accuracy of MSA grading.
Operational, Governance and Implementation considerations:
The feedback and engagement with the various industry bodies, producers and processors reiterates the need for more information through pilot programs in beef to enable evidence based decision making by the broader industry and the processing sector in particular given their differing needs and business models. Key developments are showing that, while the use of DEXA as an objective measurement technology in beef appears to have promise, it has yet to be categorically proven that it can objectively measure carcases of all types and characteristics at line speeds.
Additionally, the level of complexity and management surrounding both the use of the proposed DEXA technology in processing facilities and the ownership and use of the accompanying data produced, necessitates a significant level of structured oversight and governance. This would also include overseeing the collective negotiation of commercial use of data and IP. There is also a perceived lack of scale by the sole supplier to meet the needs of the industry, creating a potential risk to The Proposal if the supplier faces difficulties to deliver and at scale. Furthermore, there are issues as to the level of IT infrastructure support (both hardware, and software) to manage, encrypt, transmit and analyse (calibrate and gather insights for industry wide use) the data that would be produced as a result of running DEXA in processing plants.
Financial and commercial considerations:
There are a number of benefits and costs in which The Review has been unable to identify or validate the inputs for a Benefits-Cost Ratio (BCR) assessment on the information made available to us. These include costs which relate to auditing the DEXA units, training staff in using the DEXA machine, overall program governance costs, a program management office, employment of program and project managers; and decommissioning costs at the end of the DEXA lifecycle.
The Proposal envisions that processors will operate and maintain the DEXA unit, while the ownership is retained by MLA. These terms should be considered carefully by processors choosing to participate in The Proposal, if electing to use DEXA to enable automated boning which we understood could require an additional investment (e.g. of approximately $4-5m).
Furthermore, the review has been provided with the proposal’s benefits of $910m by 2026 as derived from the benefit calculations included in the OM Strategy Report5. However, The OM Strategy Report and The Proposal benefits do not reconcile, as the OM Strategy Report was commissioned to measure benefits of OM technology more broadly.
A BCR, if calculated, would be a useful comparator for the industry to evaluate The Proposal for investment purposes. This would need to include total cost ownership including operating costs, full economic benefits and their timing. The Review recommends that expected BCR scenarios should be prepared based on pilot findings and as agreed through industry consultation.
Correspondence has confirmed that the proposed financing model is in draft. The Review recommends that a financing options analysis is performed and has outlined a list of potential debt funding options and matters to be considered. Where shared financing arrangements are proposed, the conditions should clearly stipulate how the benefits are to be realised, and shared, amongst peak industry councils and their members.
A possible way forward for the industry
In this increasingly global and competitive industry, the review has concluded that there needs to be careful and ongoing consideration about how to best position the Australian industry and Australian producers and processors. However, the driver for any business decision should be consumer-led; as consumers drive industry demand, and thus a more consumer centric approach to introducing new developments could assist in the industry’s transformation.
Additionally, the industry should consider a more staged and incremental approach to new operating models as disruptive and potentially transformative as that proposed. This would allow for consideration of all the issues identified in our Review to enable trials to be conducted and evaluated, and gather further evidence including how this might affect the range of different business models that exist in the industry.
Sources: AMPC, AMIC, EY Independent report