Understanding the role of weather in the supply chain - Met Office

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Understanding the role of weather in the supply chain October 2015 www.metoffice.gov.uk/retail 1

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Contents SECTION ONE Foreword............................................................................................................................................................................................ 2 About the authors.............................................................................................................................................................................. 3 About the research............................................................................................................................................................................. 4

SECTION TWO Executive summary............................................................................................................................................................................ 5

SECTION THREE The role of weather in the supply chain............................................................................................................................................. 7

SECTION FOUR Conclusion....................................................................................................................................................................................... 18 DemandMet™ - weather services for retail........................................................................................................................................ 19 Contacts........................................................................................................................................................................................... 20

Section one

1 || Understanding the role of weather in the supply chain

Foreword At the Met Office, we’re aware of the key goals of supply chains: • great product availability for customers • low inventory • low costs including reduced waste We work closely with retailers and suppliers to help them manage the impact of weather on their supply chain. As part of our role, we wanted to get an in-depth understanding of how retailers and suppliers are currently using weather products and data, and the impact of the weather on their business. We’ve spoken to over 200 food retailers and suppliers and this is the first time that research of this kind has been conducted in the industry.

The research has produced some fascinating results. What stood out for us was how few organisations currently use weather data in their planning. Incorporating weather forecasts in their operations is a significant opportunity for them to improve demand planning across the whole supply chain and better understand customer purchasing behaviour. While many may believe that their product portfolio is not weathersensitive, operationally the weather will always have an impact on their logistics and commercial activities. This research goes on to reveal a number of surprising opportunities and insights that will enable us to support British retailers and suppliers more effectively. Barbara Napiorkowska-Dickson

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About the authors Barbara Napiorkowska-Dickson biography Met Office retail business manager Barbara is a marketing professional with broad experience in regional and global strategic marketing for a number of companies including Philips, Microsoft and Johnson & Johnson. As part of her career, Barbara was instrumental in helping Philips DA division in Poland achieve the leadership position on the Polish market. Whilst managing Philips worldwide food category, Barbara was involved in developing and introducing a number of successful household products into regional markets including France, Italy, CEE countries, Brazil and China. Barbara was also part of the team that introduced Microsoft X-box to Eastern Europe, Russia and the Middle East. Throughout her career, Barbara has built strong relationships with a number of global and local retailers, including Carrefour, Auchon, Mediamarkt, and Lidl. She joined the Met Office in 2014 and was part of the team that launched the DemandMet™ suite of forecast products tailored for the retail market. Barbara is currently retail business manager and responsible for building the retail market for weather services in the UK.

3 || Understanding the role of weather in the supply chain

About the Met Office: Right across the world, every single day, people make decisions based on the weather. The Met Office provides weather and climate forecasts and advice to help with those decisions so people can be safe, well and prosperous. Everything it does is based on world-leading science and enhanced by the close working relationships it has with partner organisations around the globe. The Met Office can help retailers and suppliers manage the impact of weather on their supply chain with its tailored weather forecasting service aimed at improving product availability for customers, whatever the weather. DemandMet™ is a tailored weather forecasting service for retail that can help improve product forecasting and, as a result, product availability.

About the research Research methodology: In order to better understand the impact of the weather on shopper behaviour and supply chains, the Met Office undertook research among supply chain managers and executives to draw out valuable insights and implications for the role of weather in the industry.

Which of the following most accurately describes your role? Forecasting/demand or supply planning/replenishment

58% Supply chain process innovation/development

Our research consisted of:

20%

• An online survey responded to by over 240 senior managers and executives, across many well-known industry organisations • Views from retailers, suppliers and third party logistics providers, with the majority in the food and grocery industry • Cross-functional representation with the majority of respondents involved in planning

Distribution/logistics/transport/network management

19% Supplier/customer development/management

19% All supply chain activities

16% Commercial/sales

11% Operations/production

Food supplier

5%

53% Food retailer/wholesaler

14%

Other

3%

Non-food supplier

8% Food & non-food retailer/wholesaler

7% Food & non-food supplier

3%

We also spoke to IGD, a research and training body, who recently undertook a survey about forecasting in supply chains and the impacts of external factors, such as the weather, on supply chain efficiency.

Non-food retailer/wholesaler

1%

The combined outcome includes findings like:

Private labels

2% All others

12%

• What areas of the supply chain the weather impacts and how big a role it plays in influencing demand • How they currently use weather products/ data to drive better decisions • What the challenges are with using weather data

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Section two Executive summary

5 || Understanding the role of weather in the supply chain

While UK retail sales have been enjoying a period of steady growth, with volumes rising for the 27th consecutive month and growing 4% year on year[1], they continue to be held back by the under performance of the food sector. Sales in the food category fell by 0.1% in June 2015, down from +0.6% in the previous month.

The results illustrate that better tracking and understanding of weather conditions is essential to better meet consumer demand, ensure the timely and safe delivery of goods and reduce unnecessary inventory and waste in the face of more seasonal weather extremes.

The food sector is facing a number of unique structural challenges which are holding back growth in this category:

Some of the key findings from the research reveal:

• Shopper behaviour. This is a significant contributor to supply chain complexity. There has been a fragmentation of demand across multiple channels coupled with growing customer expectations. Consumers are increasingly mercurial, with many buying bulky goods online and doing more regular ‘topping up’ at convenience stores • Retail environment. Competition has intensified amongst the major supermarkets, with the likes of Aldi and Lidl gaining a larger slice of market share by offering lower prices. We’re seeing demand influencing range changes, an increasing number of promotions and shorter lead times • External factors. An increase in seasonal weather extremes, fragile economic recovery, as well as the growing need to reduce food inventory and waste, all have a part to play Forecasting demand accurately is the most important function to get right in the supply chain in order to deliver its primary goals of better service and lower costs. Despite this, and improvements in forecasting systems, intelligence and data analysis, forecasting is getting harder. There are, however, opportunities to be had from getting to grips with one of the external factors – the weather – to help address this challenge. In order to explore this relatively untapped opportunity, the Met Office has developed the “Understanding the role of weather in the supply chain” report to demonstrate how the weather can have a huge impact on managing supply chain complexity and response to consumer spending behaviour. This research has been shaped by the views of over 200 executives and managers from the industry, to understand how they’re currently using weather products and data, how they plan to do so in the future, and the impact of the weather on their supply chain.

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Retail Economics: Retail Sales Report - July 2015

• Almost half of respondents (47%) rank the weather as the third most important factor external to their business, which drives consumer demand. Because it’s external, it is vital to have weather forecasts to understand its impact • Despite this, only 16% use commercial weather data while 19% rely on free data • Weather forecasts rank third bottom for factors already incorporated into demand planning, but sit third top for factors that respondents would like to use • While 67% of respondents say that forecasting has become harder, there is also a clear desire from supply chains to use the weather forecasts more broadly within their businesses, particularly to drive commercial benefits. For example, through forecasting footfall and online traffic and planning marketing campaigns • Those using paid-for weather services reported improved customer service (62%), better sales forecast accuracy (57%), better on shelf availability (51%) and less waste (43%) – the key priorities of most supply chains Findings from the research conclude that understanding the weather is an essential, but often overlooked, factor for retailers and suppliers looking to increase consumer advocacy and drive competitive advantage.

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Section three

The impact of weather on the supply chain of retailers and suppliers

7 || Understanding the role of weather in the supply chain

The goal of any supply chain is to provide customers with what they want, when they want it, and at the lowest cost to the business. This requires an efficient flow of products and information across the entire chain; from the supplier to the consumer. Supply chains play an increasingly central role in determining business strategy; from improving product availability to customers to streamlining operational costs and reducing inventory and waste.

• A move away from half price/ BOGOFs to everyday low prices is having implications for forecasting, volumes, etc.

According to the research, despite recent improvements in forecasting systems, intelligence and data analysis, forecasting is getting harder due to increasing supply chain complexity. The findings revealed that 67% of respondents said that forecasting demand is getting harder, with just 14% saying it’s getting easier.

• Range rationalisation in the industry, for example, changing demand patterns across all products.”

67% Harder

19%

No change

14% Easier

Rapidly changing shopper behaviour is adding significant complexity to the supply chain, with a fragmentation of demand across multiple channels coupled with growing customer expectations. Online grocery has changed the way consumers shop for food, with many buying bulky goods online and ’topping up‘ at convenience stores – a growing trend which is undermining the value of supermarket formats.

According to the CEO of a major grocery retailer: “These are the most challenging conditions in 30 years. Customers have never been so savvy.” A demand planning manager from a leading private label manufacturer summarises the key changes happening in-store: “There are smaller volumes (more players, more channels, more differentiation/ customisation of products, range proliferation, etc.) and more volatility driven by:

• Increasingly susceptibility to last minute changes (promotions/ prices, etc.)

The influence of weather events on shopper behaviour should not be underestimated, and presents a real opportunity for retailers and suppliers to help forecast product demand accurately, which is the most important function to get right in the supply chain in order to deliver its primary goals of product availability, low inventory and low costs including reduced food waste. The weather affects everyone’s supply chain and will have an increasing impact in the future as shopper expectations continue to evolve and the risks of extreme weather change. Retailers or suppliers of weather sensitive products, such as BBQ meats, salads, beverages and soups, particularly in locations where the weather is more variable and less reliable, will be most affected. In the food retail market this is especially important as consumer demand for certain products can change as quickly as the weather. The perishable nature of food makes planning even more important – a ‘use it or lose it’ situation where huge waste – and losses – can be the result when it isn’t managed correctly. The weather in the UK is also more variable than many other markets. This makes the shopper response to the weather much more pronounced, so not only is it harder to forecast, but it’s also even more important to get it right.

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The weather has a significant impact The research found that, for 47% of respondents, weather was ranked as the 3rd most important factor external to their business that drives consumer demand.

Our research has found that 35% of respondents in the UK are not using any form of weather forecasts within their business and 19% of those that responded are relying on using only freely available online data. Just 16% of respondents are using a commercial weather forecast service.

What weather products or data do you use in your business? (Tick all that apply)

What are the top three factors, external to your business, that drive end consumer demand? Events / holidays / seasonality

80%

16% 27%

Competitor activity

70%

19% 12%

The economy

60%

11%

1%

21% 1%

12% 35%

The weather

43% Commercial product

47%

Only free data

Media influences

50% 26%

29%

Legal / regulatory / political

Used only outside supply chain

24%

5% Other

None used/no detail Skipped question

Retailer

Total

Supplier

4% Environmental / ethical changes

4%

Essentially, it is a key factor, and something that cannot be ignored. Brands invest huge sums in research into analysing and predicting consumer demands, competitor behaviour and trend mapping. It may be assumed that weather forecasting receives equally significant investment, but this is, in many cases, far from the reality.

9 || Understanding the role of weather in the supply chain

Retailers are much more likely than suppliers to use commercial products (27% versus 11%). They sell a wide range of products, at least some of which are likely to be weather sensitive. Suppliers have a narrower portfolio and, for some, their business may be less affected by the weather. Even if weather does not affect the product portfolio, it will still have an impact on logistics operations, sourcing and commercial activities. Those that use freely available forecast data have, in the main, concentrated on Met Office or BBC data with over a third (35%) using free online Met Office forecasts.

Unsurprisingly, larger companies are more likely to pay for weather products, although many smaller companies are also sufficiently impacted by weather to justify paying for data or products. The average number of data sources used (including free and commercial products) at about 1.8 per business.

What weather products or data do you use in your business? (Tick all that apply)

Looking at suppliers, short term sales forecasts (58%) also top the list for current use of weather data, this time followed by long term sales forecasts (43%) and promotional planning (33%). Promotional planning was the main thing which they would like to use weather forecasts for (30% of those that aren’t already), again followed by planning stock availability (28%) and long term sales forecasts (25%). Long term planning of food/ raw materials is also a key area where weather data is needed, cited by 25%.

6% 20%

22%

24% 6% 31% 38% 52%

3%

26%

Commercial product Only free data

34% 18%

20%

Currently retailers are primarily using weather data for short term sales forecasts (62%) followed by planning stock availability (43%) and planning deliveries from depot to store (43%). Planning stock availability and long term sales forecasts (29% both) are the two most desired uses of weather forecasts for retailers. Planning national marketing campaigns also takes a big jump, with 24% wanting to use weather data to support this activity, up from 19% who currently do so.

Used only outside supply chain None used/no detail

For both retailers and suppliers, this reflects a clear desire from supply chains to use the weather forecasts more broadly, particularly to drive commercial benefits, forecast footfall and online traffic (20%), and plan a variety of marketing campaigns (19%). This desire to improve planning in these areas is in line with their supply chain priorities including product availability for customers, low inventory, low costs and reduced waste.

Skipped question

$5b

Weather data driving end-to-end decisions Weather forecasts are currently used to support a broad range of decisions and activities in the supply chain like sales forecasting, planning stock availability and promotions, and managing deliveries/logistics.

Different weather factors in planning The most commonly used weather factors in planning are varying measures of temperature – maximum, average and minimum - which have the strongest impact on consumer demand. For example, a senior supply chain manager (fresh foods) from a national retailer said that demand for products can differ dramatically depending on how the weather varies through the day:

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What do you/would you like to use the weather forecasts for? What decisions do they support? Retailers

Suppliers

Short term sales forecast

Short term sales forecast 62%

24% Planning stock availability

58%

23% Long term sales forecast

43%

29% Product deliveries from depot to store

Promotional planning 43%

14%

43%

25%

Promotional planning

33% 30% Planning stock availability

38%

24%

30% 28%

Operational product forecasting 29% 14%

Long term planning of food/raw materials 25% 25%

Planning in-store merchandising 24% 19%

Operational product forecasting 20% 23%

Planning in-store/online marketing campaigns 24% 19%

Ranging decisions 13%

Ranging decisions 19% 5%

Financial and marketing analysis 13% 20%

Forecasting in-store footfall/online traffic 19% 24%

Product deliveries from depot to store 13% 15%

Long term sales forecast 19%

Forecasting in-store footfall/online traffic 5% 20%

29%

20%

Planning national marketing campaigns 19% 24%

Planning national marketing campaigns 5% 18%

Long term planning of food/raw materials 10% 10%

Planning in-store merchandising 3% 20%

Financial and marketing analysis 10% 14%

Planning in-store/online marketing campaigns 3% 18%

Other

Other 3%

5%

10%

8%

Currently used for

11 || Understanding the role of weather in the supply chain

Would like to use for

“It’s not enough to consider an average weather or temperature for the whole day. For example, if it’s sunny at lunch (and rains later) you can sell 20% more sandwiches than if it rains at lunch (and may be sunny later). The same goes for a BBQ. If the sun breaks out at 5pm then you may have decided not to BBQ already, but if it breaks out in the morning you may decide to do that and do your shopping, even if you then find it’s cloudier later. You have already made your decision and done your shopping (and could even potentially BBQ in less good weather than you would have otherwise, but either way you have bought the product).”

“The weather that retailers care about is temperature, sunshine hours and extreme events. For their historical analysis they look at average temperature at the weekend and they would also look at this by UK region.” According to the head of planning at a private label manufacturer, the most weather sensitive are BBQ products for the big retailers: “They are the biggest challenge because orders depend on how retailers interpret what the weather is going to do. Demand is typically stable up to a certain point (22/23°C.) and then spikes rapidly/ exponentially when temperatures hit 24-28°C.”

Extreme bad weather events, whilst also impacting consumer demand, tend to have just as important an impact on logistics such as supply and delivery. For example, snowfall and ice can potentially prevent or delay the delivery of products to the supermarkets, while one packaging supplier said that adverse sea weather can add 5-6 days to a shipment.

“A hot summer is great for sales, with many hot weather sensitive products desired by customers. However, this puts pressure on capacity in the supply chain.” Demand planning manager at a beverage manufacturer. While demand increases with temperature, beyond a certain temperature, people turn away from some products. So there is a happy medium which probably applies across a broader range of products and it’s important to take this downswing into account, particularly with more extremes of temperature in the future.” Extreme weather also impacts business continuity, as illustrated by the planning system implementation manager at a dairy supplier: “In extreme weather, people can’t get to the office which impacts the business. So there is an opportunity to use the forecasts to prepare people or gear them up to work from home in advance, which can help mitigate the impact of this scenario.”

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Respondent feedback around the impact of the weather includes:

The impact is quite significant. We in general over-index on higher end products. That includes things like BBQs – most of these products are fresh The temperature has the biggest impact on our weather sensitive products. There is no strong correlation of demand for other weather factors. In terms of ranking, weather has the most impact. Even more than promotions. The hot weekends are the real drivers of demand when you get very large spikes with 30-40% increases overnight possible. The effects are short lasting.

What weather factors are taken into consideration in your forecast/planning? Maximum temperature 50% Average temperature

Looking at retailers specifically, there were some key differences where weather factors were taken into account. For example, those using commercial products were 13% more likely to take rainfall levels into consideration, 9% more likely to take frost and ice into account and 10% more likely to take snowfall into account; all key factors which can impact consumer behaviour and demand levels for certain products.

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53% 48%

Minimum temperature

67%

63%

44% 42% 47%

Snowfall

40% 39%

Extreme weather conditions 27% Rainfall

The research allowed the Met Office to map factors which are taken into consideration during the planning phase, and align these against those who only use free products versus all respondents. The key outtakes here were that those using only free forecasting data tended to be more reliant on the temperature range as a key factor to take into consideration. Those using paid-for forecasting services were more likely to take into account more parameters, for example, sunshine hours, and the impact this has on shopper mood and buying habits. Commercial forecasting services effectively provide retailers and suppliers with the whole picture. Using more parameters subsequently helps them make better planning decisions, as they’re not just looking at one parameter in isolation.

59%

47%

33% 44%

27% 24% 31%

Frost/ice

24% 24% 28%

Sunshine hours 12%

23% 38%

Feel of the temperature 13% 18% 9% Humidity 6% 3% 9% Wind

6% 9% 3%

Other 4% 6% 0%

All users Those using only free forecasts Those using commercial products

What weather factors are taken into consideration in your forecasts/planning? Retailers

Suppliers

Average temperature 64% Maximum temperature

70%

70% 64%

Extreme weather conditions

38% Average temperature

38%

57% Snowfall

40%

Rainfall

30%

Frost/ice

20%

Sunshine hours Other

20%

10%

0%

Frost/ice 50%

43%

Rainfall 29%

24% 25%

50% Sunshine hours 10%

Humidity

Wind

10% 7%

29% 25%

Extreme weather conditions 14%

Feel of the temperature 10% 7%

Wind

44%

Feel of the temperature 24% 13%

Other

10% 14%

63%

43% 38%

Snowfall

50%

62%

43%

Minimum temperature

50% 50%

Minimum temperature

Maximum temperature

0%

38%

25%

5%

5% 0% Humidity 0% 6%

Those using only free forecasts Those using commercial products

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Benefits of using weather data Participants in the research were asked to identify the benefits to their business of using weather data as a whole: Retailers Better on shelf availability – linking back to the aforementioned ability to predict consumer demand – was identified as the most prominent benefit, and chosen by 81% of respondents. Better sales forecasting (62%), less waste (57%) and better customer service (43%) were further key benefits identified.

43%

Better sales forecast accuracy

69%

Suppliers

81%

Less waste 57%

Lower stockholding

Suppliers Better customer service (69%) was identified as the leading benefit for suppliers by a significant margin. This was followed by the ability to better forecast sales (56%). Better on shelf availability and less waste (both 39%) were also identified.

43%

A key outtake from the results was that those who paid-for weather forecasting products on average identified a larger number of benefits to their company from weather forecasting compared to those who relied only on free products. On average suppliers who paid-for forecasting data, identified 3.9 benefits compared to 2.6 for those who did not. There was a smaller, but still significant difference for retailers, of 3.7 benefits versus 3.1.

Better deployment of resources 14% 28% Lower costs 10%

3.9

Paid for

62% 56%

39%

28%

Retailers

Free data

Better on shelf availability

39%

Paid for

Free data

2.6

What benefits have you received from using weather data? Better customer service

3.7

3.1

22%

Earlier booking of transport 14% 11% Improved profit margins 10% 14% Better management of cash flow 14% 8%

Retailers Suppliers

15 || Understanding the role of weather in the supply chain

Overall, retailers were much more satisfied than suppliers by using weather data. There were also significantly different levels of satisfaction between those who use free weather data and those who use paid-for data. Just 18% of those who use free weather products said they were ‘satisfied’ or ‘very satisfied’ with them, compared to 45% who pay for their weather products.

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Section four

Conclusion and further information about DemandMet™

17 || Understanding the role of weather in the supply chain

Conclusion As demonstrated in the research findings, the influence of the weather on shopper behaviour, and the importance of including its impact in demand planning, is increasingly recognised across the retail industry. With almost half of respondents ranking the weather as the third most important factor external to their business, which drives consumer demand, it is something that can no longer be overlooked. Different companies are at different stages of the journey. Some incorporate automated feeds from commercial weather products directly into their sales forecasts and others rely on freely available data that they have to source, download and interpret themselves. The majority do not use weather products at all. When we set out to conduct this research, we expected more companies to be using weather data in their planning – both paid and non-paidfor - and were surprised that this was not the case. We certainly weren’t surprised by the difference between retailers’ and suppliers’ use of weather data, in terms of the specific activity and parameters. However, what was

interesting was that for those suppliers that are using weather data, they are actually supporting many more planning activities than retailers are. What really stood out for us was what people understand a weather-sensitive product to be. You may assume that your products are not weathersensitive, but your business most certainly is. It is too simplistic to just take a product-facing approach – the weather will always impact your sales and marketing business in some way. The findings clearly illustrate the differences that come from paid-for or free data; organisations get far more out of paid-for data, citing improved customer service, better sales forecast accuracy, better on-shelf availability, lower inventory and less waste – the key priorities of most supply chains. In synopsis, using advanced weather data is a significant opportunity for organisations to improve supply chain efficiencies for British retailers and suppliers. We hope that these insights will drive a shift within the industry to incorporate more weather data within demand planning.

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About DemandMet™ The Met Office is ideally placed to provide forecasts for retailers and suppliers to help them drive efficiency across the entire supply chain. DemandMet™ is a tailored weather forecasting service that can help improve product forecasting and, as a result, on-shelf product availability. The service, based on worldleading weather forecasting capabilities, puts weather into the context of the industry and focuses on interpreting how it feels and evolves over time.

This will help organisations be prepared for the impact of weather on their business.

Unlike competitor forecasts, the Met Office uses aerial capability rather than using a single location to represent the region. As a result, the data is much more targeted. DemandMet™ helps retailers and suppliers to:

• Hazard Forecasts

• Better forecast customer demand for specific product categories • Better forecast in-store footfall and online traffic • Maximise profits and increase efficiencies especially for key trading periods • Reduce waste of perishable goods and over-ordering of products • Ensure stock availability at a national, regional and store level • Increase customer satisfaction through better product availability

19 || Understanding the role of weather in the supply chain

The DemandMet range includes: • National forecasts • 14 day regional forecasts • Executive summary • Forecaster advice • Weather warnings and alerts

The research revealed that the most desired weather data features for retailers and suppliers are ‘comparison to weather conditions last year’ (38%), ‘graphs and tables’ (31%), ‘comparison to weather conditions last week’ (26%) and ‘descriptions of the feel of the temperature’ (24%). The DemandMet portfolio already provides all of these features to ensure the most accurate data and analysis. The latest addition to the DemandMet portfolio is Hazard Forecast. Hazard Forecast enables safe and timely transport of goods. DemandMet Hazard Forecast is specifically designed for logistics and health and safety departments within retailers and suppliers. It helps to ensure the safe and timely delivery of goods, providing advanced and accurate weather forecast data that supports logistics operations.

Contacts For further information on DemandMet™, or to discuss how weather forecasting can improve efficiencies in your supply chain, contact the Retail team on [email protected] or 01392 885680.

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Met Office FitzRoy Road, Exeter Devon, EX1 3PB United Kingdom

Phone: 0370 900 0100 Fax: 0370 900 5050 [email protected] www.metoffice.gov.uk/retail

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