The major objectives of integrating thesupply chain within the food and beverage sectors are cost reduction and customer service(Figure 1). The theory that customer service and cost trade off each other still prevails.In fact, the opposite is true. The high levels of efficiency required for excellence incustomer service, derived from focusing on customer needs, core processes and a simplerbusiness, also drive cost down to industry-leading levels.
Fig.1 Model of an integrated supplychain
The benefits of integration
It is important to be clear on the objectives of an integrated supply chain, since it iseasy to be seduced by technology such as Electronic Data Interchange (EDI), bar coding orElectronic Funds Transfer. The result is that the implementation of these enablingtechnologies is seen as the primary criteria for success. Winners of KPMG’s Awards forExcellence in supply chain management have demonstrated many indicators of whatconstitutes an integrated supply chain, including:
- provision of high levels of quality and service to both internal and external customers at low cost
- management by business process rather than function
- rapid response to changes in both market conditions and customer requirements
- minimal inventory and work in progress, along with low levels of obsolescence
- partnership with customers and suppliers
- innovation and exploitation of information technologies
Integrating people, processes and Information Technology across both the internal andextended supply chain poses a difficult challenge. Experience shows that success isdependent upon all three components being aligned to the requirements of specific supplychains. The challenges posed by internal integration are discussed in terms of physicalinfrastructure, business processes, Information Technology, organization and people.
The physical infrastructure of manufacturer-retailer supply chains ischanging. Cost pressures are forcing suppliers to rationalize their own manufacturingsites. At the same time the number of suppliers selling to a given sector is alsocontracting. The net effect is both a contraction of suppliers and manufacturing sites.Similarly, the number of retailers continues to reduce. These changes increase integrationbetween fewer parties and more clearly distinguish the types of supply chains. The maintypes are:
- branded manufacturers supplying all retailer sectors
- own label suppliers supplying the major retailers
- the producers who combine the two types
However, the physical infrastructurebetween the producer and the end customer is becoming less integrated with theintroduction of intermediate warehousing. Suppliers deliver direct to a large intermediatewarehouse where branch ready orders are picked. These are taken to a Regional DistributionCenter (RDC). There they are cross docked and then delivered to store. The benefits ofsuch a plan are debatable. A more attractive long-term solution may be increasedintegration between producers. This means that a single truck can pick up goods frommultiple suppliers, instead of each supplier delivering direct to each retailer.
A major obstacle to supply chain integration is internal functional barriers. Manycompanies are attempting to address this issue by moving to process management. Thisemphasizes the importance of aligning a company to its market value chain to respond tomarket pressures. By doing so, it enables companies to link their operations more directlywith their strategy, and increase interaction with customers and suppliers. Processesshould flow from a clear understanding of a company strategy and its critical successfactors. Within food and beverage companies, there are four categories of businessprocesses:
- the market value chain
- new product introduction/development
- resource management functions
- strategic management
Often the easiest processes to identifyrelate to the supply chain with one or both ends outside the company. Processes fordeveloping new products require a structure and activities that combine creative andoperational skills. The ‘soft’ processes, which usually relate to people, planning,communications and culture, are difficult to define. However, they are critical tolong-term success. The application of a process approach can yield significant benefits.Major food brands are coming under increasing pressure from dominant multiple grocers.
These grocers increasingly dominate thepoint of contact with the customer. The dynamics of large branded businesses now requiregreater capabilities in managing product distribution and display. The distinctive visualimpact of the brand is a critical factor in the competition for vital shelf space andconsumer attention. This has resulted in a continuous change in packaging with anincreasingly rapid response time.
Pack change involves almost every part ofthe operation. Traditional methods, carried out by many functional departments are slow,costly and too error prone for the new performance requirements. One solution is to set upa specialist group to manage pack change as a complete process rather than a series ofseparate events. The process would typically start with the initial commercial briefing.It would end with the handover of the final plates to the printer. Having a single processowner, with control and visibility of the whole process, provides the platform forinvestment in systems improvements and application software.
Fig.2 Management of the supply chainrequires management of business processes
Information Technology (IT)
The majority of UK food and beverage manufacturers believe that InformationTechnology (IT) is the solution to their problems. However, IT should be seen as anenabler, not a battering ram. One of the key dangers is that IT may develop into an end initself and ignore the need for strategic thinking about processes. For example, somecompanies have tried to resolve their lack of accurate sales forecasts by purchasing newsales forecasting application software. This is done without the review of processes andkey posing of questions such as what forecasts are required by whom and when, and docurrent performance measures inhibit the forecasting process? However, IT is an essentialsupport and catalyst for supply chain integration and should provide:
- information on the cost, quality and outputs of an activity as a basis for continuous improvement
- information on a process which leads to a deeper understanding of the activity interaction and causality as a basis for system improvements
- speed of communication and computation to enable frequent exploration and adjustment of activity plans and priorities in order to limit the impact of forecasting errors
- a direct link into the systems of market partners in order to extend the boundaries and scope of supply chain management
A recent KPMG Management Consultingresearch report concluded that just over one third of respondents regarded their ITinfrastructures as an enabler to supply chain integration. Over 50 percent regarded it asa hindrance. If IT is to support supply chain integration then internal systems should beintegrated and allow some form of integration with external systems. While the integrationwithin a given sphere such as production, transport or warehousing may be good, mucheffort is being devoted to integrating the different elements together. This is led bysoftware vendors who recognize that they need to offer both industry specific solutions aswell as a range of applications. This will allow effective internal supply chainintegration.
The use of inventory at different stages ofthe supply chain to buffer against uncertainty of demand and supply is under attack. Thisis because developments in telecommunications and computer processing power make itfeasible to substitute information for inventory. This trend is likely to continue asinformation becomes cheaper and inventory more expensive, particularly as product lifecycles reduce. It has also lead to a new generation of Advanced Planning and SchedulingSystems (APASS). Manufacturing Resource Planning (MRPII) and Enterprise Resources Planning(ERP) systems are very good at processing transactions like sales orders and invoices.However, they cannot look down upon the supply chain as a whole. Therefore, althoughintegrated, they have a number of shortcomings, including:
- focusing on optimizing individual elements of the supply chain, not the whole supply chain
- the sequential planning of individual elements that can take days
- unexpected changes that cannot be handled readily
- ‘what if’ planning that is difficult or extremely arduous
This new breed of APASS is aimed atplanning the supply chain as a whole. They should effectively sit above the transactionsystems with which they need to integrate. The aims of these systems are to:
- allow rapid optimization of the whole supply chain
- perform ‘what if’ calculations on the total supply chain
- ¥ re-plan in the event of unexpected changes in supply and demand
- ¥ schedule based upon real life constraints such as fixed vessel capacity or limited ‘in process’ shelf life
One such company that uses this type oftool is a UK-based premium brewery. They have implemented supply chain planning software,which allows them to model, plan and manage their supply chain from the barley field tothe bar.
Stock levels and costs have reduceddramatically, and demand on brewery capacity is more evenly spread. Before the investment,which was part of a major supply chain re-engineering project, they were operating at91-92 percent capacity. Already it is heading towards 96 percent and this is expected toincrease further. These types of systems are not just relevant to producers of ambientgoods, they are particularly relevant to manufacturers of chilled products that have alimited shelf life. In this case, mistakes can be costly and result in expensive wastage.
Organization and people
Internal and external integration across the supply chain is highlydependent upon the quality, attitude and vision of top management. The motivation forintegration needs to be driven by an understanding of the necessity for change and avision of the company’s future. This message must come from the company leaders in simplelanguage that combines rationality and powerful symbols. A key issue in achievingintegration is the removal of the barriers of traditional cultural beliefs of command andcontrol, and the constraints of a hierarchical organizational structure. These are oftenembedded in the fabric of the management systems and need the leverage of top managementto remove them. This is important because the development of partner relationships betweenmanufacturers and retailers can stumble due to a company’s cultural and organizationalissues, rather than from a lack of awareness of the benefits for all parties and acommitment to a common goal.
Organizational ingredients required for thesuccessful development of partnerships involve alignment between organizations and thedegree to which political rivalry between departments will override process efficiencyconsiderations. For alignment, organizations can assist the process by forming closerelationships between key people at various levels in both organizations. The politicalissues can be addressed through implementing goals based on successful partnershipachievement and the adoption of process ownership.
Historically most supply chain integration was internally focused and aimed atstreamlining the companies’ own logistics processes. In the future, the biggest gains arelikely to be derived from external integration in which suppliers and customers worktogether to optimize the whole supply chain. Although ECR initiatives have tended to focuson the manufacturer – retailer relationship, the supplier – manufacturer relationship isof equal importance. The latest KPMG UK Food Manufacturers Survey identified the mainobjectives of joint programs from a manufacturer’s perspective. The chart below shows themain objectives of both joint customer and supplier programs.
An example of how a manufacturer andsupplier can improve relationships, reduce supply chain costs and improve service is amajor soft drink producer’s concentrate production facility in Cork. This soft drinkproducer has a deal with one of its suppliers to have a key ingredient piped through thewall from the supplier’s facility on an ‘as required basis’.
Good information flow is a pre-requisite tosupply chain integration. The majority of European food manufacturers and retailerstransmit and receive order transactions via EDI. Continuous replenishment transactions,such as purchase acknowledgements planning schedules are the second most popular EDIsupported process group. The third group covering EDI supported file maintenancetransactions such as price changes and item details still has some way to go beforereaching the levels of usage of order cycle transactions. The greatest short termpotential for EDI expansion is in the transmission of Regional Distribution Center (RDC)vehicle booking slot information and exchange of proof of delivery information back to thesupplier.
The movement of materials in and out ofRDCs will become increasingly critical given the trend towards smaller, more frequentdeliveries.
Common problems such as inflexibleinformation systems, conflicting resource priorities and reluctance to share informationare hindering the rate of increase of sharing information.
In addition, the lack of standardizationwill make supply chain integration more difficult. A major manufacturer could investconsiderable resources in integrating the supply chains with different retailers basedupon different approaches and standards. The result would be that his/her overall coststructure increases. His/her position will be in direct contrast with an own labelsupplier dealing through only one or two of the major retailers.
A significant issue, which impacts theintegration of the supply chains of certain sectors is the management of promotions. Inparticular those types of promotions that have a major supply chain impact such as ‘buytwo, get one free’ call for high levels of integration between all parties. Promotionsneed to be managed carefully since the cost penalties are high. Also the promotion of oneline can have an impact on associated lines both during and after the promotion. Supplychain integration offers certain companies significant benefits in helping them plan,manage and evaluate promotions.
An existing barrier to access ofinformation generated by grocery retailers is that of supplier size. This is because muchof the current information flow is with the larger, ‘preferred’ suppliers. Cost will stillimpose a barrier even when retailer Electronic Point of Sale (EPOS) data is readilyavailable to all suppliers.
The exploitation of IT in non-transactional processes shared between suppliers,manufacturers and retailers is likely to increase. It will combine existing technologiessuch as the internet, document management and workflow tools. An example of such aprocess, which could yield significant time and quality benefits, is new productintroduction/pack changes. This process involves supplier personnel, the manufacturer andthe retailer executing processes in parallel. This is done where packaging samples anddocuments need to be exchanged and reviewed on a frequent basis. Integrating sharedprocesses is likely to be an area of major investment in the future.
Dr. Dunham is an engineer with 13 yearsconsulting experience at KPMG Management Consulting. He has worked for many of the leadingEuropean and UK food and beverage manufacturers in the areas of Information Technology,cost reduction/performance improvement, benchmarking and supply chain processes. KPMG isthe leading advisor to the food and beverage sectors. It produces an annual industry-widesurvey on Food Manufacturers and are sponsors of ‘Awards for Excellence in supply chainmanagement’.