DIRECT DIVERSION PROCESSING Detailed Training Session

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DIRECT DIVERSION PROCESSINGDetailed Training
Session

• Wednesday
• October 1, 2008
• 100 to 330 pm

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What is Direct Diversion?

• Processing Option for WI schools
• Bulk commodities committed by schools on annual
  order to chosen processors
• For example
• Raw bulk chicken into chicken nuggets
• Raw coarse ground beef in cooked beef patties
• Bulk orange juice into 4-oz orange juice cups
• Bulk commodities are ordered by DPI to be shipped
  directly from USDA to the processors.
• Regardless of which processing option selected,
  brown box commodities are available to all
  schools placing an annual order.

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The Benefits

• Increase participation
• More variety
• School-specific products
• Consistent product
• (commodity commercial)
• Potential savings on storage costs

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How Do Schools Commit Bulk Pounds?

• During the Annual Order Period (January 15 to
  February 15) schools select the processing option
  of their choice.
• The direct diversion processing survey lists all
  bulk commodities and participating processors.

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Direct Diversion Processing Survey
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Bulk Raw Products List
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Processors Available for Bulk Coarse Beef
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What Do I Have To Do?Where and How Do I Start?
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THE STEPS

• Processors
• Products
• Procurement
• Agreements
• Annual Order
• Order End Products
• Monitoring

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PROCESSORS

• Who are the eligible processors for Wisconsin?
• USDA approves multi-state processors on a
  national level. DPI uses the USDA approved list
  as a starting point for who is eligible to
  participate.
• Annually, all interested processors must
  complete an Intent to Participate form and
  return to DPI.
• A List of eligible processors is listed on the
  DPI website at the end of September of each year.

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Products

• What products are available for your program?
• 1) Processors Summary End Product Data
  Schedules
• 2) Annual Food Show

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Summary End Product Data Schedule (SEPDS)
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SEPDS A B

• SEPDS A is for all donated foods excluding
  Guaranteed Minimum Return.
• Relevant columns A, E, F and H
• SEPDS B is for meat and poultry processed under
  Guaranteed Minimum Return.
• Relevant columns A, E, G, H

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SEPDS

• Please Note The commodity values are updated
  annually by USDA. The new commodity values are
  released on November 15th for the following
  school year. Each processor must re-submit their
  SEPDS to USDA for approval after the release on
  November 15th. It takes some time for USDA to
  approve the SEPDS with the new prices.
  Therefore, the SEPDS may not be available for a
  few months after the release of the new prices.
• The commodity value for the bulk commodity may
  increase or decrease.
• Therefore, the amounts in Column H and Column I
  may be slightly different for the upcoming year.

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Products

• How many approximate servings per product do you
  need?
• Determine approximate usage by
• Servings per day x number of days on menu
• (100 students x 45 days 4,500 total servings
  needed)

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PROCUREMENT

• Informal and formal procurement methods are
  established practices, appropriate for the
  acquisition, that are followed consistently.
• Determine which method you must use.

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Informal Procurement

• Relatively simple and informal practices to
  acquire goods and services that cost less than
  the small purchase threshold (100,000).
• Small purchases are conducted using specific
  procedures that are not as rigorous as formal
  procedures, but STILL PROVIDE COMPETITION.

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Informal Procurement

• Splitting purchases into segments less than
  100,000 does not permit school to use the
  informal purchase method (i.e., three purchases
  of 40,000 each which are paid for with
  non-profit program dollars).
• Written price quotations are obtained from all
  applicable processors who are on the DPI
  Eligible Processors List.

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Informal Procurement

• Solicitation documents need not be complex but
  must provide sufficient information to permit an
  eligible processor to respond.
• At a minimum, this must include
• A description of the products needed, including
  quantity.
• The date by which the products must be provided.
• Any other pertinent requirements.

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Formal Procurement

• Formal procurement methods are established
  procedures that must be followed when purchase is
  expected to equal or exceed the small purchase
  threshold (100,000).

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Formal Procurement Methods

• Competitive Sealed Bidding
• Competitive Proposals

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Competitive Sealed Bidding

• Invitation for Bid (IFB)
• Most appropriate for processing
• Must have a complete, adequate and realistic
  specification or purchase description
• Firm fixed price contract and is awarded to the
  lowest priced responsible, responsive bidder
• Formal advertising is required
• All bids opened publicly on specified date

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Competitive Proposals

• Uses a Request for Proposal (RFP)
• Firm fixed price or cost reimbursable contract
  is awarded to the responsible offeror, price and
  other terms
• The response to a RFP consists of two distinct
  elementstechnical proposal and cost proposal
• Offerors to a RFP must be ranked using identified
  criteria

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Procurement Options

• When working with processors to determine
  finished end products, determination can be
  arrived at by one of the following methods
• School indicates in procurement documents the
  generic product specification (no brand
  specified). Brand is selected during the final
  phase of the procurement process.
• School uses the branding process to pre-approve
  acceptable brands to include in procurement
  documents. For details on this procurement
  method, visit the National Food Service
  Management Institute (NFSMI) website at
  http//www.nfsmi.org/ResourceOverview.aspx?ID64

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Procurement Recommendations

• Offer a bid (formal or informal) or RFP that has
  the potential for renewal for a set time period.
  Typically the bid is for one year with the
  potential for two one-year renewals. This
  reduces the number of bids generated and allows
  the school and manufacturer to develop a
  long-term relationship.

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Procurement Recommendations (contd.)

• Have the bid opening on any day except Monday.
• Have the bid opening anytime after 100 p.m.
  Federal Express will not guarantee delivery
  before 1030 a.m.
• Consult your school calendar to make sure your
  school will be open on the day of the bid
  opening.

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Procurement Recommendations (contd.)

• Allow the manufacturers adequate time to complete
  the bid (minimum of three weeks).
• Clearly indicate where manufacturer will ship
  finished product (i.e., commercial distributor,
  school warehouse, etc.).
• Clearly list the factors that will be used to
  determine the winner of the bid. Indicate how
  and when the manufacturers will be notified of
  who was awarded the bid.

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Procurement Tools

• RA ACDA Commodity Processing Handbook
• Direct Diversion Product Specification Samples
• Direct Diversion Procurement Worksheet Samples

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What additional direct diversion-specific
information do I need to include in my
procurement process?

• End Products
• 1) What end products to purchase
• 2) Approximate usage of products (how much do
  you need to order?)
• 3) Delivery schedule of end products
• 4) Specify delivery location of finished end
  products (i.e., to your district or to your
  distributor)
• Value Pass Through Methods
• Yield Options
• Procurement Sample Language

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What Information Do I Require the Vendor to
Include in Their Submission?

• Manufacturers product code number of product(s)
  submitting for bid
• USDA bulk commodity code number for the commodity
  used in the end product(s)

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What Information Do I Require the Vendor to
Include in Their Submission? (contd)

• Minimum run requirements, if applicable.
• Minimum delivery requirements, if applicable.
• The meal pattern contribution per serving
• Summary End Product Data Schedule (SEPDS)

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Delivery of End Products

• All direct diversion processed products cannot
  come through the state-contracted warehouses and
  delivery system.
• Direct diversion schools can still get brown box
  commodities through the state-contracted delivery
  system.
• School must ensure that theyve addressed
  delivery needs as a part of the procurement
  process.

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Delivery of End Products (contd)

• It is necessary to include your desired direct
  diversion end products in your commodity
  commercial distribution procurement process.
• The commodity delivery portion of your
  procurement process must be completed prior to
  the annual order time period. This will help to
  ensure
• that your bulk pound commitments made on the
  annual commodity order are accurate.
• that you will be able to order and receive the
  desired finished end products from your
  distributor.
• It may be necessary to coordinate the distributor
  bid for your commercial products with your bid
  for direct diversion products.

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What is Value Pass-Through?

• Value pass through is the way in which SFAs
  receive the full value of donated food contained
  in a further processed product.
• (Or, the entitlement value of the bulk product
  contained in the end product.)

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Value Pass-Through Options

• Sales Rebate to Recipient Agency
• Fee for ServiceProcessor
• Fee for ServiceDistributor
• Net Off Invoice (NOI)

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Sales Rebate

• DirectProcessor sells end product directly to RA
  and invoices RA at gross price. RA applies for
  rebate for value of commodities contained in end
  product.
• IndirectProcessor sells end product to a
  commercial distributor at gross price.
  Distributor invoices RA for gross price. RA
  applies for rebate from processor.
• Commercial price Your price
• (school applies for a rebate monthly)

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Sales Rebate (Indirect) Example

• School A purchases pizzas from distributor and
  pays gross price of 32 per case. Entitlement
  value per case of pizza purchased is 3.50.
• School A files rebate to processor for the 3.50
  entitlement value per case of product purchased.
• Schools actual net cost per case is 28.50 (32
  - 3.50).

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Fee for ServiceProcessor

• Processing fee charged by processor.
• Processor invoices RA for the cost of the
  non-commodity ingredients and the processing fee.
• Value of the commodity has already been taken out
  of the price.
• Other ingredients labor packaging overhead
  other costs Your Price

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Fee for ServiceProcessor Example

• Processors cost of non-commodity ingredients,
  labor, packaging, overhead and other costs is 22
  per case of pork taco filling.
• The entitlement value per case of pork taco
  filling is 12.
• The 22 processing fee takes into account that
  processor will use 12 worth of donated food to
  make the taco filling.
• School A will be invoiced by processor 22 per
  case of pork taco filling.

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Fee for ServiceDistributor

• Distributor invoices RA for the cost of the
  processed product and distributor
  handling/storage fees.
• Price represents a processors cost of
  ingredients, labor, packaging, overhead and other
  costs incurred in the conversion of commodity
  into an end product.
• Value of commodity has already been taken out of
  the price.
• Other ingredients labor packaging overhead
  other costs distributors fees Your Price

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Fee for ServiceDistributor Example

• Processors cost of non-commodity ingredients,
  labor, packaging, overhead and other costs is 22
  per case of pork taco filling.
• Distributors handling/storage fee is 3 per case
  of pork taco filling.
• The entitlement value per case of pork taco
  filling is 12.
• The 22 processing fee takes into account that
  processor will use 12 worth of donated food to
  make the taco filling.
• School A will be invoiced by distributor 25 per
  case of pork taco filling (22 3).

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Net Off Invoice (NOI)

• Processor sells to a commercial distributor at
  gross price of end product.
• Distributor invoices RA at net case price.
  Invoice lists gross price, minus value of
  commodity in case and then net case price.
• Distributor claims a credit from processor for
  the value of commodity food contained in the end
  product.
• gross price - commodity value net case
  price

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Net Off Invoice (NOI) Example

• Processor sells case of chicken nuggets to
  distributor for 30 per case.
• Distributors handling/storage fee is 3 per case
  of chicken nuggets.
• The entitlement value per case of chicken nuggets
  is 10.
• School A will be invoiced by distributor 23 per
  case of chicken nuggets (30 3 - 10).
• Distributor will claim a credit to the processor
  for the 10 entitlement value per case of chicken
  nuggets.

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Why Do I Need to Know Value Pass Through Methods?

• Not all processors do all methods.
• During the bid process, SFAs need to indicate in
  their bid which method(s) they are requesting
  pricing for.
• For monitoring purposes, SFAs need to ensure
  they are receiving the full value of donated food
  back.

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What is A Substitutable Donated Food?

• In commodity processing, all bulk donated foods
  offered by USDA to distributing agencies fall
  into one of the following categories
• 1) substitutable
• 2) non-substitutable

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Substitutable Donated Foods

• Full Substitution
• Limited Substitution

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Full Substitution

• A processor can substitute commercial food for
  bulk commodity foods without restriction, so long
  as the substitute food is of the same generic
  identity, equal or better quality, and of
  domestic origin. The exception to this is bulk
  beef, pork and poultry on a limited approval
  basis.
• Fully substitutable foods are subject to the 100
  yield requirements.

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Full Substitution Example

• Cheese Processor XYZ will be receiving two trucks
  of mozzarella cheese for Wisconsins direct
  diversion schools.
• Cheese is fully substitutable. Therefore, Cheese
  Processor XYZ can use commercial bulk cheese to
  produce Wisconsin schools finished end products.
• Benefit school can receive finished end product
  regardless of whether bulk commodity has arrived
  at processors warehouse.

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Limited Substitution

• The substitution of commercial product for bulk
  donated foods with some restrictions. This is
  applicable to poultry products. Processors must
  have a substitution plan approved by both FNS and
  AMS. Only bulk pack chicken, chicken parts, and
  bulk pack turkey delivered by USDA vendors to
  processors are eligible for substitution.
• No backhauled poultry may be substituted.

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Limited Substitution Example

• Chicken Processor 123 will be receiving five
  trucks of bulk chicken for Wisconsins direct
  diversion schools.
• Chicken Processor also processes bulk chicken for
  Ohio, Texas and Oklahoma.
• Wisconsins trucks have not arrived at
  processors facility however, processor has
  received some trucks for Ohio.

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Limited Substitution Example (contd)

• Processor uses an Ohio truck of bulk chicken to
  produce some of Wisconsins orders. Therefore,
  Wisconsin schools can receive finished end
  products prior to Wisconsin bulk chicken arriving
  at processors facility.
• When Wisconsins truck of bulk chicken arrives,
  it is then used for Ohios processing.

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Non-Substitutable Food

• A USDA donated food that cannot be substituted
  with a commercially purchased product under the
  terms of a processing agreement.
• Processor cannot produce finished end products
  until the Wisconsin bulk truck arrives at
  processors facility.
• Schools can not receive finished end products
  until processor receives bulk truck.

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Why Do I Need to Know About Substitution Methods?

• The type of substitution method utilized by your
  processor(s) will determine when you receive
  finished end products.

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What is Yield?

• The amount of finished end product returned for a
  defined amount of bulk raw commodity sent to a
  processor.

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Yield Methods

• 100 Yield
• Guaranteed Minimum Return (GMR/GMY)
• Standard Yield (SY)
• Guaranteed Return (GR)

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100 Yield

• Processor must return 100 of the donated food
  received back to RA in the form of finished end
  products.
• Processor must add equivalent commercially
  purchased food to make up for manufacturing loss.

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100 Yield Example

• School A commits 120 pounds of bulk cheese to
  Cheese Processor XYZ.
• School A purchases pizza product B that contains
  12 pounds of bulk cheese per case. Product B is
  the only item that School A will purchase from
  Cheese Processor XYZ.
• School A will receive 10 cases of Product B
  containing the 120 pounds of bulk cheese.
• Cheese Processor XYZ does not have any
  manufacturing loss.

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Guaranteed Minimum Return

• The minimum weight or number of units of
  processed product that will be produced and
  returned for a set amount of donated food
  provided.
• This information is obtained from the processors
  summary end product data schedules.

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Guaranteed Minimum Return Example

• Turkey Processor H has completed SEPDS B and
  indicated in Column G Estimated Cases of
  Finished Product Per Truckload that 725 cases of
  sliced oven roasted turkey will be produced.
  This is Processor Hs guaranteed minimum return.
• Processor H overyields and actually produces 800
  cases from one truckload of bulk turkey.
• Therefore, schools receiving this product from
  this bulk truck will all receive a fair share of
  the 75 cases overyield.

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Standard Yield

• A concept that fixes the number of finished cases
  that a RA will receive from a fixed truckload of
  raw commodity.
• Standard yield will be higher than a processor
  could normally achieve in regular processing.
• Standard yield requires the processor to add some
  commercial product to the commodity product.
  Therefore, products processed under standard
  yield will have a higher per case price.

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Standard Yield Example

• Chicken Processor 123 is processing chicken
  nuggets under standard yield.
• Processor 123 has completed SEPDS A and Column F
  indicates 25 pounds donated food inventory
  drawdown per case.
• For every 25 pounds of bulk chicken committed,
  school receives one case of chicken nuggets.
• There are no overyields or underyields.

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Guaranteed Return

• A red meat processing option
• Specifies an exact number of finished cases that
  will be returned to the RA from the processor.

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Guaranteed Return Example

• Beef Processor STR is processing beef patties
  under guaranteed return.
• Processor STR has completed SEPDS A and Column F
  indicates 20 pounds donated food inventory
  drawdown per case.
• For every 20 pounds of bulk beef committed,
  school receives one case of beef patties.
• There are no overyields or underyields.

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Why Do I Need to Know Yield Methods?

• Schools need this information for evaluation of
  IFB/RFP.
• Schools need to know the various methods for
  monitoring, to ensure receipt of full commodity
  value.

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Conducting the Procurement Process

• Federal, State and local regulations must be
  followed.
• The most restrictive regulation(s) prevails.
• The procurement goal is to obtain the best
  product at the lowest price through a competitive
  process.

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Evaluation of IFB/RFP

• Yield will affect number of finished cases
  received.
• Therefore, part of the price evaluation process
  should factor in yield method. This can be
  accomplished by including entitlement value per
  case and converting to a per serving price.
• For example, Processor A submits pricing for
  turkey breast using GMR and Processor B submits
  pricing for turkey breast using SY.

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Evaluation Example

• Processor A, 101 servings per case
• 14.20 processing fee/case
• 20.19 entitlement value/case
• 34.39 total cost .3404 per serving
• Processor B, 96 servings per case
• 16.50 processing fee/case
• 16.44 entitlement value/case
• 32.94 total cost .3431 per serving

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Award IFB/RFP

• The final step of the procurement process is
  awarding the processing IFB/RFP.
• Part of the award process should include
  notification to all processors regarding who was
  awarded IFB/RFP.

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AGREEMENTS

• DPI/SFA Agreement
• Fees for Service Recipient Agency and Distributor
  Sample Agreement
• Value Pass Through (NOI) Recipient Agency and
  Distributor Sample Agreement

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DPI/SFA Agreement

• Due back to DPI by February 1
• Annual agreement
• Prep/joint language
• FSMC/Vendor language
• Agreement available on DPI/Commodity webpage

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Fee for Service Recipient Agency and Distributor
Sample Agreement

• Outlines responsibilities of each party
• Annual agreement
• Invoicing details

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Value Pass Through (NOI) Recipient Agency and
Distributor Sample Agreement

• Annual agreement
• Outlines distributors responsibilities

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DIRECT DIVERSION ANNUAL ORDER PROCESS

• Based on procurement awards, determine actual raw
  pound commitments to each processor.
• Make commitments on annual order, January 15 to
  February 15.
• Some time in April or May, schools can view final
  commitments for upcoming school year.

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Determining Actual Raw Pound Commitments

• Peanut Butter (DF) and Jelly Sandwich
• DF Inventory Draw
• Down per case Approximate Usage Raw pounds to
  commit
• 5.08 lbs. X 63 cases/year
  321 pounds
  
• Chicken (DF) Nuggets
• DF Inventory Draw
• Down per case Approximate Usage Raw pounds to
  commit
• 20 lbs. X 55 cases/year
  1,100 pounds

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Determining Raw Pounds

• Direct Diversion Processing Step-By-Step Guide
• Direct Diversion Processing Step-By-Step Samples

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Inventory

• Bulk commodities have various ship periods
  available, which may affect when schools may
  start receiving finished end products.
• Some processors will allow schools to receive
  finished end product(s) prior to processor
  receiving USDA bulk commodity(s).
• Verify with your processor(s) when you can start
  receiving finished end products. If and how much
  varies by processor.

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Inventory

• USDA Policy FD-040 explains inventory draw down
  for each value pass through method.
• DPI Inventory Carryover Policy.

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Shortages/delays/cancellations

• Do USDA commodity delays, shortages, and
  cancellations affect direct diversion?
• Yes, but how and to what extent depends on the
  processor and the VPT.

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Final Commitment

• In April/May, schools can view final commitments
  ordered for each processor.
• Adjustments may have been made by DPI to schools
  initial commitments.

80
ORDER END PRODUCTS

• May through July schools will work with
  processors and food brokers to place orders and
  identify delivery schedules and locations for the
  upcoming school year.
• Please note that all processors have different
  lead time requirements for placing orders.
  Therefore, placing your orders early is important
  to ensure that processors can meet your delivery
  schedule.

81
ORDER END PRODUCTS

• Minimum production run requirements apply at the
  processor level.
• Minimum drop requirements apply at the
  distribution level.
• Remember, none of the direct diversion processed
  products come through the state-contracted
  warehouse.

82
MONITORING

• August to May All schools must track orders to
• 1) ensure orders are accurate and complete
• 2) monitor inventory balances at processors
• 3) monitor value pass through methods to
  ensure receipt of entitlement value

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MONITORING (Contd.)

• Many of the processors have electronic systems
  for monitoring inventory balances.
• Schools are responsible for understanding and
  accessing all applicable systems, as used by
  their selected processors.
• Two common systems used
• K12-Food Service http//www.k12foodservice.com
• ProcessorLink https//www.processorlink.com

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Monitoring (Sales Verification)

• As required by USDA, schools must participate in
  sales verification for all NOI processing.
• Many processors use an electronic sales
  verification program.
• Refer to ACDA RA Commodity Processing Handbook,
  page 12 for specific details.

85
Invoicing

• Administrative fee charged on all bulk pounds
  committed to processors.
• Bulk pounds committed for both direct diversion
  and cheese processing program will have an
  administrative fee.
• Fee is charged on the adjusted amount, after DPI
  has balanced truck loads.
• Fee is billed in August of each school year and
  collected through the offset method.

86
Direct Diversion Timelines

• Mid-Aug Direct Diversion information Packet
  mailed to all SFAs
• 1st wk Sept Processors return Intent to
  Participate agreement to DPI
• Mid-Sept List of interested processors posted on
  website
• Sept 26 Food show with all interested direct
  diversion processors for all potential direct
  diversion schools
• 1st part Oct Direct Diversion training
  session(s)
• 3rd wk Oct Detailed direct diversion process
  packet available online
• End-Oct SFAs begin procurement process for
  direct diversion vendors
• Mid-Jan SFAs select direct diversion vendors,
  using appropriate procurement process. SFAs
  verify commercial distribution of selected
  processed products with their distributor(s)
• Jan 15 to
• Feb 15 SFAs commit pounds of bulk products
  to vendors (on annual survey) chosen through
  the procurement process
• Feb 1 Direct Diversion Agreement between SFA and
  DPI due to DPI

87
Resources and Contacts

• DPI Website http//dpi.wi.gov/fns/index.html
• USDA Website http//www.fns.usda.gov/fdd
• ACDA Recipient Agency Commodity Processing
  Handbook available on the DPI Commodity webpage.
• DPI Contacts
• Laura Sime, 608/267-9119, laura.sime_at_dpi.state.wi.
  us
• Lynne Slack, 608/266-2596, lynne.slack_at_dpi.state.w
  i.us
• Dino Ante, 608/266-3615, antonio.ante_at_dpi.state.wi
  .us