Feature America’s Second Harvest
idding started at 10 a.m. (CST). Two hours later, the winner was announced: Kansas City, Missouri, got the cereal
bars for 11,418 shares. Invariably, there were disappointments,
but few complaints. Since July, America’s Second Harvest has
used “the choice system,” a method of online electronic noncash bidding—devised by faculty at Chicago GSB—that lets
food banks compete for products they want from about 75
truckloads of food donated every day. The participants lose far
more often than they win, but say they vastly prefer the new
approach to the “big brother” system—a rotating list that
B
America’s Second Harvest had used to assign donations for
15 years.“Deciding which products to bid on isn’t easy, but we
know our service area better than anyone else, and we know
what kind of niche each product might serve,” said John
Arnold of Second Harvest Gleaners Food Bank in Comstock
Park, Michigan. “For better or worse, the decision making is
now precisely where it needs to be.”
For big food producers like Kraft and ConAgra, America’s
Second Harvest provides a way to donate surplus food
instead of paying to warehouse it—or throwing it away.
Dan Dry
HOW
FOOD BANKS
CAME TO LOVE
THE FREE MARKET
On November 11, Quaker gave 20,780 pounds of surplus cereal bars
to America’s Second Harvest, the nation’s food bank network, which
distributes such donations daily to nonprofit agencies that feed the hungry. From Alaska to New York, each of the 210 food banks desperately
wanted the load. To get it, they had to compete. By Patricia Houlihan
34
Chicago GSB Spring 2006
Spring 2006 Chicago GSB
35
Feature America’s Second Harvest
THE CHALLENGE OF ALLOCATION
For America’s Second Harvest staff, allocation has always been
a challenge. In the early 1980s, whoever could pick up food in
a timely fashion got the donation. By the late 1980s, the
organization began using goal factors based on poverty and
population to determine the amount of food each member
should receive for the year. America’s Second Harvest kept
track as members approached their allotment, and as donations
came in each day, staff offered the food to members furthest
from receiving their share. The type of food rarely mattered:
chicken, canned beets, fresh lettuce, apple juice, potato chips.
Since the members paid for shipping, they were sometimes put
off if freight costs were too high. Whether the local food bank
accepted the food or turned it down, the load counted as an
allocation, and that member dropped down to the bottom of
the list immediately.
“When your name was at the top of the list, someone at
America’s Second Harvest would call and say, ‘Would you like
this load?’ If it was chicken, you were happy. If it was barrels of
olives, it was maybe not the best thing,”said Susannah Morgan,
executive director of the Food Bank of Alaska. “But whether
you took it or not, your name would drop back down on the list
until it worked its way back up again. From my perspective,
there was practically no choice, only yes or no.”
In an attempt to help, America’s Second Harvest staff
sometimes tried to guess who needed what; sometimes they
even skipped a name on the list to save a member the expense
of turning down a load, but that frustrated members, too.
“There might be a load of chicken in Florida, but America’s
Second Harvest would say, ‘Alaska won’t want to go to Florida
for it,’” Morgan said. “But they wouldn’t know if I wanted it
badly enough to do that.”
On occasion, the problem was too much food. America’s
Second Harvest offered potatoes to an Idaho food bank or
orange juice to a Florida food bank—items that local producers
were already donating to them. In some cases, the food spoiled
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Chicago GSB Spring 2006
before it could be distributed. In frustration, America’s Second
Harvest had tried twice since the 1980s to come up with a new
allocation system but had no luck. In November 2002, they
called on Chicago GSB faculty to help after two GSB alumni
saw an opportunity at hand.
CREATING A NEW ECONOMY
Steve Saleh, ’86, was a policy analyst at the Department of
Commerce when it funded a study of how nonprofits,
including America’s Second Harvest, used the Internet. In
conversation with David Prendergast, ’86, America’s Second
Harvest senior vice president for planning, Saleh suggested
Prendergast seek help from former teacher and friend Harry
Davis, Roger L. and Rachel M. Goetz Distinguished Service
Professor of Creative Management, and Robert Hamada,
Edward Eagle Brown Distinguished Service Professor Emeritus
of Finance. Both professors quickly agreed. “Allocation of
scarce resources is what we teach and research at the GSB,” said
Hamada.“That’s what economists do.”
Davis served as moderator for the new task force—three
executives from the national offices of America’s Second Harvest and nine member food bank directors, a wildly disparate
group ranging from ex-hippies to former military officers, all
of them used to running their own operations. Some would
accept only healthy foods while others were self-described
“scavengers” and would take anything. Some served enormous
metropolitan areas; others ran tiny rural food banks.And while
most dealt with packaged goods,others distributed only prepared
food that had been “rescued”from restaurants or delicatessens.
And after they agreed on a new distribution method, the task
force members would have to convince the other 201 members
it would work. “They had to own the answer themselves and
feel it was as much their idea as it was ours, because they had to
sell it to this very diffuse network,”Davis said.
He and Hamada tapped microeconomist Canice Prendergast,
W. Allen Wallis Professor of Economics, to help. Prendergast
was intrigued. “It’s not often you get to create a little economy
all on your own. We were doing it from scratch.” In fact, their
first step was to scrap the old system. Hamada thought of a
bidding system immediately, but he didn’t mention it to the
task force. “I had a model in mind of vouchers and bidding to
elicit what kinds of things and how much is demanded—more
Dealing in Volume: America’s Second Harvest distributes millions of pounds of
donated food to food banks across the country, which then send the products
to such local organizations as homeless shelters, soup kitchens, and the Greater
Chicago Food Depository (shown here).
Dan Dry
In addition, manufacturers have the opportunity to give away
products that are imperfect or close to their expiration date.
Either way, the measure provides the corporations a tax break.
America’s Second Harvest accepts donations from 550 donors
at 5,000 locations and distributes them daily across the 50 states,
the District of Columbia, and Puerto Rico to food banks that
are America’s Second Harvest network members. Those organizations, in turn, dole them out to local food pantries, soup
kitchens, homeless shelters, and other charitable agencies.
Spring 2006 Chicago GSB
37
Feature America’s Second Harvest
or less a market solution. But we were very careful in couching
our terms so that it didn’t sound like competition,”he said.
Member directors raised several concerns; faculty suggested
solutions, which the members accepted or tweaked. Ultimately,
the “choice”system that resulted was a collaborative work. Each
morning, America’s Second Harvest would allocate shares
to each food bank, using an equation based on poverty and
population. Members would be free to bid or save their shares
day after day in an account. Using a closed-bid auction that
resembled eBay, America’s Second Harvest would post available products twice a day. The highest bidder would win the
load for the amount of the second-highest bid, a measure that
replicates a standard auction in which the winning bid need
be only slightly higher than the previous bid.
To generate shares for the next day, all the shares spent that
day would be reallocated proportionately among all 210
Comparatively tiny and powerless, they were historically
disenfranchised. To incent them to participate,“the FROs were
given a considerable amount of shares to join the system,”
Prendergast said.
The task force came up with a formula to determine how
many shares to distribute among the 210 members on the first
day. One pound of food would equal 0.2 shares; a typical truck
holds 25,000 pounds and so would trade for about 5,000
shares.With about 75 truckloads donated a day,members would
spend about 375,000 shares during one day’s transactions.“But
that logic only works if people don’t keep shares in the bank,”
Prendergast said. “We guessed that they’d keep an average of
four days’ shares set aside and win a load once every two to
three days.”
Another challenge was providing incentives to food banks to
put anything they couldn’t use on the auction block. The extra
food brought into the system was
dubbed “maroon pounds”by the
GSB faculty. Members with local
product, like the Idaho food
bank with extra potatoes, could
offer it to other member food
banks through the system, receiving 90 percent of the resulting
shares; a 10 percent tax collected
by America’s Second Harvest
would be reallocated to members in greater need of assistance.
“We had a long discussion about what the tax rate should
be,”Prendergast said.“Some wanted it really high, but if you tax
it 50 percent, you’re not going to get as much as if you tax it
10 percent. We provided incentives by keeping the tax low but
reallocating it differently.”
“Chicago GSB faculty helped
us come up with a real business
solution.”—Maria Hough
members the following morning, again using the poverty and
population goal factors.
To make sure small food banks could sometimes outbid
their much larger peers, the task force came up with three solutions. Smaller organizations would get larger lines of credit.
Small food banks also would be permitted to band together
and bid as a group, sharing a truckload of food that was too
large for any one of them to use. And any member could ask
America’s Second Harvest staff to handle its bidding, providing
a list of wanted items.
The group also realized that a bidding system operating
continuously throughout the day would favor large food banks
with enough staff to assign someone to watch the market all
day while small food banks with few staff would miss out,
Prendergast said. As a compromise, food would be put up for
bid only twice a day.
Launching the new economy on its first day provided another
set of obstacles. The food rescue organizations (FROs) that distributed restaurant and deli food and fresh produce had only
recently become America’s Second Harvest network members.
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Chicago GSB Spring 2006
CONVERTING TO A MARKET SYSTEM
Perhaps the most unusual challenge the task force grappled
with was preparing food bank executives to operate in a freemarket system when they were used to a top-down socialist
culture. Prendergast said,“They were worried about what they
perceived as capitalism’s inherent unfairness. A lot of the
checks and balances helped persuade them that everybody
gains. But what sealed it was that the shares get recirculated.
If a large food bank wins a load, those shares go straight back
into the system.” Besides that, he added, “A lot of it was their
frustration with the old system. They were obliged to take
things they didn’t want and pay transportation for them.”
After the task force came up with the theory, the members
needed to see it put into practice. In less than a month, professor
of operations management Donald Eisenstein created a prototype that let food bank operators get four to eight weeks’ worth
of experience with the choice system in about an hour. The
prototype played the role of other members, some aggressively
bidding every day, others being conservative. It included such
history about products as the average winning bid. The simulation even included status reports that showed who acquired
what. The prototype gave task force members a chance to learn
the system and experiment with different strategies. “No one
wants to overbid,” Eisenstein said. “They want to be able to
plan, to see how much they need to save or how long they
have to wait to acquire a load. The prototype allowed users to
experiment with various strategies and gain confidence in the
system because they could see that, over time, even small players
acquired the loads they wanted.”
The prototype was a huge hit, convincing more than 200
food bank operators and executives at America’s Second Harvest that the market system would work for them. On July 1,
with a few minor adjustments to the prototype, the choice
system was launched and proved successful immediately, said
Maria Hough, managing director of logistics at America’s
Second Harvest. One measure is the number of maroon
pounds—additional food brought into the system by food
banks. Within the first three months, America’s Second Harvest
distributed 72 million pounds of regular donations as well as
six million in maroon pounds, she said.
Food bank directors also value the transparency of the
system.“We don’t get loads of chicken and peanut butter every
day, and we don’t give all the product to one state,”Hough said.
America’s Second Harvest staff time has been freed up to seek
more donations from manufacturers, both in volume and
variety. For instance, items like shampoo and toothpaste, once
thought to be of less value than food, are highly sought by
food bank directors and their clients and are now among
products offered.
Most importantly, the new system has made America’s
Second Harvest a more efficient business.“We’re feeding more
hungry Americans, so it’s all for the good,” Hough said. “But
the Krafts and ConAgras of the world don’t donate their excess
product just for philanthropic reasons. This is business-tobusiness. Chicago GSB faculty helped us come up with a real
business solution.” n
Second Harvest By the Numbers
Using its new allocation
system, America’s Second
Harvest was able to distribute significantly more food,
beverages, and toiletries
to food banks across the
country. Statistics compiled
after the first six months
illustrate the increase
between July 1 and December 31, 2005, compared
with the same time frame
in 2004.
2004
2005
Amount from
national donors
distributed
Amount from
national donors
distributed
When natural disaster struck, America’s Second Harvest
sent additional donations directly to food banks in areas
serving storm victims without asking the members to use
the new allocation system.
2004
2005
2005
Amount
distributed
for storms
Amount
distributed
in 2005
for storms
Wilma,
Ophelia,
Dennis,
and Tammy
Amount
distributed
for storms
Rita and Katrina
57
percent
Members who have
seen an increase
in product
8
million pounds
164
million pounds
200
million pounds
7
million pounds
3
million pounds
66
Additional amount
shared between
members, also
known as “maroon
pounds” in 2OO5
million pounds
Source: America’s Second Harvest
Spring 2006 Chicago GSB
39