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SUPPLY CHAIN MANAGMENT

Gourmet IndustriesAn analysis of Supply Chain

Date : 2nd April, 2011


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ContentsIntroduction .................................................................................................................................................. 3Supply Network/web. ................................................................................................................................... 4Push/Pull View .............................................................................................................................................. 5Strategic fit .................................................................................................................................................... 6Supply Chain Drivers ................................................................................................................................... 11Distribution Network Design: ..................................................................................................................... 13Design option for a distribution Network ................................................................................................... 16Supply Chain Macro Process ....................................................................................................................... 17

Customer Relationship Management (CRM) .......................................................................................... 17Internal Supply Chain Management (ISCM) ............................................................................................ 17Supply Relationship Management (SRM) ............................................................................................... 17

Coordination in Supply Chain ...................................................................................................................... 18Recommendations ...................................................................................................................................... 19


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IntroductionIn our second semester, of our final year, at the Lahore School of Economics our esteemedteacher Ms. Saba Rana asked us to write a project on the supply chain of a company inPakistan. We were asked to wrote about their immediate supply chain and to commentupon any problems they face during the adding value of the supply chain. As we knowfrom recent history and our text book the supply chain has not been what it used to besome time ago. Our first objective in the project is to learn the strategic importance ofgood supply chain design, planning, and operation for every firm. The reader will be ableto understand how a good supply chain management can be a competitive advantage,where as weakness in the supply chain can hurt the performance of a firm.We selected Gourmet as the respective company that we would use to apply all the supplychain policies and testing solutions we have discussed in the class.First of all let us establish the companys supply chain map.

Tier 3 suppliers

Tier 2suppliers

Tier 3 suppliers

GOURMET FACTORIES

Retail points

CUSTOMERS


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Supply Network/web.

The supply chain includes not only the manufacturer and suppliers, but also transporterswarehouses, retailers and even customers. So this is how we have picked up todemonstrate our project. Identifying the 6 major drivers of supply chain and going onexplaining gourmet with respect to these drivers and then formulating an analysis at the

end in order to provide helpful suggestions if any.When a customer makes a purchase from one of the 103 retail outlets provided bygourmet he not only is part of the buying process but apart from him the supply chainincludes, among others, Gourmets retail outlet, the delivery system, gourmetsmanufacturing plant and all of Gourmets suppliers and their suppliers. A typical supplychain may involve variety of stages, these stages include

Customers Retailers Wholesalers/distributors Manufacturers Component/raw material supplier

The term supply chain may also imply that only one player is involved at each stage. Inreality, a manufacturer may receive material from several suppliers and then supply

several distributors. Thus most supply chains are actually networks, it may be moreaccurate to call the supply chain networks or supply web. A regular supply web can betraced as following:

Each stage in the supply chain is connected through the flow of products, information, andfunds. These flows often occur in both directions and may be managed by one of thestashes or an intermediary. For gourmet we found out that Gourmet doesnt rely on anydistributors they rather themselves have a retail option and deliver the goods by

themselves rather than an intermediary. So in order for us to completely understand theconcept of this distribution system employed by Gourmet we need to draw it on the basisof the structure we previously ordained.

We see that even though there is a process from the supplier to the customer and goesthrough important hubs such as Manufacturers and Retailer, this for almost all of theproducts i.e. manufactured at the Gourmet facilities. The one line we see that originatedfrom the supplier to the retailer is for the products that are of third party producers. Theseinclude packages like Lays etc. these are not manufactured at the Gourmet facilities but aresupplied to the retailer by selected suppliers for the purpose of selling them on the retailoutlets. Gourmet gets a piece of the revenue for lending the retail outlets to third partyproducers.

Supplier

Manufacturer Distributor Retailer Customer

Supplier

Manufacturer Retailer Customer


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Push/Pull View

The push/pull boundary in a supply chain separates push processes from pull processes.Push process operate in an uncertain environment because customer demand is not yetknown. Pull processes operate in an environment because customer demand in whichcustomer demand is known. They are, however, often constrained by inventory and

capacity decisions that were made in the push phase. With pull processes, execution isinitiated in response to a customer order. With push processes, execution is initiated inanticipation of customer orders.Gourmet executes all process in the customer order cycle after the customer arrives. Allprocesses that are part of the customer order cycle are thus pull processes. Orderfulfillment takes place from product in inventory that is built up in anticipation ofcustomer orders. The goal of the replenishment cycle is to ensure product availabilitywhen a customer order arrives. All process in the replenishment cycle are performed inanticipation demand and are thus push processes. The same holds true for processes inthe manufacturing and procurement cycle.

Customer OrderCycle

Replenishment andmanufacturing cycle

Procurement cycle

Gourmetretailer

Gourmet factory

Supplier

CustomerPULLPROCESSES

PUSH PROCESSES

Customer ordercycle

Procurement,Manufacturing,ReplenishmentCycles


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Strategic fit

Competitive Strategy: A competitive strategy defines, relative to its competitors, the set of customer needs that it

seeks to satisfy through its products and services. For example Gourmet when started it business ithad a lot of competition from Shezan which was its major competitor and other included Cakes &Bakes, Rahat Bakers but they all lack in giving good services to its customers gourmet aimed to providehigh availability of a variety of products for reasonable quality of price, basically gourmet has used thequality element to surpass their competitors and now they are the biggest bakery industry in Pakistan.

New Product Development:New product development strategy specifies the portfolio of the new produc ts that a company

will try to develop. Gourmet has developed new products when there is a need, they diversify theirmarkets by added new products and going into new markets for example at beginning they were onlyconcerned with bakery items but when they saw that there are some other markets as well which canbe catered then they started manufacturing gourmet water and competed with some major playersof the industry like Nestle and Aquafina by Pepsi. Due to the competition and being new in the marketgourmet had to come up with some new and brilliant plan, which could make them capture the marketshare, and they did. Gourmet reduced their price a lot as compared to its competitors, where nestlewas giving its 19 liter water bottle for rupees 120 gourmet was giving it for almost half price Rs 55which was really attractive and that is where gourmet found their competitive edge after that theywent into the milk industry and were successful there as well cause gourmet provided good quality andfollowed all the international standards.

Supply Chain Strategy:It determines the nature of procurement of raw materials, transportation of materials to and

from the company, manufacturing of the product and finally distribution of the product to thecustomer . The supply chain strategy of gourmet is very strong and efficient. They have the earliestsupply of products in their stores and compared to its competitors. They have their own vehicles whichare on the move 24/7 and whenever any shop needs something it is readily made available to them.Distribution system of Gourmet is very strong and vast as supplying to 103 branches in Lahore daily isone big job to do.

So for the success of any company the supply chain strategy in fact all the strategies which havebeen discussed above are important cause the delivery time, manufacturing time and the time whichthe company takes to deliver its final product to the customer is very important because for companylike these cant afford to be late or keep their customer s waiting because this market is highlycompetitive for example if they are out of sandwich bread and the customer is waiting then he can goand take it from Shezan or any other store as well.


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Achieving the Strategic Fit:It means that both the competitive and supply chain strategies have aligned goals. There are

three main things which are linked to the success or failure of the company discussed below1. The competitive strategy and all functional strategies must fit together to form a coordinated

overall strategy.2. The different functions in a company must appropriate structure their processes and resources

to be able to execute these strategies successful3. The design of the overall supply chain and the role of each stage must be aligned to support eh

supply chain strategy.

Above three factors are very important for any company when achieving strategic fit because all thestrategies have to work together to achieve strategic fit similarly all the department like humanresource, finance, sales, research and development should work together and their duties should bespecifically defined by the heads. The company should understand who is achieved by

1. Understanding the customer and Supply chain Uncertainty:Now the company should know what their customer needs are and what they can do to

meet them and how effectively they can meet those needs and demands. Gourmet has done exactlythe same they want their customer to be happy and satisfied, they are giving the best and the cheapestproduct in the market, because they know they have to cater more to the middle class who cannotafford too much rates. Gourmet has taken care of the response time which the customers are willing totolerate because there is a specific limit which they can handle and after that the company would loseits customer. Gourmet has served its customers well. They have reasonable products prices which mostof its customers can afford. Gourmet has the level of product innovation that is required to be theleader in the bakery market. Now if we have to place gourmet then it will be on the left most sidebecause of predictable supply and demand.

|-------------------------------------|--------------------------------------------------|Predictable supply Sum what uncertain highly uncertain

And demand supply and demand supply and demand

2. Understanding the supply chain capabilities:Gourmet has a wide structure of supply chain distribution and they readily meet the

uncertainty of demand in the market. Now the supply chain responsiveness is defined as that supplychain which can do all the following things

Respond to wide ranges of quantities demanded Meet short lead time Handle a large variety of products

Build highly innovative products Meet a high service level Handle supply uncertainty


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The above figure shows that Gourmets supply chain is highly responsive because it has all thecharacteristics which are followed by highly responsive companies. They have most of the time certaindemand because they know what their stock limit and capacity is and which product has how much ofshelf life so they take in consideration all the factors and then order then next day stock. Everything inGourmet is fresh so daily early morning their stock comes in the store and is loaded. They also havebackup inventory in case there is demand uncertainty.

|---------------------------|---------------------------------------|------------------------------|Highly Somewhat Somewhat HighlyEfficient efficient responsive responsive

The above figure is the responsiveness spectrum which consists of four dimension such as highlyefficient, somewhat efficient , highly responsive and somewhat responsive as we have talked earlierand concluded that gourmet lies on the right most hand side as it is highly responsive they cater towhat the customer needs and it is readily available. Daily the bakery products are manufactured andcomes to the factory then is distributed to the stores. Everything is delivered to the stored as perrequirement, Gourmet has allocated staff of such information that they take daily that what stores is in

need of what bakery item and the next day it is delivered to that specific store.

Certain Demand Implied Uncertainty

Spectrum

Uncertain Demand

Responsive SupplyChain

ResponsivenessSpectrum

Efficient SupplyChain

GourmetBaker

Gourmet


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Applying strategic fit:Now the last thing is to actually apply the strategic fit after mapping the implied demand uncertaintyand supply chain position on the responsiveness spectrum now the last step is to apply the strategic fitfor example like gourmet what they did was to deliver and provide the product to the customer reallyquick and that is where they had their competitive edge.

Expanding Strategic Scope:Now there are many ways of expanding strategic scope which are given below.

Intercompany Interoperation ScopeThis is where the company uses the strategy of minimizing local cost and the strategies are

considered is one operation within a operational area within the company, now when gourmet startedis business they used this strategy because they were new in the market and price was the only factorby which they could have taken the market share so they tried to cut their own supply chain cost.

Intracompany Intrafunctional Scope:

This is the stage where the company minimizes on functional cost. In this the company and itsfunctional departments work on joint strategy to minimize the total functional cost which can be reallyeffective as gourmet has its wide supply chain network so they have done is rather to outsource theirdistribution network they have owned the wagons and distribute to the stored.

CompetitiveStrategy

ProductDevelopment

Strategy

SupplyChain

Strategy

MarketingStrategy

Suppliers Manufacturer Distributor Retailer Customer


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Intracompany Interfunctional Scope:This is another way by which the company maximizes the company profits. This is where Gourmet

really expanded in business to different markets like water and milk industry and enjoyed massiveprofits because they were leading the market by giving the best quality and at half rate as compared toits competitors as it has been mentioned above of gourmets 19ltr water bottles as they were giving it athalf rates as compared to nestle. At first Gourmet only tried this water experiment in their own outletsand after they had the feedback that was successful they started expanding it to offices only and finallycame the residential areas, now Gourmets water is distributed all across Lahore.

Intercompany Interfunctional Scope:Lastly the company can grow and maximize its supply chain surplus. Gourmet has maximized its

supply chain surplus as all of their supply chain functions are well coordinated


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Supply Chain Drivers

Facilities:Facilities are a key driver of supply chain performances in terms of responsiveness and

efficiency. Gourmet places its facilities in a way that it allows the company to be moreresponsive rather than efficient. Locating facilities close to customers increases thenumber of facilities needed and consequently reduces efficiency. If the customer, as in thiscase, demands and is willing to pay for the responsiveness that having numerous facilitiesadds, then this facilities decision helps meet the companys strategy goals. The role of thefacilitie s is more flexible in nature rather than dedicated. The companys facilities produceall type of products ranging from dairy and bakery to confectionary and soft drinks. Thistype of flexibility allows Gourmet to be challenging on all fronts with over 100 retailoutlets and provide the bit consistent consumer demand with responsive products. Eventhough the company is responsive the very nature of their products allows them to keeplittle excess capacity, which in turn helps them reduce cost and increase profits in theprocess. The companies facilities are located all around the city of Lahore with 3 in the Kotlakhpat industrial sector one in Township and one in the Sundar estates. The companyalso has a facility in Faisalabad for the retail outlets in that area.

Inventory:Inventory exists in the supply chain because of the mismatch between supply and demand.This mismatch is intentional at a retail store, Gourmet, where inventory is held inanticipitation of future demand. An important role inventory plays in the supply chain is toincrease the amount of demand that can satisfied by having the product ready andavailable when the customer wants it. This can be seen in the way Gourmet keeps itsinventory around its facilities and at its retail outlets. The company has an apparel supplychain with high inventory levels at the retail stage has a high level of responsivenessbecause the consumer can walk in the store and walk out with any one of the products heor she was looking for. As the companys competit ive strategy requires a level ofresponsiveness the company achieves this by locating significant amounts of inventorynear the consumer in its facilities and its retail outlets. The company exhibits two types ofinventory Cycle and Safety. The company has over 100 outlets that need to be supplied byperishable product almost twice a day, this keeps the company on its ties as the companydeploys a fleet of state of the art vans on the city twice a day to fulfill anticipated demand.What this does is makes the company keep a buffer of inventory called the safetyinventory. This inventory is used in periods oh fluctuation as the company suppliesproducts of an inelastic nature, losing the quantity demanded can seriously affect thecompanys competitive strateg ies.

Transportation:Transportation moves products between different stages in a supply chain. Like othersupply chain drivers transportation has a large effect on the responsiveness of thecompany. In Gourmets case it allows them to use faster transportation, it has dedicate dfunctional vans that transport ice cream and fresh cream at -30 degree Celsius. Also thecompany has vans for bakery item that are kept at +4 degree Celsius. These functionalvans are in great number which allows the firm to keep a fleet of such vans at theirdisposal to deliver products to every retail outlets twice a day. Since the customer in theretail department is willing to pay for the high responsiveness and high productavailability the company relies on the fleet of vans rather than a massive number of saleforce. This allows them to cut on the cost as maximum 2 are required per van. And due thereason the vans area part of the company this allows the firm to exploit economies of scaleand reduce their cost. The design of the transportation network is formed keeping in mindthe type of market and its need for a responsive supply chain retail business, includingmultiple sale points for one delivery who has to make 6 stops each run. This makes iteasier for the firm as it employs the van type transportation mode.


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Information:Information serves as the connection between various stages if a supply chain allowingthem to coordinate and maximize total supply chain profits. In gourmet not muchrelevance is given to the information part, there is no process designed to help the flow ofinformation from one place to another. The company relies on hand held devices used by

few delivery personnel but almost all of them carry sheets of paper to record daily stops.These papers are then handed over to the distribution in charge back at the factory whoputs them in an order on a daily basis. The process there reaches a bottle neck as onesupervisor needs to stack all that paperwork and it needs to be in such a form that it canhelp the superiors. The superiors here are not that much worried about the paperwork asthey would rather have a summary of it then read a room full of paperwork. Thisnegligence proves costly as there is no base in the forecasts as no one knows exactly howthe market is behaving. Relying on instincts and old policies might nor hurt the firm in itspresent state but failing to realize its potential may very well be the biggest hinder block inits path.Sourcing:Since gourmet is a major firm with lots of facilities and a whole army of vans it allows themto completely ins source from manufacturer onwards. Gourmet still doesnt own or wantto own its suppliers, who are in great number. According to the contact in the company,the firm believes that its better to engage into procurement from a vast variety of suppliersrather than own a few and see the costs rise up. This sourcing decision pays off with thesheer number of retail outlets the firm needs to address to, outsourcing is a very expensiveoption. In other bases the suppliers are selected on the bases of price and quality. Theproduction managers and supervisors lay special attention the quality of the stock comingin, Gourmet has almost three tiers of suppliers who range from dairy products topackaging. Procurement varies from product to product sometimes the firm extracts theraw materials every day while for other inventory is piled up. The number of supplierswith the company allows it to dominate the market with low prices and helps it changefrom suppliers in case of quality defects. Moreover this allows the firm to give sometechnological advantage to a certain supplier as the company did in its dairy departmentloaning out some built sheds to suppliers for positive externalities to the dairy industryand converting the raw material required for Gourmet a bit more cheaper.

Pricing:Pricing is the process by which a firm decides how much to charge customers for its goods.Pricing affects the customer segments that choose to buy the product as well as thecustomers expectations. Pricing is also a lever that can be used to match supply anddemand. The prices at gourmet are fixed beyond a doubt, the firm doesnt have anyquantity discounts or bulk averages. The firm keeps its prices fixed to the dot to helppromote a sense of consistency and the prices are not easily changed even under constantthreat from the political conditions which have required many firms to raise prices incomparison to the fuel prices rising. The contact was very keen to tell us that even in pastwhen the government has raised fuel prices, and even though that effects are cost directlyand indirectly, we have refrained from raising prices in order to provide a feeling ofconsistency to the customers.


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Distribution Network Design:The main feature that effect a network design are:

Response time Product variety Product availability Customer experience

Time to market Order visibility Returnability

Response time is the amount of time it takes for a customer to receive an order. Productvariety is the number of different products that are offered by the distribution network.Product availability is the probability of having a product in stock when a customer orderarrives. Customer experience includes the ease with which customers can place andreceive orders as well as the extent to which this experience is customized. It also includespurely experiential aspects such as the possibility of getting a cup of coffee and the valuethat the sales staff provides. Time to market is the time it takes to bring a new product tomarket. Order visibility is the ability of customers to track their orders from placement todelivery. Returnability is the ease with which the customer can return unsatisfactorymerchandise and the ability if the network to handle such returns. Most customers maketradeoffs between these factors to enhance their experience of the product purchase.Gourmet tries on to fulfill the customer needs in some of the factors while other are bitnew to Pakistans market and while some are completely not applicable in this sort ofmarket.An important frontier is to balance off different things in order to provide maximumsatisfaction to the customer, one of them is between the response time and desireresponse time. Since the retail business requires its residents to be responsive to thecustomers demands.

Gourmet lies in the upper quadrant of the graph which shows that the firm In order toreduce the response time the firm relies on increasing the number of facilities it has, to

RequiredNumberoffacilities

Desired ResponseTime

Gourmet


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reach a greater number of customers. This has some side effects as in increasing thenumber of facilities, it decreases the overall efficiency of the firm since all the facilities areat a lower capacity rather than a few facilities working at maximum capacity.Some other important factors are

Inventories Transportation

Facilities and handling InformationWe will look at each of them with respect to the number of facilities, and then comparethem to Gourmets and plot them in respective graphs to visualize Gourmets position inthe market.There are two types of costs incurred by a firm inbound transportation cost are the costthat are incurred in bringing material into the factory, outbound transportation cost arethose cost which are incurred while distributing the product from the factory to thecustomer. Since Gourmet owns the outbound transportation so those costs are broughtdown and they are further help to minimize inventory costs as explained by the graphbelow :

The point on the graph explains that even though the company focuses on a large numberof facilities their dependence on such products that do not require a huge inventory but arunning inventory the company never has an exceeding inventory numbers at any onemoment.

Gourmet

InventoryCosts

Number ofFacilities


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What this does is, it provides Gourmet to utilize the economies of scale produced by theownership of the outbound transportation costs. These economies of scale help bringdown transportation costs as number of facilities is increased. Gourmet has a hugenetwork of transports to supply the spider web of Lahore which consists of more than 100outlets. We can produce this on a graph as :

Gourmet

Number of facilities

Transportationcost


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Design option for a distribution NetworkThe design option used by Gourmet is retail storage with customer pick up. It iscomplemented by another network design the manufacturer storage, the only differencebeing the factories tend to supply the retail outlet rather than to the customer. There aremany benefits for the firm to employ such a design option. The cost analysis according toprevious factors is done below;

Inventory costs are a bit high with multiple facilities and a condensed distributionnetwork. But its relatively low because of in house transportation network. Transportation costs are low With a greater number of facilities. Handling costs rise up and the cost of keeping

the 100+retail outlets too require maintenance cost Investment is required in the information department Response time is kept low An enhanced number of product variety can be supplied Product availability is on the expensive side Customer experience is handled by the customer staff Order visibility is very easy Returnability easier to perform

Factory 1Factory 2 Factory 3

Retaileroutlet 1

Retail outlet 2

CUSTOMERS


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Supply Chain Macro Process

Customer Relationship Management (CRM)

At the customer service department, personnel try their level best to align responses from thecustomers in a haphazard form. Since no proper method of collecting such information on an efficientfront, the department gets info from the delivery people, the sales staff at the outlets and throughobservation from the CCTV recordings. This data might be able to predict customer flow or analyze thelevel of customer interaction but it fails to provide the factory with concrete data on how the customerdemand pattern changes in its minutes of forms.Internal Supply Chain Management (ISCM)

At Gourmet Industries, the flow of information is systematic and a means of emailcorrespondence is used to communicate within the company. Proper network of supply chainis designed for the flow of information across the organization. Raw materials procured arehandled and distributed among the respective units where production is catered to. Moreover,

supply is planned according to the inputsSupply Relationship Management (SRM)

The number of suppliers varies as there is no fixed number of suppliers. The company uses a variety ofvendors, keeping in mind the nature of products being purchased. The company sits at top of a retailbusiness with very few competitors, thus placing it on hallow ground, where it is in such a position thatit can dominate the proceedings with the suppliers. The belief in the company is not to make friendsbut to procure the raw materials the cheapest as possible. This does have its negative effects.


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Coordination in Supply Chain

Supply chain is well coordinated at the Gourmet Industries as performance is a measure ofoverall day to day actions of employees. Company goals and objectives are well communicatedacross the company so every employee knows what they have to achieve at the end of theday. Whereas, the company has also communicated the incentives across the organization sothat decisions regarding supply control aids the costs associated to them. Hence everyone iswell communicated and coordinated.The communication link between suppliers and the factories is kept elegantly but it too is byhefty paperwork, this paperwork is not the most efficient type of communication but it fulfillsthe basic requirements.


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Recommendations

Gourmet should move forward and employ professional inventory controlsoftware. The current process is saturated by paperwork.

The use of huge number of vans on selected routes could provide responsivenessbut the company needs to be a bit efficient to lower its overall cost, we recommend

a strategic map of Lahore city to utilize the resources i.e. 5 facilities and web ofvans, to its maximum advantage. Furthermore there is no such system present at the company that helps

information to flow from the customer to the factory. The van drivers and the retailtouch points are proving to be difficult to help the flow of information. Thecustomer relation relies a lot on customer feedback but the process by which theyengage feedback is not helping.

The company needs to develop better relationships with its long term suppliers,rather than enjoying a negotiating point, a point at which the company sits now, thecompany should look to develop better relations to ensure better loyalty.

There is no supplier assessment criteria rather than price and quality which also isat the hand of production manger to create a formulae in his mind to balance thetwo. A proper format of supplier assessment is needed. Value point method orweighted methods are to name the few.

The company should look more toward the positive externalities in other suppliersas well. i.e. carry the same strategy into poultry for example.

A communication link between the supplier and the factories needs to be there. Customer feedback needs to be improved keeping in mind the change in

technologies over time.

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