Pallet Return Programs

Pallet Return Programs

Rijksuniversiteit Groningen Faculteit Bedrijfskunde Supervisors:

Dr. J.T. van der Vaart Drs. M.M. Bergervoet

- A research regarding possible return programs for the Heineken USA pallet -

By Willemijn Nagtglas Versteeg

Pallet Return Programs

- A research regarding possible return programs for the Heineken USA pallet -

Place: Amsterdam Date: 28-02-2003

Author: W.F.C. Nagtglas Versteeg Studentnr.: 1005812

University of Groningen

1

Supervisor: Dr. J.T. van der Vaart

2

Supervisor: Drs. M.M. Bergervoet

Preface

To finalize my study Business Administration (Bedrijfskunde) at the University in Groningen, a thesis had to be written based on an internship as such the last exercise to put the acquired knowledge into practice. During this internship I have done a research which lied in the

‘Production and Service management’ field which I’m majoring in. The first several weeks, I started working on the project, which was assigned by Tom Bongiovanni from Heineken USA, at Heineken Netherlands Supply in Zoeterwoude and finalized it during a five months stay at Heineken USA in White Plains, NY. I look back at a very interesting and enjoyable period. Being able to see the company at two different sides in such a short period of time taught me a lot and it has of course been very useful for the project as well.

This was for me the first time to work for a company as big as Heineken. To deal with the complexity, the amount of people in the company, different ideas, opinions and all features which need to be taken into account, were a great experience. I really learned a lot during this internship. The project regarding the pallets was very interesting although not always easy.

But I have enjoyed working on it! It was also a privilege to have the opportunity to work on a second project besides my original project and therefore to be able to use directly my obtained knowledge concerning return flows of certain materials. And of course being able to stay a month longer in the USA!

I would like to use this opportunity to thank everybody who assisted me during my project.

I’d like to thank specially Rodolph Italianer, Tom Bongiovanni, Greg Sommer and Corinne Ebisu from the Planning Operations Department in Heineken USA. Furthermore I’d like to thank my supervisors Rob de Vogel and Ruud van Oost from the Distribution & Customer Service department at Heineken Netherlands Supply. Everybody has been very nice and helpful during my stay here in both Zoeterwoude and White Plains. I hope we’ll meet again in the future!

To conclude this preface I especially would like to thank my two supervisors at the University in Groningen, Dr. T. van der Vaart and Drs. M. Bergervoet, for supporting me during my graduation period. You have been very helpful. Thank you very much for everything!

Willemijn Nagtglas Versteeg

Summary

The motive behind this research lies in the ambition of Heineken to become preferred beer supplier in terms of customer service, quality and profitable brands. Paying attention to the signals from the HUSA distributors it becomes clear that distributors would see Heineken more as a preferred supplier if Heineken would take the empty beer pallets back after delivering the beer.

The objective of this research is contributing to the discussion of the management of the Planning & Operations Department in Heineken USA by designing a pallet return program which has the best performance in terms of cost efficiency and improvement of the service, in order to enable Heineken to make better decisions regarding improvements of the service level to the HUSA distributors. The related main question for this research is

‘Which pallet return program for the Heineken USA distributors has the best performance in terms of cost efficiency and improvement of the service?

To be able to give an answer to this question we have reviewed the current policy regarding the pallets, the logistical pallet flow, and the distributors’ satisfaction regarding the current pallet flow. Based on these descriptions and the variables destination, purpose, sorting point, quality of pallet and volume of distributors we have designed different pallet return programs which would increase the service towards the distributors. After having excluded a variety of scenarios, the final pallet return programs which are used and thoroughly analyzed in this research are:

1. Return to the Netherlands for reuse, with its sorting point in the US

2. Return to the Netherlands for reuse, with its sorting point at the brewery in the Netherlands 3. Return to the Netherlands for reuse, with its sorting point at the pallet supplier in the

Netherlands

4. Return to the Netherlands for reuse, with most cost efficient sorting point by using a slightly modified pallet quality

5. Return to the Netherlands for reuse, with most cost efficient sorting point by using a returnable pallet

6. Dump at a third party in the US

These pallet return programs are compared by their performance regarding cost and service.

By making the necessary assumptions and using different cost and service components which represent the logistical pallet return flow, we completed the cost and service analyses of all scenarios. Returning the pallets to the Netherlands (managed by the Kegspeditor) by using a slightly modified (scenario 4) or returnable pallet (scenario 5) and sorting them on the P&P line at the brewery and repairing them at the pallet supplier came out to be the most cost efficient and service improving scenario. Compared to the current situation scenario 5 would cost about $247.139 more per year (with the dollar exchange rate of 1, this results in $29.446 per year).

Including some additional related aspects, we can conclude that the answer to the main question of this research is a pallet return program which returns the pallets back the Netherlands using a slightly modified (scenario 4) or returnable pallet (scenario 5). This pallet would have a 40,3 x 48 inch size (the Duncan pallet). The advantages of this solution are twofold. Using the Duncan pallet size will first of all improve the cost efficiency of the beer flow to the US. This improvement will most likely cover the slight incremental cost which is caused by returning the pallets to the Netherlands (cost analysis result of scenario 4 and 5). Secondly by returning the pallets back to the Netherlands, improves the service towards the distributors as they don’t have any more trouble getting rid of their excess Heineken pallets. The distributors will save a lot of money per year by not having to pay landfills to dump them.

Some questions regarding this solution will still need to be answered by Heineken. First of all the question which pallet quality (slightly modified or returnable) will be used depends on the possibility of Heineken to continue charging the distributors a $4.00 charge per pallet. If this is possible then Heineken should implement the returnable pallet (scenario 5) which has a slightly better cost efficiency performance. Secondly the question concerning the group of distributors should be answered. For which distributors should Heineken implement this pallet return program? Should it be implemented for all distributors, only the interested distributors or only the impact distributors which cause the best financial result? What will be the result of the cost analysis for these three groups of distributors when the financial advantages of using the Duncan pallet are included? Finally, Heineken should get insight in the consequences of implementing the Duncan pallet for the distributors. Will this pallet worsen the situation concerning the fitting of these pallets in the distribution trucks of the distributors? Are there any other (dis) advantages of using this pallet size for the distributors?

Table of Contents

Chapter 1 Background information about Heineken 8

1.1 History 8

1.2 Organizational structure 9

1.2.1 Heineken NV 9

1.2.2 Heineken Netherlands Supply 10

1.2.3 Heineken USA 12

1.3 Current pallet management of Heineken Netherlands Supply 14

1.3.1 Production of pallets 14

1.3.2 Purchase of pallets 14

1.3.3 Distribution with pallets 15

1.4 The supply Chain focused on the pallet flow 17

1.5 Structure of research 21

Chapter 2 Methodology of research 22

2.1 Introduction research approach 22

2.2 Introduction to the problem 24

2.2.1 Motive for research 24

2.2.2 Problem possessors and problem owners 26

2.3 Formulation of the problem 29

2.3.1 Problem setting 29

2.3.2 Demarcations and Elucidation 33

2.4 Theoretical background 35

2.5 Information Sources 37

2.6 Measure- and Observation methods 37

2.7 Methods of analysis 38

2.8 Summary 38

Chapter 3 Current situation 40

3.1 The current pallet policy in the USA 40

3.1.1 The pallets for cans and bottles 40

3.1.2 The keg pallets 41

3.2 Outcome survey concerning the distributors’ current solution for 41 the pallets and their opinions regarding the pallet quality

3.2.1 Introduction survey 41

3.2.2 Justification of survey 42

3.2.3 The current solution of the distributors for the pallets 46 3.2.4 The opinions of the distributors concerning the pallet 47 quality

3.3 The possibilities regarding different pallet qualities 48

3.4 The current pallet market in the USA 50

3.5 Summary 52

Chapter 4 Scenarios for a pallet return program 54

4.1 Possible pallet return programs 54

4.2 Elaboration of the potential scenarios 55

4.2.1 Return to the Netherlands for reuse, sort in the US 56 4.2.2 Return to the Netherlands for reuse, sort at the brewery 57 4.2.3 Return to the Netherlands for reuse, sort at the pallet 58 supplier

4.2.4 Return to the Netherlands for reuse, with most cost 59 efficient sorting point by using a slightly modified

pallet quality or returnable pallet

4.2.5 Dump at a third party in the US 60

4.3 Summary 60

Chapter 5 Cost Analysis 61

5.1 Short description of the return flow with its related 61 cost components

5.2 Assumptions 67

5.3 Cost analysis for Scenario 3 70

5.3.1 Collecting & Handling Cost 70 5.3.2 The Ocean freight & CSC Cost 71 5.3.3 The Recover Cost: sort, repair, destroy and replace 71

5.3.4 Transportation cost 72

5.3.5 Handling cost 72

5.3.6 Administration cost 73

5.3.7 Dumping cost 73

5.3.8 Total costs summery for scenario 1, 2 and 3 73 5.4 Returning to the Netherlands for reuse, with most cost 74

efficient sorting point by using a different pallet quality

5.4.1 Introduction 74

5.4.2 Scenario 4: Using a slightly modified pallet quality 74 5.4.3 Scenario 5: Using a returnable pallet 79 5.5 Scenario 6: Dump at a third party in the US 82

5.6 Conclusion 83

5.7 Discussion regarding the sensibility of certain figures 86

5.8 Summary 97

Chapter 6 Service Analysis 98

6.1 Introduction 98

6.2 Service towards the Distributors and Heineken 98

6.3 Service towards the environment 99

6.4 Conclusion and Summary 101

Chapter 7 Conclusion 102 7.1 Conclusions regarding the content of the research 102 7.2 Recommendations regarding the optimum pallet return program 104 7.3 Questioning this research when the context of this research 107

changes

7.4 Research evaluation 112

7.5 Summary 114

Appendix 1: The pallet survey 116

2: The interested distributors 120

3a: Individual Collecting & Handling cost per distributor for 123 scenarios 2 and 3

3b: Individual Collecting & Handling cost per distributor for 124 scenario 1

4: Estimation of the Lead time of the pallet 125 5: Calculation of the Ocean freight cost per port 125 6: Individual Ocean freight & CSC costs per pallet 126 7: Estimated percentages for broken, reparable and good pallets 127 for 1 year

8: Calculations of the Handling costs for scenario 2 129 9: Calculations of the Dumping costs per pallet for scenario 6 130 10: The cost analysis of scenario 1 and 2 131

11: List of impact distributors 140

12: Pallet size results from the survey and research 140 13: Comparison cost analysis result by: different group of 142

distributors, scenario 4 and 5, exchange rate and current situation

Literature list 143

Chapter 1 Background information about Heineken

In this first chapter a description of the Heineken Company will be given. At first a brief look at the history of Heineken will be presented in paragraph 1.1. The organisational structure of Heineken N.V., Heineken Nederland Supply and the Operating Company Heineken USA will be will reflected in paragraph 1.2. The management regarding pallets and the supply chain will be described in paragraphs 1.3 and 1.4.

1.1 History

The history of Heineken started on 16 December 1863. On that day Gerard Adriaan Heineken bought the brewery called De Hooiberg (The Haystack) in Amsterdam. The brewery had been in existence since the 16

century and in two centuries it had grown to become the biggest in Amsterdam. The purchase of de Hooiberg was the birth of the firm of Heineken & Co.

Within a few years Gerard Adriaan succeeded in increasing sales so much that construction of a new brewery proved necessary. A new brewery was built at the Stadhouderskade in 1868.

On 4 January 1873 the then board of directors of Heineken’s Bierbrouwerij Maatschappij NV decided to build a brewery in Rotterdam as well. In 1914 Dr Henry Pierre Heineken, son of Gerard Adriaan was appointed director. Three years later he became Chairman of the Board.

Until 1951 he was closely linked to the company. At that time the grandson of Gerard Adriaan, Alfred H. Heineken started to play an important role in the Heineken concern.

The Amstel brewery N.V. and Vrumona N.V. became a part of the Heineken concern in 1968.

In 1975 a brand-new brewery had been built at Zoeterwoude, mid-way between Rotterdam and Amsterdam. This brewery took over the production of the Rotterdam and Amsterdam breweries.

Heineken took over the following breweries over a period of 10 years; in 1982 de Ridder B.V.

in Maastricht, in 1989 Brand in Wijlre and in 1992 the Brouwketel B.V. in Rijsbergen.

Figure 1-1: Organizational structure of Heineken N.V.

Executive Board Executive Board

Policy & Control Policy & Control

Facilities&Support Staff Facilities&Support Staff

Clusters/Regions Clusters/Regions

Operating Companies Operating Companies

Marketing Marketing

Production Production

Finance Finance

Inform.& Com.Tech.

Inform.& Com.Tech.

Hum an Resources Hum an Resources

Communication Communication

Legal & Bus. Affairs Legal & Bus. Affairs

Technical Service Technical Service

Com pany Secretary Com pany Secretary

Security Security

Personal Draught Syst.

Personal Draught Syst.

Africa/ Middle East Africa/ Middle East

Asia Pacific Asia Pacific

Caribbean/ C.Am erica Caribbean/ C.Am erica

Latin Am erica Latin Am erica

Other Europe Other Europe

HNSHNS

Heineken Brouwerijen Heineken Brouwerijen

HNBSHNBS

Heineken Beheer Heineken Beheer

Vrumona Vrumona

Export Export

Heineken USA Heineken USA

Heineken Espana Heineken Espana

Heineken Italia Heineken Italia

Sogebra Sogebra

Athenian Brewery Athenian Brewery

as dfasdf

Executive Board Executive Board

Policy & Control Policy & Control

Facilities&Support Staff Facilities&Support Staff

Clusters/Regions Clusters/Regions

Operating Companies Operating Companies

Marketing Marketing

Production Production

Finance Finance

Inform.& Com.Tech.

Inform.& Com.Tech.

Hum an Resources Hum an Resources

Communication Communication

Legal & Bus. Affairs Legal & Bus. Affairs

Technical Service Technical Service

Com pany Secretary Com pany Secretary

Security Security

Personal Draught Syst.

Personal Draught Syst.

Africa/ Middle East Africa/ Middle East

Asia Pacific Asia Pacific

Caribbean/ C.Am erica Caribbean/ C.Am erica

Latin Am erica Latin Am erica

Other Europe Other Europe

HNSHNS

Heineken Brouwerijen Heineken Brouwerijen

HNBSHNBS

Heineken Beheer Heineken Beheer

Vrumona Vrumona

Export Export

Heineken USA Heineken USA

Heineken Espana Heineken Espana

Heineken Italia Heineken Italia

Sogebra Sogebra

Athenian Brewery Athenian Brewery

as dfasdf

1.2 Organizational structure

1.2.1 Heineken NV

The international operating Heineken N.V. has currently grown to be one of the biggest and most important companies in Holland. It produces and distributes prominent brands with the accent on beer. The famous beer brands are Heineken and Amstel. These brands are supplemented and supported by a large number of national and regional brands as well as a number of specialty beers. These beer brands are being brewed by their own dispensing. The owned breweries of Heineken and Amstel are located in Zoeterwoude and ‘s Hertogenbosch.

Heineken NV is the world’s most international brewing group, with operations in more than 170 countries. In 2001 the total volume of beer brewed by the Heineken Group was 105,1 million hectolitres, ensuring a place within the biggest brewery groups in the world.

Production is based at more than 110 breweries in over 50 countries. Besides this, Heineken operates through export activities and licence partners. In parts of Europe (Holland for example) the Group owns beverage wholesalers, through which in addition to beer it supplies a supporting range in soft drinks, wines and spirits to the on-premise sector. Some of the soft drinks are produced in Heineken’s own facilities.

The umbrella organization is shaped by Heineken N.V. In 2001 is the average staffing

numbered 40.000 employees, of which 6000 employees were located in the Dutch

organizations (Heineken, 2001). 50,005 % of the stocks of Heineken N.V. is held by the

Heineken Holding N.V. The organizational chart can be viewed in the following figure.

The Policy & Control departments are all equal to each other, as well as the Facility &

Support Staff departments, the different clusters and regions and the different Operating Companies. For example the Operating Company HNS, Heineken Netherlands Supply, is equal to for example Heineken Netherlands Business Services (HNBS), Vrumona or Heineken USA.

This research has partly taken place at HNS and in Heineken USA (HUSA). Therefore these Operating Companies will be further described in the following paragraphs.

1.2.2 Heineken Netherlands Supply

Heineken Netherlands Supply takes care of the planning process, purchasing, production, and the distribution activities of (among other brands) Heineken, Amstel and Murphy’s. HNS supplies HUSA, Export and the Dutch market. These three represent Marketing & Sales units.. See the following figure.

HUSA

Production Distribution Planning

EXP

HNL

Suppliers HNS Marketing &

Sales Units

Retail

Retail

Retail

On-site Distributor

Distributor

Retail DC

Wholesaler

Figure 1-2: Rough Supply relation between HNS and HUSA

The actual organisation structure of HNS is represented in the next figure.

The figure shows that HNS consists of a purchasing department, production department (the four breweries in Holland which are on an equal level), a distribution department, a demand

& supply department and the supporting departments.

For this research we have mostly worked with the Distribution & Customer Service (DCS) as this department represents the beginning of the supply chain. DCS is responsible for the distribution of beer to the wholesalers for the hotel and catering industry, distribution of beer to distributions centres for supermarket chains and responsible for the transportation of the export beer to the ports in Rotterdam or Antwerp. The activities of DCS are all activities from order reception at the production line to expedition, storage in warehouse, loading in trucks and finally transportation to the various destinations. Besides these activities DCS is responsible for the return packing, for example crates, bottles, kegs and pallets.

HNS General Manager

Human Resources &

Organisation Development

Financial Planning &

Control

Supply Development &

Support

Brewery Zoeterwoude Purchasing &

Sourcing

Distribution &

Customer Service

Demand & Supply

Brewery

´s Hertogenbosch

Brewery Brand

Brewery De Ridder

Figure 1-3: Organization structure of Heineken Netherlands Supply

1.2.3 Heineken USA

Of great importance for the premium image of the Heineken brand all over the world is the strong position that the brand holds in the United States. The export to the US has been a very important contribution to the international development of Heineken. Heineken was the first brewer to export to the USA at the end of the prohibition¹ in 1933 (1920-1933). Three days later, the first shipment of Heineken beer was unloaded in the American port of Hoboken, New Jersey. That proved to be the start of a tremendous period of growth for Heineken in the US. The Heineken brand became very quickly the most popular European imported beer of the US. Amstel Light, the biggest import light beer in the US, developed very successfully after its introduction in the 80’s. To this day the Heineken brand remains America’s favourite imported beer.

In view of the positioning of the Heineken brand in the US, the brand’s European heritage is of essential importance. That is the reason why Heineken beer has never been brewed locally in the United States.

The organization structure shows that HUSA represents all departments like Corporate Affairs, Legal, Knowledge management/ IT, Human Resources, Marketing, Sales, Finance and Operations Planning except Production. HUSA has mainly marketing, sales and distribution tasks.

The Operations Planning Department (Ops Planning) is directly related to this research. Ops

President & CEO President & CEO

Finance Finance

Human Resources Human Resources

Operations Planning Operations Planning

Marketing Marketing Corporate Affairs

Corporate Affairs

Legal Department Legal Department

Knowledge Management Knowledge Management

Sales Sales President & CEO

President & CEO

Finance Finance

Human Resources Human Resources

Operations Planning Operations Planning

Marketing Marketing Corporate Affairs

Corporate Affairs

Legal Department Legal Department

Knowledge Management Knowledge Management

Sales Sales

Figure 1-4: Organization structure of Heineken USA

The manager of Demand Planning and Inventory Control is responsible for creating the production forecast for HNS to replenish the demand points as well as managing the entire inventory at the demand point. Other responsibilities are the management of the "days on hand" inventory, out of stocks, implementation of new products and managing the distributor’s orders and order changes.

The Operations Manager is responsible for the day to day operations that deal with all brokerage activity, repack, operational systems, detention, demurrage, and reporting damage.

The Transportation Planning Manager is responsible for managing all operational budgets and long term planning (Ocean costs, Demand Point costs, Inland Transportation costs) and all process and procedures related to managing the day to day activity at the demand point.

The organization structure of the Operations Planning Department is outlined in the following figure.

These past descriptions of organizations and departments were meant to give an indication of how Heineken is structured and where in the organization this research is done and from where the information was gathered. The main departments are the Operations Planning department in Heineken USA and the Distribution & Customer Services department at HNS.

Ops Planning Vice President Ops Planning Vice President

Ops Planning Director Ops Planning

Director

Demand & Inventory Planning Demand & Inventory Planning

Operations Manager Operations Manager

Logistics Planning Logistics Planning

Transportation Planning Transportation Planning Ops Planning

Vice President Ops Planning Vice President

Ops Planning Director Ops Planning

Director

Demand & Inventory Planning Demand & Inventory Planning

Operations Manager Operations Manager

Logistics Planning Logistics Planning

Transportation Planning Transportation Planning

Figure 1-5: Organization structure of the Operations Planning Department

1.3 Current pallet management of Heineken Netherlands Supply

After describing the organizational structure of Heineken in the previous paragraph, in the following paragraph we will discuss shortly some background subjects related to my research.

These subjects reflect the production of the pallets at the pallet supplier, the purchasing procedure, and the distribution of the pallets for the Netherlands, Europe and the rest of the world.

1.3.1 Production of pallets

HNS has currently two pallet suppliers. These are the Emballage Industrie & Houthandel Dongen BV in Dongen and Phoenix-Pallets BV in Hasselt. Phoenix-Pallets BV is one of the twelve operating companies under the holding Faber Halbertsma Group. Each company produces a wide range of different kinds of pallets. They produce standardized and custom made pallets.

The type of wood, size and thickness of the pallet mainly determine the quality and price of the pallets. The suppliers purchase the wood directly or make use of an agent. The production of the pallets in Phoenix is for a great part done automatically. The employees mainly control and do quality checks.

The suppliers keep for HNS about two/three weeks’ stock which must be kept dry. This has to do with the type and quality of the wood.

1.3.2 Purchase of pallets

The strategy regarding purchasing can be described as follows.

HNS currently has, as already mentioned, two pallet suppliers. Each delivers the whole variety of pallets HNS uses in their production. Each supplier produces around 600.000 one- way pallets for HNS.

HNS is towards the suppliers price focused. Other factors like service, reliability etc. are also important, but the price is leading for negotiations. Each € 0,05 off the price, results around

€ 60.000 a year in profit gaining. Therefore HNS tries to play them off against each other.

HNS may take the liberty to do this because the production for Heineken covers a great deal

of their annual turnover. Once a while HNS compares the price with a third or fourth party

making sure they’re not paying too much. There’s a risk that both parties make price

The operational purchasing process starts when the DSM (Demand & Supply Management) department receives the production forecast from the Demand Points in the USA. The amount of pallets needed, can then be determined. The suppliers are given a rough forecast 13 weeks beforehand. The Operational Scheduling department calls the pallets each week at the two suppliers and gives an update on the next 13 weeks.

1.3.3 Distribution with pallets

In the next part we will give a short description of how the beer pallets are managed differently depending on the country.

The Netherlands

In the Dutch market HNS uses a DPB (Dranken Pallet Beheer) pallet pool. This is a pallet pool where each party rents a certain amount of pallets for a contractual period of one year.

Each pallet costs € 6,60 per year ( € 0,55 per month). This price is independent of the amount of trips. Once a party has joined the pallet pool, it’s obliged to stay in for at least 5 years. The past few years HNS rented around the 280.000 pallets each year. In case of a financial surplus, this surplus will be proportionally divided by the parties. Retailers pay a deposit that they get back when returning the pallets, thus ensuring returns of all pallets.

This was set up in 1994 by the initiator CBK (Central Brewery Office). This office is represented by all beer breweries in Holland. The purpose of this pallet pool is cost reduction for the breweries and uniformity in the pallets for the retailers. Nowadays besides the beer breweries (Grolsch, Bavaria, Gulpener, Brand, Alfa, Interbrew etc.) other producers/

distributors of soft drinks and milk products like Coca-Cola, Hero, Spa, Melkunie, Friesche Vlag, Nutricia and more have joined the DPB pallet pool. To recognise the pallets they are painted in a red colour. The size of the pallets is 100cm*120cm and the quality of them is very high.

From the brewery in Zoeterwoude the full pallets are transported to the 100-150 distribution

points in Holland. The trucks drive back with empty beer pallets to the brewery. In the

production line the pallets are checked if they meet the quality requirements. If one doesn’t it

will be brought to either Palldon or Phoenix, which will be pointed out by the Dranken Pallet

Beheer (DPB). The lifetime of a DPB pallet is around 8 years. Reparation costs are embodied

in the rent.

Advantages of this pallet pool:

- Good quality pallets - Low costs

- Uniformity in pallets for retailers Disadvantages:

- Controlling the flow of the pallets is difficult. A party can take more pallets in return from the distribution centre then they actually rent. So there must be a proper and detailed administration of the different pallet flows.

Europe

In Europe, each country decides how the pallets are managed. For a great deal of the countries HNS has one-way pallets. For each shipping HNS buys new, relatively low quality pallets.

Each country can also ask for a different size pallet.

There are a few exceptions though.

In Germany and Switzerland for example HNS uses the Europallet. The Euro pallet system is based on an exchange system. It’s a standard 80cm*120cm pallet with a slightly lower level quality than a ‘Dranken Pallet Beheer’ pallet. HNS delivers its beer on these pallets to its distributors in these countries and they take empty beer pallets back. Other parties besides these distributors like its customers or other German breweries use also these Europallets.

This way these few parties use the same pallets. A disadvantage of this system is that repairs and maintenance of the pallets are the responsibility of every involved party. Because controls are lacking each party will try to use a pallet without having them repaired and therefore end up being responsible for the costs. This results often in poor quality pallets.

Outside Europe

The export on pallets outside Europe differs for each country. I’ll just mention a few very shortly. For Japan HNS uses a special, high quality, one-way pallet. This has to do with high wood import restrictions into Japan. The imported wood must have possibilities to be re-used.

For Asia and Africa HNS often uses no pallets at all. The containers then are loaded manual.

This means that for loading in the containers no pallets or other unit load formation

equipment is used. This is possible because of low labour costs in these countries. The

containers there are unloaded manually. Advantages for Heineken here are cost reductions in

pallet purchase, space gaining in the containers so you can load a container with more boxes

1.4 The Supply Chain focused on the pallet flow

International expansion has been a cornerstone of the Heineken business since the company’s earliest days. As mentioned earlier, Heineken was the first brewer to export to the USA at the end of the prohibition in 1933 and to this day the Heineken brand remains America’s favorite imported beer. Other brands, which Heineken exports, are Heineken Lager, Heineken Special Dark, Amstel Light, Murphy Irish Stout, Murphy Irish Amber and Buckler Non alcoholic beer.

The Supply Chain can be defined as the activities that transform raw materials into intermediate goods and final products, and that deliver those final products to customers. For most firms, supply chain management requires operating a network of manufacturing and distribution facilities that are often scattered around the world. The activities of the supply chain involve purchasing, manufacturing, logistics, distribution and transportation to marketing (Dornier a.o., 1998: 214).

The Supply Chain regarding the flow of the pallets between HNS and HUSA is illustrated in figure 1-6.

Figure 1-6: Supply Chain focused on pallet flow between HNS

and USA

The entire process starts when the forecasts from the Demand Points arrive at the Planning Departments of the breweries. The majority (85%) of the sales in the US is produced at the brewery in Zoeterwoude. This is especially bulk production. The rest is produced in Den Bosch. A replenishment plan for the production is made based on the stocks, the in transits and the weekly Demand Point forecast. This plan contains: “When and where does which product need to be received in order to have enough in stock, which enables them to meet the expected sales.” Within a certain bandwidth (minimum and maximum stock levels in order to meet fluctuations in the demand and supply) HNS is free to make choices regarding is replenishment plan. The plan depends on the capacity of the breweries and possible changes in the forecast.

Besides the weekly sales forecast which HNS receives for the following week, there’s another forecast which is used to make long term production planning. This is called the LE-forecast (Last Estimate). They distinguish the LE0 (timing end of 4th quarter with figures for the following year), the LE1 and LE2 (timing 1

and 2

quarter, this is a fine tuning of the LE0) and finally the LE3 (timing 3

quarter, this contains final projections for the running year). In

the end of each quarter the forecast for the following quarter is being fine tuned.

The entire process is structured based on a drumbeat:

Week 1: Planning Week 2: Production Week 3: Shipping

As can be seen in figure 1-6 the chain starts at the pallet suppliers. They produce the pallets based on a forecast. The pallet suppliers take care of the transportation. The cost of the transportation is included in the price HNS pays for the pallets. They deliver an average of 7 shipments per day (500 pallets per shipment). In summer seasons this will run up to 8 or 9

LE0

(End year 0)

YEAR 1

1rst quarter 2nd quarter 3rd quarter 4th quarter

LE1 LE2 LE3 LE0

(End year 1)

done by Heineken. About 10% is temporarily stacked inside near the end of the production line (bottling and packaging). The rest is stacked outside.

The pallets are then led on a conveyer to the palletizer where the cases are stacked. About 90% of the HUSA pallets are stacked 80 cases, 8 layers of 10 cases. One case contains 24 bottles or cans. The remaining 10% is stacked with 70 cases, 7 layers of 10 cases. These pallets are specifically produced for one distributor, Phoenix Beehive, which can’t handle 80 cases in their warehouse. This distributor represents about 10% of the total sales of Heineken in the US.

After the pallets are loaded with cases and then shrink wrapped, the pallets are transported with a fork-lift truck to the warehouse. The full pallets stay in the warehouse at the brewery about 2 or 3 days.

HNS uses three trucking companies. The biggest company is Van der Heijden and then Verachtert and De Boer. After HNS calls on the trucking company, the full pallets are loaded on the containers using the loading dock. Each container destined for the US is loaded 21-23 pallets per container. This depends on the weight restrictions per state in the US. On average 6 or 7 containers are loaded per hour.

Heineken has three different ways of loading:

- ‘Scoop loading’; a fork-lift truck is used to load the pallets with goods. The goods with pallets are loaded into the container. This way of loading is mainly used for the US Market.

- ‘Mechanical loading’; the goods are pushed off from a special pallet using a metal plate attached onto the fork-lift truck. The goods go into the container without any pallets. This is used when exporting to countries in Asia. The wages are low there and therefore the containers can manually be unloaded.

- ‘Manual loading’; loading is done manually for containers which contain different kind of products, packages etc. This is mainly done in Den Bosch.

Afterwards the loaded trucks are transported to either the Rotterdam port or the port in Antwerp. Heineken uses five different shipping companies in order to create competitive prices. The companies are Maersk Sealand, MSC, PONL, Hanjin and Evergreen.

Once all the goods are loaded onto the ships, it takes about 2-3 weeks for the goods to arrive

on the East Coast and about 3-4 weeks to arrive on the West Coast. At the seaports in the US,

the ships are unloaded and the containers are temporarily stacked on the port site. It stays here until the order is picked up by the related Demand Point.

In the next figure an overview is given of the 9 Demand Points in the US. As can be seen there are 2 Demand Points on the West Coast and 7 Demand Points on the East Coast. The distributor Phoenix Beehive is also illustrated as this distributor represents about 10% of the sales.

The Demand Points are managed by different companies. Newark, Norfolk, Long Beach and Oakland are run by Hudd. Houston, Miami, Charleston and Baltimore are run by S&S Traffic.

The kegspediting program, mentioned earlier, is also run by S&S Traffic. Tighe manages the Boston Demand Point. These Demand Points are full service distribution centres which are provided every week with beer that is produced on the basis of demand forecasts. These demand points monitor customs clearance, handle product storage and execute distributor deliveries.

Each demand point serves the distributors in certain states located near the demand point. In the appendix a list can be viewed with the demand points and their related states.

MIAMI BALTIMORE

LONG BEACH

HOUSTON

CHARLESTON BOSTON WA

TN

PA OH

NY MI

WI

CO MO

OK

TX

LA AR

MS AL GA

FL IA NJ

SD ND MN

NM AZ

UT NV

MT

CA OR

NC SC IN

IL NE

WY

VT NH

ME

ID

VA KY

MA

KS

CT

WV

AK

HI

PHOENIX*

KY OAKLAND

NORFOLK NEWARK

MIAMI BALTIMORE

LONG BEACH

HOUSTON

CHARLESTON BOSTON WA

TN

PA OH

NY MI

WI

CO MO

OK

TX

LA AR

MS AL GA

FL IA NJ

SD ND MN

NM AZ

UT NV

MT

CA OR

NC SC IN

IL NE

WY

VT NH

ME

ID

VA KY

MA

KS

CT

WV

AK

HI

PHOENIX*

KY OAKLAND

NORFOLK NEWARK

Figure 1-7: Map of the USA with the Heineken Demand Points

Once the demand point has picked up the containers, it brings them to their warehouses.

Among other brands from other breweries or soft drink companies the pallets are stacked three high. The Demand Points have an average of 2 to 3 weeks in stock. Once the demand point managers, Hudd, S&S Traffic or Tighe, receive the orders from the distributors, they distribute the orders to them by freight transportation. Either the trucks are hired or they use their own. The distributors receive only full pallets (80 cases) of a certain product. These distributors pay a certain amount for a full load pallet and on top of that, Heineken charges them $4.00 per pallet. The distributors own from the pallets from that point on. They can reuse them, sell or dump them. Heineken uses in total about 410 distributors. They differ in size and location. Most distributors are located in the North East region of the US. This is also the focus for Heineken looking at the market.

1.5 Structure of research

After having described shortly the organization of Heineken and giving some background information concerning certain aspects important for this research, in this paragraph we will shortly describe the structure of the research.

The following chapter will discuss the methodology of this research with its objectives, main question and methods of data collection and analysis. Chapter 3 will describe the current situation regarding the pallet policy at Heineken USA, the distributors’ solutions for the pallets, their opinions regarding the pallet quality, the possibilities regarding different pallet qualities and the pallet market in the USA. Chapter 4 will determine the possible scenarios for a pallet return program. The cost analysis of each scenario determined in this chapter will be discussed in chapter 5. Chapter 6 will show the service analysis regarding these scenarios.

The last chapter, chapter 7 will give an answer to the main question of this research by

combining both analyses. Besides the answer also other conclusions and recommendations

will be done in this chapter.

Chapter 2 Methodology of research

In this Chapter the methodological framework for this research will be described. The used approach for this research, including its objectives, main questions and sub questions will be described in the following paragraphs.

2.1 Introduction research approach

Before we will mention the framework which we will use for my research, we will describe the characteristics of the research. First of all the kind of research needs to be determined. De Leeuw distinguishes two types: scientific research and practical research (see figures 2-1 and 2-2).

The important differences between these types are the Starting and Ending points. The practical research looks first at the reality and ends there as well. The scientific researcher looks first in its knowledge base and ends there after the research as well (De Leeuw, 1996:

73).

Scientific research uses furthermore an empirical cycle. The knowledge of the researcher and its hypothesis is being compared and tested with empirical data.

This research for Heineken is a good example of practical research. Practical research can be described as; the outcome of the research, like data, insights, methods, concepts can be used for specific management problems. The purpose is to satisfy the specific customer related need for knowledge (De Leeuw, 1996: 70).

Researcher Knowledge base

Reality

Fig 2-1. Practical Research (Leeuw, 996:72)

Researcher Knowledge base

Reality

Fig 2-2. Scientific Research (Leeuw, 1996: 72)

This research flows by the Regulative cycle. As can be seen in the figure 2-3, it starts with a problem in a practical situation. After the problem has been perceived a solution for this problem will be designed. This solution is then a measure for the practical problem.

To determine the main activities of my research process, we will use the Methodological Framework of De Leeuw as a guideline (1996). The different elements are related to each other and the different decisions need to be made in relation to each other.

This is, looking at my research, a correct and logical approach, because the purpose of my research is solving a problem in practice. All necessary elements need to be considered in coherence with each other. The next paragraphs will reflect each decision mentioned in the Methodological Framework of de Leeuw.

Problem formulation

Methods of Analysis

Concept to be used

Measure- and Observation methods Information sources

Figure 2-4: The Methodological framework of research (Leeuw, 1996: 88)

Measur

e

practical situation

Design solution

Figure 2-3: Regulative cycle (Leeuw, 1996)

2.2 Introduction to the problem

Problems arise in the first instance in a kind of ‘rough’ form. Often are these indications of a problem based on signals of certain parties in or outside the organization. Looking at the motive and the background of the problem for Heineken an indication can be given of the actual problem. In this next paragraph the motive for this research and the problem owners are described.

2.2.1 Motive for research

Looking at the still growing market in the USA, Heineken strives to become the preferred beer supplier in terms of customer service, quality and profitable brands. To improve this position, Heineken is constantly searching for new solutions to improve their customer service level towards their distributors. Raising their level above the level of their competitors is of course preferred. The reason why this is so important is because of the 3 tier system which exists in the US. It was introduced just after the Prohibition period (1920-1933). Beer wholesalers occupy the middle tier of a three-tier system established for the distribution and sale of beer. This system was designed to insulate retailers from control by suppliers, encourage moderation in consumption, guarantee full collection of state and federal taxes and permit states to impose rules and regulations over the licensed beverage industry that reflect their own practices and beliefs. In this system it is impossible for brewers to sell beer directly to the retail. Only marketing was possible. The distributors have in this situation the power.

They decide which product to distribute and therefore sell to the retail. The relationship between the brewer and the distribution is as a result very important.

In the past few years Heineken reorganized their supply chain which was called the Star

Chain project. This global supply chain project was designed to fully integrate and streamline

the entire process of beer making and distribution; from gathering raw materials for the Dutch

breweries to moving the beer to the customers in the United States and to other export

markets around the world. For Heineken USA the major change was the way in which beer

shipments destined for the US would be organised. In the past, beer was brewed, packed and

distributed based on individual orders of distributors. This led to a mixing of brands, packages

and package configurations within containers. In the new system ‘Demand Points’ have been

every week with beer that is produced on the basis of demand forecasts. These demand points monitor customs clearance, handle product storage and execute distributor deliveries.

Heineken USA now has ten demand points, all of them located near major seaports. The demand points will enhance Heineken USA’s distribution by improving the flow of products, which will mean fewer ocean shipments, an improvement in distributors order lead times and inventory levels and a better overall customer service to distributors. This improved level of service includes a maximum order lead-time of ten days (down from an average of eight weeks), reducing distribution inventory levels from an average of 38 days to 14 days. As a result, the freshness of the beer is comparable to that of the best domestic brewer (down from an average of 89 days to 45 days). There are also benefits for the brewery in Holland. Instead of having 425 different order points, the brewery now only has 10. The consolidation of orders reduces the number of times that production lines have to be changed, and that in turn brings improvements in production planning and scheduling.

The existence of these central demand points additionally opens up other possibilities. As Heineken produces their beer in Holland for the US market, Heineken has to ship their beer over the ocean to the US. They do this in barrels, cases and cans. These package units are stacked on wooden pallets. These pallets are one-way pallets. Once the distributors receive the full pallets the distributors own the pallets and can do anything what they want with them.

But the last couple of years it seems that the distributors have had a hard time getting rid of them. They have often had to pay parties to remove them from their warehouses or have them destroyed at a cost incurred by them.

Paying attention to the signals from the HUSA distributors it becomes clear that distributors would see Heineken more as a preferred supplier if Heineken would take the empty beer pallets back after delivering the beer.

To achieve being a preferred supplier, Heineken would like to meet these requests and thereby achieve higher levels of customer service with Heineken distributors.

With regard to the existence of the demand points, Heineken questioned if there were any

interesting possibilities for Heineken to collect the pallets and have a destination for them. By

doing this Heineken would meet these requests from the distributors and therefore increase

their service level towards them.

2.2.2 Problem possessors and problem owners

I will shortly discuss the actual ‘problem possessors’ and ‘problem owners’ of this research.

A problem possessor is a person or a group of persons which has/have a problem or is concerned about how he thinks a piece of the world is and how he thinks it should be (Leeuw, 1996: 175). De Leeuw distinguishes 3 types of problems:

- Perception problems: problems are caused by a misperception of the problem owner.

- Goal setting problems: problems are caused by striving to unfeasible goals.

- Reality problems: problems are indeed caused by a phenomenon in reality.

These problems don’t always have to be real problems. They can also be feelings or ideas that some things can go better.

Problem owner can be the same person, but it can also be someone, that because of his/her function or position, he/ she should have a problem. This person can then also be seen as a potential problem possessor (De Leeuw, 1996: 175).

Heineken USA assumes, based on certain signals, that the Heineken distributors have a problem with the excess one-way Heineken USA pallet.

The problem possessors in this situation are the Heineken USA distributors. Their problem is

that they have excess HUSA pallets and it costs them to get rid of them. To make sure that

this isn’t just a perception problem of Heineken, we set up a survey into the actual opinion of

the distributors concerning the Heineken pallets. The results of the survey would have to

indicate that Heineken has a perception problem or indeed a reality problem. The response of

the survey was 74%. 299 of the 407 distributors had responded. This can be considered as a

good response. The introduction, justification and further outcome of the survey are discussed

in Chapter 3.

Figure 2-5: Interest in a pallet return program

Looking at the chart it says that 36,4% of all distributors are interested in a pallet return program. But out of the distributors which responded, you can say that 50% is interested and the other 50% is not interested. So supposing, out of the 26% which didn’t respond 50%

would be maybe interested. This would contain about 54 distributors. But we will not include these non-respondent distributors as we have hardly any information to be able to say anything about them or their opinions. In the rest of the research we will work with the actual amount of interested distributors (148 distributors).

As you can see in table 2-1 there are three categories Yes, No and No answer. The distributors which responded

“Yes, interested”, but added that they wanted money for the pallets as a solution, were categorized as “Not interested”. The reason for this decision is because the alternative solution of Heineken will never involve paying distributors for the pallets. The distributors pay Heineken currently $4.00 per pallet when receiving a pallet with beer. Returning (a part of) this money as a deposit is not an option for Heineken.

Table 2-1: Data concerning interest in a pallet return program The interest of distributors in a HUSA alternative solution

Frequency Percent Valid Percent

Cumulative Percent

Valid No interest 127 31.2 42.5 42.5

No = Yes, but want money 21 5.2 7.0 87.6

Yes, interested 114 28.0 38.1

Yes, want returnable 34 8.4 11.4

No answer 3 0.7 1.0

Total 299 73.5 100.0 80.6

Missing System 108 26.5 99.0

Total 407 100.0 100.0

The distributors that responded “Yes, want a returnable pallet” were categorized as “Yes, interested”. The reason for this is because a returnable pallet is a possible scenario. But suppose the solution will not be a returnable pallet. Then the question here is with what idea did the distributor give this answer? With the idea of not having to pay the $4.00 charge or the idea that they then wouldn’t have any disposable pallets anymore? If the distributors were considering the $ 4.00 charge, then these distributors actually would have had to go to the “Not interested” category. These distributors would have the same motives as the distributors with the answer “Yes, but want money”. Regarding to this the chance that the percentage “Yes, interested” can be slightly lower in reality has to be kept in mind.

But suppose their motive behind this answer would be the idea of getting rid of the disposable pallets, then we would assume that there isn’t any problem. Because then the distributors would also be interested in other scenarios as long as they get rid of their pallets.

The reason for this indistinctness in the answers is twofold. As mentioned before the distributors are currently charged $4.00 per pallet when receiving a full load. This is for them an additional expense. Domestic beer suppliers have a returnable system and the distributors pay a deposit for the pallets which they receive back once the pallets are picked up. So the $4.00 charge which they pay to Heineken and they don’t get back is constantly a poignant subject. The distributors always try to get rid of this charge. Therefore Heineken wanted to avoid anything which would include costs or revenues in the survey, which could provoke discussions about this subject. The scenarios which Heineken wanted to come up with will not include Heineken paying the distributor for the pallet when picking them up or it will not include that the distributors have to pay Heineken if they pick up the pallets. It will just be a situation that Heineken will pick up the pallets for free at those distributors which are interested in it.

Before we sent out the survey to all distributors, we sent out the survey to two distributors to check if the survey would cause any problems, if there were any indistinctness in the questions or what so ever. This didn’t seem the case, so we didn’t foresee the problems, selecting some answers in other categories, concerning this question.

These interpretations, by selecting some answers in certain categories, could make the output of this survey regarding this question slightly invalid. The percentages of the groups interested distributors and non-interested distributors can slightly differ as used for this research. This has to be taken into account in the rest of the research. In the case that one of the pallet return programs will be used and implemented, then a careful approach towards the distributors regarding that certain pallet return program needs to be taken. The pallet return program needs to be clearly explained with all its consequences for both parties to avoid any misunderstandings. After all the research was started to improve the service towards the distributors.

I will summarize the problem owners analysis shortly. As mentioned before, to be able to stay

or improve the compatibility of Heineken USA, Heineken searches among other things

constantly for possibilities to improve their service towards their distributors. The problem of

Heineken is the desire to improve service through a pallet return program. At first it was

partially a perception problem because they thought that all distributors wanted to get rid of

so the reality problem would be the desire to improve service for those distributors that have a pallet problem. Heineken USA is then not directly a problem possessor, but more a problem owner. This regards the possibility that the strength of the relationship between the distributors and Heineken can diminish in the future when Heineken doesn’t go along with demands of distributors.

The Heineken distributors which are interested in a pallet return program are considered to have a problem with the excess Heineken pallets. Therefore the interested distributors are in this research the problem possessors.

The environment is not directly one of the problem possessors. But because of the fact that pallets, a wooden product, are often currently disposed in the US, are therefore related to the environment. The possible scenarios can in their turn influence the environment positively or negatively. Although we will not mention the environment as a problem owner, we will take this party into account when comparing the scenarios.

2.3 Formulation of the problem

After describing the general problem with their motives, background and problem owners, the actual problem needs to be pointed out more detailed. De Leeuw (1996) does this by stating the objective of the research, the main questions and their related sub questions. The objective formulates for whom the research is done, what the result of the research will be and finally why it for them relevant is (De Leeuw, 1996: 85). The sub questions have the purpose to structure the process of answering the main questions. Certain definitions and limiting conditions for the research will additionally be outlined.

2.3.1 Problem setting

Regarding the problem with Heineken we have, in consultation with the management of the Operations Planning department, come to the following objectives and main questions.

Objective of research

Contribute to the discussion of the management of the Planning & Operations Department in

Heineken USA by designing a pallet return program which has the best performance in terms

of cost efficiency and improvement of the service, in order to enable Heineken to make better

decisions regarding improvements of the service level to the HUSA distributors.

Main question of research

Which pallet return program for the Heineken USA distributors has the best performance in terms of cost efficiency and improvement of the service?

Conceptual Model

The framework used for this research is translated into a conceptual model. To conceptualize is developing a valid conceptual definition and/or conceptual model which enable us to understand the problem. It represents certain views and helps to map the reality (De Leeuw, 1996: 141).

In my research the following conceptual model is central.

Figure 2-6: Conceptual Model of research