Sales and Operations Planning within the Horticultural supply chain

(1)

Sales and Operations Planning

within the Horticultural

supply chain

A descriptive study on the applicability

of S&OP within the orchid supply chain.

(2)

FloraHolland Pr

e

fa

ce

2

Sales and Operations Planning

within the Horticultural

supply chain

A descriptive study on the applicability

of S&OP within the orchid supply chain.

Jan-Jaap Hoegee jjhoegee@gmail.com s1590197

Master Thesis

Operations and Supply Business Administration University of Groningen

(3)

FloraHolland Pr e fa ce

3 Pre face

Students of the faculty of economics and business at the University of Groningen, conclude their master education by the writhing and defending their master thesis. This master thesis can be based on a theoretical subject, or a problem at one or more companies. I have chosen to conduct research at FloraHolland, because they had questions about the applicability of Sales and Operations Planning. This master thesis project will therefore provide a descriptive research about the applicability of S&OP within the horticultural supply chain.

I would like to thank the employees of FloraHolland for their support during my master thesis project. Special thanks go out to Edwin Wenink for his help, feedback and support during my thesis project. Furthermore I like to thank Anne-Jan Steenbeek for his willingness to provide data for this thesis project and his support. I would also like to thank dr. W.M.C van Wezel for his support and critical review during my master thesis project.

I declare that the text and work presented in this master thesis are original and that no other sources than those mentioned in the text and its references have been used in creating this master thesis. The copyright of this master thesis lies with the author: Jan-Jaap Hoegee. I declare to be responsible for the contents. The faculty of economics and business of the University of Groningen is only responsible for the educational coaching and beyond that cannot be held responsible for the content. I hope you will enjoy reading this report.

(4)

FloraHolland M anagem ent abs tr ac t

4 Management abstract

The title of this study mentions the applicability of Sales and Operations Planning (S&OP) within the horticultural supply chain. This study researches if S&OP can be applied within the Horticultural supply chain and more important how S&OP could be applied. FloraHolland believes that S&OP could contribute to more control on demand and supply. Within the current situation of FloraHolland, there is no control on the amount of products that are brought to the market spaces of FloraHolland and there is no direct influence on the level of demand. FloraHolland likes to have more control on both sides. That way they can optimise their commercial objectives on serving the grower by providing a market space that pursuit’s operational excellence.

In order to explore the abilities for FloraHolland and their supply chain participants so they can benefit from an S&OP process. This thesis researches the possibilities for one product group. The product group orchid is selected because within the product group orchid the supply is expected to exceed demand and this thesis therefore could directly contribute to a solution to the problems in the orchid market. The product group is also selected because many orchid growers are a member of the cooperation of FloraHolland, which makes it easier to review the total supply market.

The research is carried out through extensive interviews with different participants within the orchid supply chain, FloraHolland business experts and comparable organizations. For the different participants within the supply chain a questionnaire is used to facilitate the semi-structured interviews. Based on these interviews a thorough insight of the capabilities of the different participants regarding an S&OP process is established. Recommendations regarding the S&OP process are done based on the capabilities of the supply chain participants.

The recommendations that are done in this research are aimed at achieving more control in the alignment of demand and supply through applying S&OP. Before applying S&OP there are two recommendations that need to be addressed:

• Acknowledge the importance of cooperation.

• FloraHolland should initiate Sales and Operations Planning for the supply chain. Several recommendations concerning the S&OP process are:

• An S&OP process frequency of one week.

• An overall S&OP process time horizon of two years.

• A detailed S&OP process time horizon of 10 ‘till 20 weeks in advance.

(5)

FloraHolland M anagem ent abs tr ac t

5

in cooperation with other participants. Figure 8.1 (page 47) will present an overview of the dominant participants for each process step. The activities related to the process steps are shown in table 0.1

Table 0.1 – Activities S&OP process

In this research is shown how S&OP could contribute to the alignment of demand and supply chain within the orchid market. In the current situation the supply and demand of orchids are aligned at the last moment which influences the price. S&OP can be a solution to this problem. The use of S&OP within the orchid supply chain will also lead to more control and a better overview of the amounts of orchids. Through and earlier matching of demand and supply, the supply chain becomes more demand driven. S&OP enables growers and exporters to create more control and a less erratic course of the amount of orchids during the year. The smoothing of supply and demand results in a more effective and easier way of doing business. On top of that the prices will fluctuate less because demand and supply are brought together in an earlier stage which encourages a better pricing and more reliability regarding product availability.

Number Activity Who

1 Forecast of the replenishment orders Exporter 2 Planning of the action orders Exporter 3 Define for each action order the region and kind of _customer Exporter 4 FloraHolland creates one data set of all exporter's _{demand reviews} FloraHolland 5 Forecast of the total supply Grower 6 Planning of allocated and unallocated supply Grower 7 FloraHolland creates one data set of all grower's _{supply reviews} FloraHolland 8 Combine the demand and supply review FloraHolland

9 Determine mismatches FloraHolland

10 Define action to prevent mismatches FloraHolland

11 Communicate mismatches FloraHolland

12 Advice exporter in controling demand FloraHolland 13 Advice growers in controling supply FloraHolland 14 Take action to align demand Exporter 15 Take action to align supply Grower

(6)

FloraHolland Tabl e of C ont ent

6 Table of Content

Pre face ... 3 Management abstract ... 4 1 Introduction ... 8 1.1 Project motivation ... 9 1.2 Problem Context ... 9 1.2.1 Demand problems ... 10 1.2.2 Supply problems ... 10

1.3 Literature review on Sales and Operations Planning ... 11

1.3.1 The S&OP process ... 11

1.3.2 S&OP in supply chain ... 15

1.4 Business processes FloraHolland ... 16

1.4.1 Auction process ... 16 1.4.2 Intermediary service ... 17 2. Research Questions ... 18 2.1 Research Scope ... 18 2.2 Research questions ... 19 3 Methodology... 21 3.1 Project approach ... 21 3.1.1 Phase one ... 21 3.1.2 Phase two ... 21 3.1.3 Phase three ... 21 3.2 Data gathering... 22 3.3 Thesis outline ... 22

4 Planning process and information needs orchid growers... 24

4.1 Current planning processes orchid growers ... 24

4.1.1 Breeder ... 24

4.1.2 Young plant growing ... 25

4.1.3 Grower production ... 25

4.1.4 Grower sales ... 26

4.2 S&OP process capabilities Grower ... 27

4.2.1 Demand review... 27

4.2.2 Supply review ... 27

4.2.3 Pre S&OP ... 28

4.2.4 Finalize S&OP ... 28

5 Planning process and information needs of orchid Exporters ... 30

5.1 Current planning processes of orchid exporters ... 30

5.1.1 Customer ... 30

5.1.2 Exporter ... 31

5.2 S&OP process capabilities of Exporters ... 32

5.2.3 Pre S&OP ... 32

6 Planning process and information needs FloraHolland ... 34

(7)

FloraHolland Tabl e of C ont ent

7

6.1.1 FloraHolland Clock ... 34 6.1.2 FloraHolland Connect ... 35 6.1.3 Product flow ... 36

6.2 S&OP process capabilities FloraHolland ... 36

6.2.3 Pre S&OP ... 39

7 Analysis S&OP within the orchid supply chain ... 42

7.1 S&OP within the orchid supply chain ... 42

7.1.1 Time horizon S&OP plan ... 42

7.1.2 Repetitions of the process. ... 43

7.1.3 Planned Data ... 44

8 Recommendations ... 46

8.1 General recommendations ... 46

8.2 S&OP process recommendation ... 47

8.2.3 Pre-S&OP ... 52

8.2.5 Alternative S&OP applicability... 54

9 Conclusions S&OP in orchid supply chain ... 57

9.1 S&OP applicability in orchid supply chain ... 57

9.2 Benefits of an S&OP Process ... 58

9.3 How to apply an S&OP Process ... 59

9.4 Generalizability of S&OP within the Horticulture supply chain ... 60

9.5 Further research ... 60

(8)

FloraHolland 1 In tr oduc tion

8 1 Introduction

Within the past few years Sales and Operations Planning is a well debated topic within supply chain management. However lots of companies still have difficulties to understand the value of Sales and Operations Planning (S&OP) and how to translate the S&OP theory into practical processes so it serves the companies objectives best. The main purpose of S&OP is to align demand and supply. Demand is seen as what the customer order at the company and supply is by many companies seen as the production capacity. This main purpose is clear for almost every company. But S&OP is evolved into a broader concept where also finance and other critical business units make a common plan to achieve the strategic objectives of the company. Besides the supply chain department it seems essential to involve other departments and functionalities like marketing, sales and finance.

This thesis project will address the applicability for the horticultural supply chain to apply S&OP. Within the horticultural supply chain FloraHolland1_{is the}

largest organization where supply and demand meets each other on their market spaces. Their objective is to facilitate space and logistic to enable growers to sell flowers and plants for a good price. The cooperation FloraHolland is the largest horticultural auctions in the world. FloraHolland has six different locations and a national intermediary service. The locations are export auctions in Aalsmeer, Naaldwijk and Rijnsburg. There are also three regional auctions in Bleiswijk, Venlo and Eelde. The national intermediary service, which is called “FloraHolland Connect”, is located on all six different locations. The cooperation FloraHolland is as a horticultural auction a market space where supply and demand comes together. In general there are two possibilities how supply meets demand, one through the auction process, and another through the intermediary service. In order to provide a matchmaking service FloraHolland needs to plan space, logistic resources, people, and understand the market so that decisions with the purpose to create a good price for the products can be made. Because of the amount of products2 this planning process is a very important process in order to be efficient. So besides logistics drivers there also are commercial drivers which support a clear effective and efficient planning process.

1_{The cooperation FloraHolland is merged in 2008 form Flower auction Aalsmeer and FloraHolland.}

(9)

9

This chapter will further address the project motivation. Paragraph 1.1 will outline the reasons for FloraHolland to start with a research on the applicability of S&OP within the horticultural supply chain. Furthermore this chapter addresses the context of the problems within the supply chain FloraHolland in paragraph 1.2. After the problem statement the concept of S&OP is explored by reviewing literature in paragraph 1.3. This chapter will finalize with a brief description of the business process within the horticultural supply chain to provide a thorough understanding of the contest of this thesis.

1.1 Project motivation

FloraHolland is an organization that pursues operational excellence. From that objective the desire arises to design a smart and effective supply chain. An effective supply chain is seen as a supply chain where the right amount of products finds their way to the customer. In order to achieve such an effective supply chain the demand and supply of flowers and plants need to be aligned. Achieving an effective supply will help realize the commercial objectives of selling flowers and plants.

Business managers within FloraHolland assume that the concept Sales and Operations Planning could help in realizing those commercial objectives. Therefore within FloraHolland questions rise about the applicability of the planning principle Sales and Operational Planning. This thesis provides an exploration research on the applicability of S&OP within FloraHolland. FloraHolland states that through a better alignment of products and demand they are able to provide a better service in matching demand and supply. Through the applying of a better alignment FloraHolland is able to realize their mission and vision in providing a market space where supply and demand meet each other. This alignment of demand and supply will enable FloraHolland to match demand and supply in an effective supply chain that supports their commercial objectives of providing flowers and plants to their customers. An effective and efficient supply chain will enable FloraHolland also to pursue operational excellence.

1.2 Problem Context

(10)

10

Besides an unclear perspective on supply, FloraHolland deals with an unclear perspective of the demand. FloraHolland has a hard time in forecasting demand. Because of the lack of accuracy on both sides FloraHolland has difficulties in controlling the alignment of demand and supply. This means that it is difficult to guaranty a proper price for a product. Regarding the concept of S&OP there are two types of problems which will be addressed from a FloraHolland point of view. Since S&OP is about the alignment of demand and supply, this paragraph will further address problems with demand and supply.

1.2.1 Demand problems

The problem with demand is that FloraHolland has no clear understanding of what amount of products their customers demand on forehand. The sales of products are done through auctioning and through intermediated sales. At the auction clocks demand reveals through the prices which are paid. And by the intermediated service the demand reveals when an order is placed by an exporter. Exporters are FloraHolland’s customers; exporters are the participants of the supply chain who sell the flowers and plants to retail organizations. FloraHolland is able to predict demand on a total level of all products based on experience and historical data of previous years. But this information is not used to forecast demand on product level and this information does not involve new trends and other influences on the current market. This lack of demand information is unable to use for controlling demand or even influencing demand when desired.

1.2.2 Supply problems

The products arriving at FloraHolland are brought by growers who want to sell their products. FloraHolland is confronted with the amount of products growers send when they communicate their supply. This is done through an electronic delivery note, which is used for making auction schemes and they often arrive at the last moment. Growers must send their electronic delivery one hour before delivery. This disables FloraHolland to know the actual supply that they could expect at their market spaces on forehand. However due to experience and historical data FloraHolland is able to forecast the expected supply quit accurately. This supply forecast is used for logistic means determining workload. The information is therefore aggraded to the level of amount of trolleys that need to be handled on one day. This forecast does not involve product specific information, concerning the amount or condition and therefore isn’t specific enough to control the amount of products or to even influence the amount.

(11)

11

Aligning demand and supply through preventing mismatches is assumed to occur by a proper applying of Sales and Operations Planning. The next paragraph will address a literature review on the subject of S&OP in order to get an insight of the planning method.

1.3 Literature review on Sales and Operations Planning

In today’s business Sales and Operations Planning (S&OP) has become a very popular topic. A lot of organizations are using or are researching the possibilities of S&OP within their organization. The basis of S&OP processes exists since 19601_{. The term S&OP is originally related to authors who discuss MRPII or}

similar systems2_{. In early MRPII terminology, the term production planning was used}

instead of S&OP. Although within a MRPII environment S&OP relates to a production plan which is based on a sales plan. This implicates that the production level is related to the demand level in various periods. Today the term S&OP most of the times refers to S&OP as being more a management decision principle that is concerned with the alignment of demand and supply plans. S&OP is recently well debated in academic business articles. The reason is perhaps that companies have grown through mergers and acquisition, product complexities have increased and supply chains have become more protracted1_{. In order to adapt to those changes}

companies reorganise their planning process to sustain a competitive advantage. Some authors3,4 argue that the economic crisis has an impact on the popularity of S&OP. In times where demand forecasts are difficult and where the deviation between demand and supply has tremendous impact, a proper alignment between supply and demand is essential. Furthermore in tough economic times S&OP strategies help companies to make planning decisions at the right time for the best combination of products, customers and markets to serve. If done properly, it can have a direct impact on profitability, performance, customer satisfaction and the product portfolio3_.

1.3.1 The S&OP process

The main purpose for companies to enhance S&OP is because S&OP results in overall efficiency through integration and co-ordination5. Some authors also specify the better ability to manage inventory and capacity. But what exactly is S&OP? S&OP is a management activity wherean organization’s demand and supply planning are aligned6_{. Traditionally it was viewed as a senior management}

decision-making process. But recently, S&OP has evolved in a concept of integrated business planning. S&OP is the process by which all plans for business are brought together into one integrated set of operational plans7_{. In order to satisfy the current}

(12)

12

demand and supply. Within a demand driven market S&OP can be realized through matching supply at demand forecasts17_{. Therefore S&OP is also called the lynchpin}

of the demand driven supply chain model8_{. However within a supply driven market it}

is not possible to simply adjust the supply plan at the demand forecast, because often demand occurs when supply is available at a certain moment. This means that in a supply driven market S&OP requires, besides the alignment of supply plans to a more complex demand forecast, also an influencing of demand through marketing activities.

The S&OP process takes mainly place on an operational level within an organization. Because S&OP is concerned with decisions about utilization level of the capacity, inventory level, and also demand influencing through marketing and sales. These kinds of decisions take place on an immediate and short term and directly support the primary business. These decisions can be distinguished from the decisions which are made on a tactical level, because those are more concerned with the activities which are required for achieving the objectives of strategic planning. Interesting feature of the S&OP process is that it is also partly strategic. Because S&OP is on one end constrained by the capacity strategy, but on the other end also influences the long-term capacity strategy through feedback from the execution of the sales plan and production plan2_{. Besides the feedback function}

S&OP is commonly supported by cross-functional meetings where multiple functionalities are represented and as a result of those meetings S&OP makes it possible to directly link strategic business plans to the operational plans. Therefore S&OP has also been described as linkages between the strategic plans and the operational plans. Because of the operational nature of the S&OP process many authors2,3,9_{argue that the process has to repeat itself frequently in order to be a}

continuous process. Many companies plan their S&OP meetings monthly. When decisions concerning the supply and demand are made each month an organization is able to align both sides and eliminate wastes, as for example over-production.

An important element of S&OP is the matching of supply and demand through cross-functional meetings. These kinds of meetings are well debated in academic literature in the field of S&OP2,3,9_{. The participants of these meetings}

should all play a significant role and have the decision making power in order to make the S&OP process successful. The different functionalities which should anticipate in the S&OP process are sales and marketing, manufacturing, supply chain planning and finance11_{. Through the integration of different functionalities the}

forecasts and different plans become more reliable. Besides reliable plans these meetings cause an important integration power5, which result in responsibilities becoming shared responsibilities.

Another element which supports the S&OP process is an integrated system12,13_{. With a business supporting system, demand and supply plans can be}

(13)

13

easily compare plans and differences could be highlighted. An integrated system which could support the S&OP process must exist of three applications; demand-side planning, supply-demand-side planning and, an S&OP workbench14_.

S&OP process steps

Many authors in the field of S&OP describe it as a process where different activities have to be carried out in order to come to a Sales and Operation plan. The issue in the S&OP process is to create an alignment between demand and supply, which implicates that a balance between sales and operations must be created15. The alignment of the demand and the supply planning is done through combining different functionalities in order to make a reliable sales and operations plan. When the process steps of the S&OP process are examined, different steps can be subdivided. First of all, in order to achieve an alignment between demand and supply it will be necessary to understand both sides. The understanding of the demand and supply side is done through a separate review. After the two reviews those plans need to be combined in one integrated plan. After integration both reviews, actions regarding the alignment needs to be taken in order to prevent mismatches from happening18_.

Demand review

Therefore the first step in the S&OP process will be concerned with the determination of the demand plan. A demand plan involves demand forecasts and sales planning7_{. In order to understand the demand forecast historical data and}

market trends should be analysed. In addition it also should take the checking against marketing plans into account. The step demand reviewing also involves the validation of sales planning in order to understand the already promised supply. As a result there should exist an understanding of the amount of products that are already sold and what the market further demands. The demand plan should present data for each product or product group, in order to be useful regarding the alignment of demand and supply.

Supply review

After the demand review, supply needs to be examined. In order to set up a production plan, capacity and workforce needs to be reviewed7_{. This involves the}

understanding of the rough cut capacity planning and the understanding of master production schedule. Based on this information a production plan could outline the possible numbers of products for a certain time horizon. The time horizon on which production and demand usually are planned covers a period of 12 to 24 months16_{. At}

(14)

14

Important is that the supply plan is presented in the same data entities as the demand plan. This simplifies the alignment.

Pre-S&OP

As soon as both sides are planned the S&OP process calls for an alignment. Alignment involves the designing of a sales and operations plan, where actions for alignment are made. This means that first there must be an understanding of what needs to be done in order to align demand and supply. Before plans concerning the alignment can be made, the demand and supply plan should be juxtaposed and mismatches identified. A sales and operations plan is made so these mismatches could be prevented. The defining of actions to alignment is a step that must be done in cooperation with different functional experts. Within the S&OP environment this is called cross-functional meetings where all functional experts outline the possibilities or the impossibilities. During this process step, functional experts must make decisions on market activities, output rates, employment etc. Those decisions can roughly be divided into decisions which modify demand and decisions which modify supply.

Finalize S&OP

When a sales and operations plan is defined it needs to be achieved through the execution of the action plans. Because every business is different these actions vary, but in general it should involve the influencing of the number of supply or demand. Influencing demand is the essence of marketing. Their objective is to influence customers to buy products and services. Prioritizing is the determination of what has a priority in times where supply is insufficient. This typically results in some customers receiving preferences over other customers. The adjustments in supply could be done through chasing the demand. However this is only possible in a demand driven market. Within a supply-driven market it is possible to level production for a period of time. When production is levelled, stable output rates are maintained, in order to achieve a uniform and high utilisation of production resources2_.

(15)

15

Figure 1.1 – S&OP process steps

1.3.2 S&OP in supply chain

Many organizations apply an S&OP process within the boundaries of their own organization. FloraHolland operates in a supply chain where an individual S&OP process is impossible to realize. This paragraph will review the issues regarding S&OP within multiple linkages in the supply chain.

The supply chain consist of a network of organizations, which are involved through upstream and downstream linkages, and which produce value in the form of products or services through different processes and activities. In order to be efficient, successful co-ordination is necessary. Because S&OP is a process that provides co-ordination and integration, it is a relevant process throughout the whole supply chain. On the other hand the first company’s supply is the others company’s demand. By sharing this information with each other it is possible to become more efficient. Therefore most academic articles about S&OP describe S&OP as a process for the supply chain. But at the same time these authors argue that activities that are done related to S&OP are mainly organized within an organization. The reason therefore is perhaps that the decisions which are made according to S&OP are made on a tactical level within the organization. However this internal focus is at least a bit remarkable because S&OP is easier realised when practitioners throughout the supply chain work together. However some authors5 propose a wider S&OP model in their article sales and operations planning: the supply chain pillar. They intend to formalise the upstream relations (supply plans) and the downstream relations (sales plans) for an organization in the supply chain, at the level of S&OP. This implicates that on an operational level, practitioners of different organizations in the supply chain, should co-operate and share information.

Demand review

Supply review Pre-S&OP:

Reconciliation of plans Finalize S&OP and

(16)

16 1.4 Business processes FloraHolland

In order to gain a better understanding of the organization of FloraHolland, a brief description of business processes is given in this paragraph. A schematic overview of the business processes is presented in figure 1.2.

Figure 1.2 – business processes within FloraHolland

1.4.1 Auction process

The auction process is in fact very easy; a grower delivers his products at one of the different locations of FloraHolland. The driver unloads the trucks and FloraHolland facilitates cooling storage. The delivery of flowers and plants occurs each day from 16.00 h until 04.00 h the next day. After the delivery the auction starts (6.00 h). For the auction the products are moved from the cooling storage to the auction hall. In the auction hall the products are shown to the buyers and are sold. After the auction the products need to be delivered at the buyer. But first the products need to be sorted out for each individual buyer. This process is called the distribution and is done by hand. After the distribution the products are distributed to the buyers. The buyer customises his products and prepares them for transport. This involves the packing and sometimes the making of a bouquet. Then the buyer transports the products from his area elsewhere, to a wholesaler or to a retail shop.

The buyers who purchase through bidding on the auction clocks have in general two ways of doing this. One is simple; they have to physically be in the auction hall. And the other way of purchasing is through KOA (which stands for purchasing on distance, ‘koop op afstand) this technology makes it, through the use of internet, possible to buy products on the auction clock without being on location. This technology enables buyers to purchase on all different locations of FloraHolland. However this means that the products which are bought elsewhere need to be transported to the buyer, who is situated at one of the FloraHolland locations.

Auction Building

Direct flow (Intermediary Serice)

Supply Docks Buyers Delivery Docks Cold

stores Clock Distribution

37% 63%

Clock flow

(17)

17

In general there are two types of buyers, despite the use of KOA. There are buyers who purchase on forecast and buyers who purchase on order. The buyers who purchase on forecast sell their products from inventory to their customers, most of the times these customers are small flower shops. The buyers who sell on demand are those who have actual information on what their customers order. Nowadays a movement from buyers that purchase on forecast to purchase on order can be recognised amongst the buyers.

1.4.2 Intermediary service

The process is also referred to as the direct trade and is provided by the business unit ‘FloraHolland Connect’. The intermediary service implicates that a grower has a deal with a buyer for a fixed price. So the products are not brought to the auction clock, but instead the products are directly brought to the buyer’s area. Sometimes this happens outside FloraHolland but it also occurs within the locations of FloraHolland. 37% of the total turnover3_{of FloraHolland is generated by the}

intermediary service but it is unclear which amount of business exists outside FloraHolland. When the intermediate service is provided within FloraHolland the internal logistics from loading dock to buyer’s area are provided by FloraHolland.

(18)

FloraHolland 2. R es ear ch Q ues tions

18 2. Research Questions

2.1 Research Scope

The research will aim on exploring possibilities for the alignment of supply and demand within FloraHolland through applying S&OP. This is the ability to control the alignment of demand and supply through making decisions in order to modify demand or supply. In order to provide a profound result this research is narrowed down ‘till one single product group. The product group orchids have been selected. The amount of the orchids supply is exceeding demand, which implicates that the orchid is overproduced. The turnover generated by orchid increases, in terms of percentage, is three times as slow as the number of plants increases. From 2005 until 2007 the growth in turnover was greater than the growth in number of orchids. Nowadays this is the other way around and growers have a hard time because the prices fluctuate and become more than often unprofitable. Experts expect that the market will be majored in 2012 however this assumption is purely based on analysing the sales of recent years. There are great uncertainties about the demand because so far it is unknown how many orchids can be sold without decreasing prices. In previous years demand was never an issue because everything that’s been produced was sold for a profitable price. Because of the recent problems within the orchid market, this research could directly contribute to a solution. In addition the product group orchid was also selected because many orchid growers are members of the cooperation FloraHolland. The percentage of members amongst orchid growers is higher than for many other product groups. This makes it easier to take the total production (supply) into account. The product group orchid is responsible for over 25% of the turnover by plants (2009), which makes it the largest product group. Within the product group the phalaenopsis is the most popular type of orchid which represents 76% of the orchid turnover. Besides the known production, the demand of orchids is relatively stable throughout the year; there aren’t any major peaks in demand.

(19)

19

Figure 2.1 – Orchid supply chain and research distinction

The companies upstream to FloraHolland are the growers and the breeders. Because the growers have control over the production it is necessary to take them into account. Downstream of FloraHolland, the exporter is responsible for the gathering of demand and the distribution to the customers. The exporter therefore has the knowledge about the demand. The other linkages within the supply chain are not directly involved in the alignment of supply and demand. This research primarily focuses on FloraHolland and the direct links in the supply chain, upstream and downstream. In order to make any assumptions about the applicability of S&OP amongst all product groups, it is necessary to review the total supply and demand of orchids at FloraHolland. This implicates that the two different selling ways, auction clock and intermediation, are taken into account.

2.2 Research questions

In order to write an academic research to explore the possibilities of S&OP, a proper research question is defined according to the framework of Ellis and Levy19_{. This framework outlines the relation between research problem, goal and}

question, from general to specific. The research problem is a general problem that has to be solved by this study. The research question is narrowed down from a research problem through a research goal.

The research problem could be summarised as; difficulties in knowing supply and demand. From the general research problem a more specific research goal could be determined. The purpose of this research is to perform a descriptive study and the goal of this research can be defined as follows:

Determine the applicability of Sales and Operations Planning within the horticultural supply chain of orchids.

(20)

20

How should Sales and Operations Planning contribute to more control on the alignment of demand and supply of orchids, amongst the direct horticultural supply chain participants?

Within this research question there are two elements which could be distinguished and subdivided into more detailed parts. These are ‘S&OP’ and ‘supply chain participants’. First of all; S&OP could be subdivided into four process steps to gain a better understanding of the applicability of S&OP. Second, the direct supply chain participants could be subdivided into the grower, FloraHolland and exporter. This should lead to the understanding how and which influence each individual participant has on the applicability of S&OP. This distinction is presented in figure 2.2.

Figure 2.2 - Schematic presentation of research questions Demand review Demand Supply Alignment Pre S&OP Supply review

S&OP Process Orchid Sales process

Finalize S&OP Grower

Exporter FloraHolland

(21)

FloraHolland 3 M et hodol ogy

21 3 Methodology

This chapter describes the methodology which is used in order to present an exploration research in the field of S&OP within the orchid supply chain. In the next paragraph the project approach will be outlined, followed by an explanation of the different data gathering methods.

3.1 Project approach

The approach in this project can be subdivided into three phases. Phase one is concerned with the determination what information is needed in order to provide an S&OP process. Phase two is concerned with understanding the current situation within the orchid supply chain and provides an insight of which participant possesses which information. Phase three is concerned with an analysis of all the lessons learned, and provides an understanding of how S&OP could contribute to the alignment of demand and supply within the orchid supply chain.

3.1.1 Phase one

Phase one determines what kind of information is needed for S&OP to be successful. This is done through researching academic literature in the field of Sales and Operations Planning, and related planning methods like Integrated Business Planning. The result of this phase is a thorough understanding of the planning method S&OP. Not only on what the benefits of S&OP are but also what kind of information is needed as an input for the S&OP process.

3.1.2 Phase two

Phase two is concerned with the understanding of the current situation within the orchid supply chain. The three main participants, (Grower, FloraHolland and Exporter) are interviewed and their businesses are analysed regarding the applicability of an S&OP process. For all different participants the ability and the disability to apply an S&OP process are mapped.

3.1.3 Phase three

(22)

22 3.2 Data gathering

To provide this project of the needed information all kinds of different data were gathered. The first phase needed information in the form of articles on the field of S&OP. These articles could be found in online databases, accessible through the University of Groningen. Within the second phase of the project there was a need for information regarding the current situation of the orchid supply chain. This information is gathered though interviews. Within the orchid supply chain all different kind of participants were interviewed. For the project is chosen to interview five growers, these growers were selected by the project group. By the selection of the growers the main issue regarding selection was that the interviewed growers must represent all growers, therefore different kind of growers were selected. The ways in which growers differ are size, product quality, innovativeness and sales professionalism. The interviews with the growers were semi-structured interviews and were supported by a questionnaire (see attachment 1).

The exporters that were interviewed related to the subject of this project were also selected by the project group. Five exporters were selected based on the same selection criteria as the growers, that the five interviewed exporters give an understanding of all exporters. The elements on which exporters differ are mainly size, product diversity and market segment. The interviews with the exporters were conducted semi-structured. A questionnaire was used to structure the interview (see attachment 2).

The possibilities of S&OP within FloraHolland are research through depth interviews with various business managers, market experts and other luminaries. The interviews related to this project within FloraHolland were all open interviews (see attachment 3 for a list of interviewed persons). Besides interviews about the current situation and the possibilities for FloraHolland to apply an S&OP process, historical data regarding the orchid market was obtained from the market information department of FloraHolland (see attachment 4).

The comparable organization which was interviewed related to this project was Friesland Campina. Friesland Campina was selected as comparable organization because both organizations, FloraHolland and Friesland Campina, are cooperatives. Friesland Campina is one of milk farmers and FloraHolland is one of flower and plant growers. This comparison means that both organizations have to deal with a certain amount of supply which only can be controlled and adjusted indirectly.

3.3 Thesis outline

(23)

23

is presented. Chapter four, five and six are part of the second phase of the research where a gathering of data through interviews is presented. Chapter four provides an understanding of a grower’s capabilities regarding the S&OP process. Chapter five describes the capabilities of an exporter regarding the S&OP process. Chapter six is also part of the information gathering phase and gives a detailed description of FloraHolland’s capabilities and needs regarding S&OP.

(24)

FloraHolland 4 P lanni ng pr oc es s and in for m at ion needs or chi d gr owe rs

24 4 Planning process and information needs orchid

growers

In order to provide an understanding of the possibilities of sales and operations planning within the orchid market, this chapter will outline the current planning processes of orchid growers and their information needs. The information that this chapter presents is based on five expert interviews with growers that is representative for all Dutch orchid growers. This chapter will also address what information is needed and is available for the S&OP process from a grower’s perspective.

4.1 Current planning processes orchid growers

The supply chain before FloraHolland exist in general of two organizations, first the breeder and second the grower. A breeder makes cultivation material for orchids, which they call tissue culture. A grower starts his process with this tissue culture and then cultivates it to become a grown plant. Figure 4.1 presents the simplified process of the supply chain before FloraHolland. This paragraph will further address the issues regarding planning based on figure 4.1.

Figure 4.1 – simplified process of growers with throughput time in weeks.

4.1.1 Breeder

At the start of the grow process growers plan their new cultivation based on capacity. Growers simply measure the amount of products that fit into their greenhouses and purchase that amount at the breeder. This is done because of the extensive time horizon that is needed for cultivation material to become ready for production. For example new product innovation take up to five years before it is useable as cultivation material. Regular products on average take up to one and a half till three years before it can be used in production. The reason that this breeding time can differ one and a half year is because of the different kind of orchids, some grow relatively fast. However one and a half year is the minimum time, on average is takes up to two years. There are some inventories concerning

(25)

FloraHolland 4 P lanni ng pr oc es s and in for m at ion needs or chi d gr ow er s

25

cultivation material but growers however are forced to buy product mixes, this means that a grower not only gets the product he desires but also products he does not need. To guarantee the right cultivation material growers have long term agreements with breeders. Due to the extensive time horizon on which growers have to plan their supply, they argue that this is the reason for capacity based planning.

4.1.2 Young plant growing

The next step in the process is the first phase growing also called the young plant growing. This phase evolves half a year before the products are ready to enter the final growing phase. Some growers have their own young plants greenhouses. Others outsource this process to the breeder. During this first growing phase there is a fixed percentage of losing plants. But it is still being planned purely based on capacity.

4.1.3 Grower production

(26)

26

it is not profitable to automate everything, especially at the beginning of the process, where the plants only need to develop leafs and stems. Growers also argue that through less automation their process becomes more flexible.

During the last phase of production the grower can influence the time it takes to finish the product. This influence results in a flexibility of two weeks. During the cooling phase the growers can influence the time, because during the cooling phase the orchids make buds. Longer cooling means more buds and shorter cooling means less buds. However because the growers utilize their greenhouse completely there is no time or space to delay production, because there is no space to cool new plants. It is possible to speed up production but this means concession concerning quality.

At the end of the production process the products need to be sold and cannot be stored. This is because of the lack of space to store the products and the short durability of the sales conditions. The funny thing about orchids is that is a very durable product because when it is looked after properly it will last for more than three months. But there are conditions concerning the sales period and that makes the plants less durable. Because these sales conditions proclaim that the plants have some flowers but even more buds. When all buds are opened it is not usable for sale and when none of the buds are open is not ready for sale. This means that the grower has one week in which he has to sell the products after production.

4.1.4 Grower sales

(27)

27

growers plan to bring products to the clock because some of their customers are there. But most growers prefer negotiation over clock trade. The clock is responsible for 10% and the negotiated trade is represents 90% of the total orchid trade.

4.2 S&OP process capabilities Grower

This paragraph will review the needs and capabilities of the growers regarding the Sales & Operations Planning process. The four process steps are presented in chapter 3.2.1. Each step is reviewed and the possibilities and needs are summarized.

4.2.1 Demand review

The individual growers have some ideas about the demand, but this is limited to their own customers and sometimes the major orders of competitors. So each individual grower in general knows when their customers are requesting products. However growers do not directly use this information to control their production process, it is more a consensus used for strategic considerations like product differentiation or extending production. The time horizon on which growers have a focus on the future is about twenty weeks ahead. For that period of time growers allocated supply to buyers if they receive an order. At the same time they do not know how their competition is doing and how many supply is already allocated to a buyer. For a grower this is critical information because if they are able to know what amount of supply is unallocated they can make an estimation of the market and anticipate with the price for the products. Concerning the unallocated demand growers are more or less able to estimate the demand of their usual buyers by reviewing the past year. The time period on which an order is placed differs from each type of buyer. Mainly there are two types, one which places orders for a longer time horizon and one that waits until the last days. Growers know from experience when an individual buyer is placing his order.

4.2.2 Supply review

(28)

28

with other growers. However if the information is aggraded to the total supply, it may be shared with other growers. But it is still highly confidential and growers emphasize the importance that this kind of information should not be shared with exporters. Because it will influence the price that they are willing to pay for the product, especially in case the supply exceeds demand.

4.2.3 Pre S&OP

This process step is concerned with the defining of matches and mismatches in the forecasted supply and demand. From a grower perspective this is difficult to achieve because a grower has no perception of the total market, on demand and supply side. For analyzing the demand and supply it is necessary to review the aggregated level of demand and supply for the total market, instead of the level of the individual grower. This step also requires the preparation of actions which could be taken in order to match demand and supply. The individual grower cannot set up actions that influence the total market. Therefore it is necessary to do this in co-operation with other growers. Growers state that it is important that this step is done in cooperation with an independent participant. For that reason FloraHolland is the most likely organization to play a dominant role in this step.

4.2.4 Finalize S&OP

This step involves the actions that must be taken in order the match demand and supply. In order to influence the total market it is necessary to mobilize different participants and together achieve a match, because an individual participant is not able to influence the total market. From a growers perspective this means that they should participate in solutions to achieve a match. In today’s business, growers feel the need to cooperate and together achieve a better result in matching supply on demand or demand on supply. The reason for them to cooperate is because they are currently not making any money. Growers are used to the idea of cooperation because of the history they all have with the cooperative flower auction. So overall there is trust in cooperation. Actions that must be taken in order to match supply and demand will influence the grower. This is because the grower is the owner of the product and therefore can influence the price which has an impact on the demand. A grower can simply decide to sell for a certain price or not to sell. And on the other hand a grower is able to influence the amount of supply decreasing his production.

(29)

29

Figure 4.2 – S&OP process regarding growers perspective Demand review

Supply review Pre-S&OP

Finalize S&OP

Grower

- Limited demand information

Grower

- Individual supply information Grower

- Unable to define mismatches Grower

(30)

FloraHolland 5 P lanni ng pr oc es s and in for m at ion needs o f or chi d E xpor ter s

30 5 Planning process and information needs of

orchid Exporters

This chapter will address how the current processes at exporters are designed and what their information needs are, regarding sales and operational planning. The planning process is in contradiction to the grower not based on the production process but on the information process. This information flow concerns the amount of orchids which are needed in the market.

5.1 Current planning processes of orchid exporters

This paragraph will address the planning at exporters. Concerning the product flow, the exporter is situated behind FloraHolland in the process. After FloraHolland the products go through two companies. These companies are the exporter and their customers. The exporter’s customers can differ from large retailers to small flower shops. All these different companies request different services and as a result usually exporters are specialized in serving one segment. The transactions of an exporter are all aimed at another company and not at consumers. This implicates that those transactions are all business to business.

In order to review the exporters planning process it is important to understand what the input for their business process is. The input for an exporter is a customer-order. From that point the business processes are controlled and planned. Figure 5.1 shows a schematic representation of the information flow from the consumer to FloraHolland. This paragraph will further address the issues regarding planning based on figure 5.1, starting with the customer.

Figure 5.1 – Simplified schematic representation of the information flow from consumer to FloraHolland

5.1.1 Customer

From the interviews with exporters could be learned that the customers place their orders at the exporter, and this is done most of the times three days before

(31)

31

delivery is required. The delivery takes on average one day. This implicates that exporters have one or two days to acquire the right products for the right price. When customers place their orders they request a good product for a certain price. An exporter then tries to serve the customer as best as he can by providing the best possible quality and additional service. Sometimes when a customer is planning a special sales action the order will be placed three months in advance, which gives an exporter the opportunity to proclaim products in an early stage. But because customers desire to stay flexible and not to allocate future supply they prefer to order at the last possible moment. In today’s orchid market this is possible because supply exceeds demand, and as a result there is always enough supply available at the last moment for a good price.

5.1.2 Exporter

When reviewing the current planning process at the exporter it is important to mention that exporters are mainly demand-driven. An exporter buys most of the time when there is a certain demand. However, in order to maximize sales they are creating demand by attracting new orders or even new customers. Creating demand is done by the sales department. Most of the times this is done based on an assortment that is assembled and presented in a web-shop where customers can place their orders. Exporters know from experience which product and what amount customers request during the year. But they do not validate this information for their planning. Besides the repeating orders there is also the possibility for special order requests if the customer demands such. If that’s the case, a customer asks an exporter to deliver something special instead of the regular articles or amounts. These types of orders mainly occur during the main holidays, like Valentine’s Day and Mother Days.

(32)

32

products ready for sale but don’t have buyers. Some exporters therefore have services contracts with growers where quality and service levels are defined.

5.2 S&OP process capabilities of Exporters

This paragraph will review the needs and capabilities of the exporter regarding the Sales & Operations Planning process. The four process steps are presented in this chapter. Each step is reviewed and the possibilities and needs are summarized.

5.2.1 Demand review

Exporters are able to know the actual demand as soon as the customers place their orders. Besides the actual demand, they could also make an estimation of the expected demand based on history and experience. Exporters should be well informed about the markets where their customers operate. Therefore they have some ideas about when special orders, like an extended order for a promotion/ action, will occur. Besides that, an exporter knows from previous years what amount a customer normally orders each week, so they are able to predict the replenishment orders. However, exporters are not willing to share this kind of information with growers and FloraHolland because they feel that this will influence the prices and their competition. Exporters argue that if they communicate demand and expected demand growers will create less supply which means increasing prices. When this kind of information is aggregated to the level of market totals, an exporter also sees a threat regarding the influence on price.

5.2.2 Supply review

Supply review involves the understanding of amount of supply during the year. The step of supply review is difficult for exporters to carry out. From experience and close contact with some growers, the individual exporters know what kind of product, quality and amount, growers are selling. But they have no insight of the actual production. They argue that this kind of information will help them in doing their business. Because if they know what amount of products are exceeding demand, they can actively approach customers with action orders. From a growers point of view this is less preferred, because if an exporter knows when supply is exceeding demand it will have a decreasing influence on price.

5.2.3 Pre S&OP

(33)

33

actions regarding the increasing and decreasing of demand. Exporters are unable to influence supply. The individual exporters do not possess the aggregated information on market totals, especially not regarding the supply. This makes it difficult to analyse demand and supply. Another difficulty with an exporter doing the alignment is that exporters have other business objectives than growers. Most important is the product price. Exporters seek the lowest price and growers try to sell it for the highest possible price.

5.2.4 Finalize S&OP

Within the finalization of the S&OP process the exporter can perform an important role. An exporter has a better understanding of the market than the grower and FloraHolland. Therefore, an exporter can better influence demand by actively approaching customers with possible actions that are suitable for their market. However, each exporter is specialised in their own market segment and not so much in the total market. The actions, that must be taken in order to match demand and supply, influence the exporter. Therefore, it is important to cooperate with them regarding the demand influencing. In fact an exporter core business is all about creating demand. In today’s business exporters seek demand and afterwards they search for a possible product to satisfy demand. An exporter is less involved in the influencing of supply, because they cannot influence the amount of production.

Figure 5.2 shows the capabilities of the exporter related to each step of the sales and operations planning process.

Figure 5.2 – S&OP process regarding exporters perspective Demand review

Supply review Pre-S&OP

Finalize S&OP

Exporter - Do not want to share,

individual demand information

Exporter - Limited supply information Exporter

- Unable to define mismatches Exporter

(34)

FloraHolland 6 P lanni ng pr oc es s and in for m at ion needs F lor aH ol land

34 6 Planning process and information needs

FloraHolland

This chapter will address how the current processes by FloraHolland are designed and what their informational needs are regarding sales and operational planning. The planning process at FloraHolland is concerned with the amount of products that are sold on the market space.

6.1 Current planning processes FloraHolland

When there is focus on FloraHolland regarding S&OP two types of streams can be recognized. The product flow and the information flow. The product flow represents the supply from the grower and the information flow represents the demand from the exporter. FloraHolland is the place within the supply chain where both sides meet. Therefore FloraHolland fulfils an important task in matching both. Figure 6.1 shows how the different organizations exchange information and products. This paragraph will further address the issues related to planning. This is mainly related to the information flow, because this is the input for the planning. The product flow can be seen as a result of the information flow.

Figure 6.1 – Product and information flow within FloraHolland.

6.1.1 FloraHolland Clock

The clock flow within FloraHolland is only concerned with the planning of supply information and not with the demand information. This is because of the

(35)

FloraHolland 6 P lanni ng pr oc es s and in for m at ion ne eds F lor aH ol land

35

characteristics of an auction. The information FloraHolland uses for planning is aggregated to the level of trolleys. This information is used to plan logistics and people for dividing the products. This information is forecasted based on historical data and expert expectations. The historical information which is available within the organization of FloraHolland, consist not only the amounts of trolleys which were brought to the auction but also consists historical weather impacts. This enables FloraHolland to compare the historical supply regarding the expected weather conditions.

The growers who choose to present their products at the auction clock send an electronic delivery note, (in Dutch: elektronische aanvoer brief, EAB). The supply information that growers send concerning their supply is only used for the auction schedule and not for planning. Because this electronic delivery note is sent half a day in advance, therefore it won’t be in time to use for planning. The planning that is made in order to provide a good service regarding the auction clock is therefore only based on forecasts and not on actual supply information.

6.1.2 FloraHolland Connect

FloraHolland Connect is within the organization of FloraHolland an independent business unit. They provide different services and activities. Their main goal is to facilitate direct trade between the grower and the exporter through intermediation. When a grower chooses to sell his products through intermediation instead of auction clock, he has multiple ways of doing this. FloraHolland Connect offers different services. A grower can choose between services how much help he requests by selling his products.

Exporters communicate their demand and Connect seeks a grower who provides his products through intermediation. In some cases an exporter and a grower already found each other. In that case FloraHolland Connect will only facilitate the financial transaction. The different orders that are sold through Connect can be subdivided into three categories.

First the day-trade orders, this is trade on short notice: a grower offers a number of plants through Connect for a fixed price and buyers can purchases this. This represents 50% of all the orders.

Besides day-trade there are also fixed lines: a buyer and a grower have a long term agreement on supply and price. A buyer purchases every week a certain amount of product.

(36)

FloraHolland 6 P lanni ng pr oc es s and in for m at ion needs F lor aH ol land

36 6.1.3 Product flow

The dividing of the different products is done at all locations of FloraHolland. Important for planning is that the two product streams, Clock and Connect are divided separately. The auction clock stream is subdivided in two streams, the flower and the plant stream. Orchids are handled on the shop floor in the in the plant stream together with the other plants. The plant stream related to the auction clock is planned based on the amount of trolleys and the split factor. This split factor defines the amount of buyers on one trolley. This spilt factor is determined, based on the historical average. For plants the split factor is 2,4. Based on the amount of trolleys multiplied by the split factor, FloraHolland is able to determine the amount of labour. This is used to plan work hours.

The product stream of orchids related to the intermediated flow is transported totally different compared to the auction clock flow. Because when a product is sold through intermediation, the buyer and the amount of ordered products are known before the products arrive at FloraHolland. In this case the products are directly brought to the buyer’s area. This can be done by the logistics provider who unloads his truck and provides internal transport or by FloraHolland who only will facilitate internal transport. The trolleys with orchids related to the intermediated flow do not need to be divided, because the grower already placed the ordered amount on one or more trolleys.

6.2 S&OP process capabilities FloraHolland

This paragraph will address the capabilities of FloraHolland regarding the Sales and Operations Planning process. All four process steps are evaluated while looking at the capabilities of FloraHolland. It is important to mention that this paragraph only outlines the capabilities regarding S&OP and not the activities that FloraHolland already does.

6.2.1 Demand review

The demand review is about the measuring of the expected demand. This is more applicable to FloraHolland Connect and not so much to the Clock flow, because the expected demand at the clock is something that FloraHolland does not control or measure. The demand at the clock is measured when the sales transactions are done. Besides, at the clock you do not know the customer until the transaction is done. You can see fluctuations in price and relate that to the amount of demand, but in today’s business FloraHolland only facilitates the auction clock as a selling tool.