DIRECT DIVERSION PROCESSING Detailed Training Session

1. DIRECT DIVERSION PROCESSINGDetailed Training Session Wednesday October 1, 2008 1:00 to 3:30 pm

2. 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.

3. The Benefits Increase participation More variety School-specific products Consistent product (commodity & commercial) Potential savings on storage costs

4. 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.

5. Direct Diversion Processing Survey

6. Bulk Raw Products List

7. Processors Available for Bulk Coarse Beef

8. What Do I Have To Do?Where and How Do I Start?

9. THE STEPS Processors Products Procurement Agreements Annual Order Order End Products Monitoring

10. 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.

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

12. Summary End Product Data Schedule (SEPDS)

13. 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

14. 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.

15. 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)

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

17. 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.

18. 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.

19. 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.

20. 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).

21. Formal Procurement Methods Competitive Sealed Bidding Competitive Proposals

22. 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

23. 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 elements�technical proposal and cost proposal Offerors to a RFP must be ranked using identified criteria

24. 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?ID=64

25. 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.

26. Procurement Recommendations (cont�d.) Have the bid opening on any day except Monday. Have the bid opening anytime after 1:00 p.m. Federal Express will not guarantee delivery before 10:30 a.m. Consult your school calendar to make sure your school will be open on the day of the bid opening.

27. Procurement Recommendations (cont�d.) 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.

28. Procurement Tools RA ACDA Commodity Processing Handbook Direct Diversion Product Specification Samples Direct Diversion Procurement Worksheet Samples

29. 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

30. What Information Do I Require the Vendor to Include in Their Submission? Manufacturer�s product code number of product(s) submitting for bid USDA bulk commodity code number for the commodity used in the end product(s)

31. What Information Do I Require the Vendor to Include in Their Submission? (cont�d) Minimum run requirements, if applicable. Minimum delivery requirements, if applicable. The meal pattern contribution per serving Summary End Product Data Schedule (SEPDS)

32. 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 they�ve addressed delivery needs as a part of the procurement process.

33. Delivery of End Products (cont�d) 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.

34. 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.)

35. Value Pass-Through Options Sales Rebate to Recipient Agency Fee for Service�Processor Fee for Service�Distributor Net Off Invoice (NOI)

36. Sales Rebate Direct�Processor sells end product directly to RA and invoices RA at gross price. RA applies for rebate for value of commodities contained in end product. Indirect�Processor 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)

37. 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. School�s actual net cost per case is $28.50 ($32 - $3.50).

38. Fee for Service�Processor 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

39. Fee for Service�Processor Example Processor�s 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.

40. Fee for Service�Distributor Distributor invoices RA for the cost of the processed product and distributor handling/storage fees. Price represents a processor�s 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 + distributor�s fees = Your Price

41. Fee for Service�Distributor Example Processor�s cost of non-commodity ingredients, labor, packaging, overhead and other costs is $22 per case of pork taco filling. Distributor�s 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).

42. 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

43. Net Off Invoice (NOI) Example Processor sells case of chicken nuggets to distributor for $30 per case. Distributor�s 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.

44. 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.

45. 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

46. Substitutable Donated Foods Full Substitution Limited Substitution

47. 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.

48. Full Substitution Example Cheese Processor XYZ will be receiving two trucks of mozzarella cheese for Wisconsin�s 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 processor�s warehouse.

49. 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.

50. Limited Substitution Example Chicken Processor 123 will be receiving five trucks of bulk chicken for Wisconsin�s direct diversion schools. Chicken Processor also processes bulk chicken for Ohio, Texas and Oklahoma. Wisconsin�s trucks have not arrived at processor�s facility; however, processor has received some trucks for Ohio.

51. Limited Substitution Example (cont�d) Processor uses an Ohio truck of bulk chicken to produce some of Wisconsin�s orders. Therefore, Wisconsin schools can receive finished end products prior to Wisconsin bulk chicken arriving at processor�s facility. When Wisconsin�s truck of bulk chicken arrives, it is then used for Ohio�s processing.

52. 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 processor�s facility. Schools can not receive finished end products until processor receives bulk truck.

53. 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.

54. What is Yield? The amount of finished end product returned for a defined amount of bulk raw commodity sent to a processor.

55. Yield Methods 100% Yield Guaranteed Minimum Return (GMR/GMY) Standard Yield (SY) Guaranteed Return (GR)

56. 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.

57. 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.

58. 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 processor�s summary end product data schedules.

59. 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 H�s 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.

60. 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.

61. 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.

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

63. 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.

64. 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.

65. 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.

66. 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.

67. 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

68. 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.

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

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

71. Fee for Service Recipient Agency and Distributor Sample Agreement Outlines responsibilities of each party Annual agreement Invoicing details

72. Value Pass Through (NOI) Recipient Agency and Distributor Sample Agreement Annual agreement Outlines distributor�s responsibilities

73. 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.

74. 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

75. Determining Raw Pounds Direct Diversion Processing Step-By-Step Guide Direct Diversion Processing Step-By-Step Samples

76. 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.

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

78. 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.

79. 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

83. MONITORING (Cont�d.) 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

84. 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@dpi.state.wi.us Lynne Slack, 608/266-2596, lynne.slack@dpi.state.wi.us Dino Ante, 608/266-3615, antonio.ante@dpi.state.wi.us