THE IMPACT OF MANAGEMENT
STRATEGIES ON DOWNSTREAM
SUPPLY CHAIN COMPLEXITY IN THE
FOOD PROCESSING INDUSTRY
Master thesis, MSc Supply Chain Management
22nd June 2015
Christopher Lim s2789825
1
stSupervisor: D.P. van Donk
TABLE OF CONTENT
ABSTRACT ... 1
1. INTRODUCTION ... 2
2. THEORETICAL BACKGROUND ... 3
2.1 DOWNSTREAM COMPLEXITY OF SUPPLY CHAINS ... 4
2.2 MAIN CHARACTERISTICS OF THE FPI ... 6
2.3 MANAGEMENT STRATEGIES ... 6 2.4 CONCEPTUAL MODEL ... 8 3. METHODOLOGY ... 9 3.1 UNIT OF ANALYSIS... 9 3.2 CASE SELECTION... 10 3.3 DATA COLLECTION ... 10 3.4 DATA ANALYSIS ... 11 4. RESULTS ... 13 4.1 UNCERTAINTY ... 13 4.2 DIVERSITY ... 16 4.3 SIZE ... 19 4.4 VARIABILITY ... 20 4.5 STRUCTURE ... 22 4.6 SPEED ... 24 5. DISCUSSION ... 28
5.1 STRATEGIES AND THEIR INFLUENCE ON DOWNSTREAM SUPPLY CHAIN COMPLEXITY ... 28
5.2 CONTEXT OF FOOD PROCESSING INDUSTRY ... 30
6. CONCLUSION AND FURTHER RESEARCH ... 30
6.1 CONCLUSION ... 30 6.2 MANAGERIAL ADVICE ... 31 6.3 LIMITATIONS ... 31 6.4 FURTHER RESEARCH ... 31 REFERENCE LIST ... 33 APPENDICES ... 36
APPENDIX A INTERVIEW QUESTIONAIRE AND PROTOCOL ... 36
ABSTRACT
The technological progress, product customisation and globalisation issues challenge companies in the food processing industry and their supply chains permanently to step ahead the competition. Currently the industrial sector is missing an understanding of the holistic view on how different activities along the supply interact and how they are related to each other. This paper explores which and how different strategies influence downstream complexity in the context of the food processing industry. A multiple case study among ten different companies from the industrial sector illustrate how conducted strategies, typical characteristics of the food processing industry and the dimension of downstream supply complexity are related.
Keywords: Supply chain management; Food processing industry; Downstream complexity
1. INTRODUCTION
Nestlé in Spain has recently introduced the possibility for customers to order a personalised selection of chocolate pralines online, to choose their preferred packaging design and enabled a delivery to the customer within 72 hours.
“Innovation is a priority for Nestlé. The Díselo con Chocolate initiative illustrates the potential of a growing consumer trend towards customisation and buying products and services online.” Bernard Meunier, Chief Executive Officer for Nestlé Spain
Several aspects in the above described example of a supply chain in the food processing industries (FPI) provoke downstream supply chain complexity (DSCC). The technological progress to enable orders nonstop, a higher degree of product customisation and a larger distribution area mainly caused this progress of the overall development. Complexity affects performance, whereas a clear understanding of the relationship between the conducted management strategies and the level of complexity needs to be investigated.
The ongoing trend towards a customer demand, with a larger product variety, a higher level of customisation and a wider market coverage, requires a constant response to the market changes/trends (Yang and Bruns, 2003) and influence the complexity of an organisation’s supply chains (e.g. Bozarth et al., 2009; Perona and Miragliotta, 2004). Companies face the challenge to manage the interaction of the different parts of a supply chain as efficient as possible to gain an advantage over their competitors. A variety of strategies, such as modularisation (Perona and Miragliotta, 2004), postponement (Yang and Bruns, 2003) or product variety (Wan et al., 2012), have been investigated and linked to performance in the past. However, the relation between the different strategies and dimensions of complexity is still obscure and requires further attention, especially in the field of the FPI.
Products of the FPI have become a major part in consumers’ daily lives as people worldwide have points of contact with this kind of products (Çelen et al, 2005). Although the food and agricultural sector has shown a steady growth (Kinsey, 2001) the profit margins are relatively low. Companies aim to keep their costs at the lowest level possible which requires an advanced understanding of the supply chain complexity and knowledge to manage these complexities in order to remain successful (Francis et al., 2008; Isik, 2010; Barbosa-Póvoa, 2014). Therefore, the targeted contribution to the current literature is an analysis which strategies exist and how they influence the manageability of the DSCC in the FPI.
This research sets its focus on identifying and further investigating management strategies and enlarging the knowledge of how possible strategies have an impact on the management of the DSCC. Hence, the aim is to obtain an in-depth knowledge on which strategies are applied and what influence each of these approaches on the manageability of the DSCC has. This is achieved by formulating the following question to contribute to the aim of this research:
How do management strategies influence the level of downstream supply chain complexity in food processing industry?
A multiple case study, as an opportunity to build up knowledge based on an investigation in a real life setting, will be conducted in order to investigate and evaluate different management strategies to manage DSCC in the FPI accurately, fill the current gap in scientific literature and highlight future research necessities. As a contribution to practice, the results can function as an approach for management teams in FPI on how to increase the handling and manageability of their supply chain. The subsequent sections of this research structured as follows: The theoretical part will introduce results of previous researches on supply chain complexity and complexity drivers of the downstream perspective, the research context, and management strategies. This section will be followed by a description of the research scenery and the applied approach during the studies. Followed by the presentation of the findings, a discussion on the findings and completed with a conclusion.
2. THEORETICAL BACKGROUND
2.1 DOWNSTREAM COMPLEXITY OF SUPPLY CHAINS
Over the last twenty-five years supply chain management (SCM) has become a key part for organisations to strengthen their competiveness (Vanichchinchai and Igel, 2009). Therefore, it becomes indispensable for organisations to have a holistic view on their operations along the supply chain instead focusing only on individual processes (Bozarth et al., 2009; Isik, 2010). A supply chain is a complex system in which involved multiple activities transform and move a good or a service from the supplier to the customer (Barbosa-Póvoa, 2014). Supply chains can be analysed from diverse perspectives. Fleischmann et al. (2007) divided the supply chain into procurement, production, distribution and sales. Bozarth et al. (2009) defined downstream complexity as “level of detail and dynamic complexity” (p. 80) occurring in the downstream markets. This includes the consideration of how to develop, manage and link information flows and physical flows of different upstream and/or downstream parties (Isik, 2010). As the market is facing a permanent change managing these upstream and downstream relationships is connected to a high level of complexity (Ahumada and Villalobos, 2009). Bozarth et al. (2009) identified potential parts that represent downstream complexity: (1) number of customers, (2) diversity of customer needs, (3) length of the product life cycle, (4) and demand variability.
Thereby, Bozarth et al. (2009) described the existence of a relation between the numbers of customers and its effect on downstream complexity. Another aspect of diversity is the heterogeneity of customer needs. The range of differences between the customers increases the DSCC, affects activities further upwards the supply chain and causes potential defective performances (Bozarth et al., 2009).
however still lack in knowledge of how certain management strategies have an impact on the downstream complexity.
Furthermore, it seems to be at least questionable whether these four complexity drivers are the only ones to influence DSCC. Adapting the information of the De Leeuw et al. (2013) study, further complexity driver could have an influence on the level of downstream complexity (see Table 1). Moreover, most of these studies have been conducted in a wide range of industries and do not have to be necessarily relevant for the FPI.
Driver Definition Source
Uncertainty The lack of predictability and reliability of demand and of supply chain in processes
All supply chain complexity literature mentioned below
Diversity The number of different suppliers and customers, the range of different products/services offered, and the level of customization of this range
Frizelle and Woodcock (1995), Frizelle (2004), Funk (1995), Isik (2010), Perona and Miragliotta (2004), Sivadasan et al. (2004), Sivadasan et al. (2006), Zhou (2002)
Size Relative number or volume of products
or activities, including batch sizes for purchase, production, supplies
Bozarth et al. (2009), Frizelle (2004), Funk (1995), Isik (2010), Perona and Miragliotta (2004), Vachon and Klassen (2002) Variability Sudden, large and variable changes in
requirements over time
Bozarth et al. (2009), Isik (2010), Sivadasan et al. (1999)
Structure The number of systems, levels, processes, etc. either within an entity and across entities
Sivadasan et al. (2006), Frizelle and Woodcock (1995), Zhou (2002) Bozarth
Speed Required responsiveness across the
supply chain in terms of throughput times, delivery times and frequencies
Bozarth et al. (2009), Sivadasan et al. (2004)
Lack of information synchronisation
The lack of coordination and control of information on requirements and resources
Sivadasan et al. (1999), Zhou (2002)
Lack of cooperation
The lack of closeness in relations between partners in the supply chain
Perona and Miragliotta (2004), Sivadasan et al. (1999)
The eight complexity drivers presented by De Leeuw et al. (2013) were reduced to six complexity drivers during the further investigation, as “lack of information synchronisation” and “lack of cooperation” are closely related to the driver “uncertainty” and more or less a consequence with leads to uncertainty in DSCC.
2.2 MAIN CHARACTERISTICS OF THE FPI
The FPI is highly affected by perishability of the natural ingredients that are used. Ahumada and Villalobos (2009) defined the main characteristics of these raw materials as the limitation in shelf-life, the variability in demand as well as the price. The main intention therefore is to consider characteristics of the processing industries and limitations of the ingredients and to place products on the market (Ahumada and Villalobos, 2009) with a long remaining best-before date (Van Wezel et al., 2006). The American Production and Inventory Control Society (APICS) which defined process industries as “businesses that add value to materials by mixing, separating, forming, or chemical reactions where processes may be either continuous or batch and generally require rigid process control” (p. 48) (Fransoo and Rutten, 1994). Fransoo and Rutten (1994) defined batch/mix businesses as more complex due to their characteristics. Supporting the Fransoo and Rutten (1994) point of view Kilic et al. (2011) focused on these two stages in the production line of the FPI considering the usage of intermediates. For example in the dairy processing industry, a single raw material is used to produce a wide range of intermediates and diverse milk end-products to fulfil customer demand (Nicholson et al., 2011). Thereby, an end- product could consists of one or multiple intermediates with a majorly limited possibility for stock keeping (Kilic et al., 2011; Ahumada and Villalobos, 2009). Van Donk (2001) summarised the characteristics of both, the food as well as the processing industry, and categorised the typical features of the FPI into three dimensions, namely by (1) plant, (2) product as well as (3) production process characteristics. Besides the described complexity drivers in section 2.1, the special characteristics of the FPI have a negative influence DSCC, e.g. perishable goods might engender short lead-times that need to be handled. However, it is not fully understood how all these characteristics are related to DSCC and how certain management (see section 2.3) practises affect the intensity.
2.3 MANAGEMENT STRATEGIES
Strategy Objective
Postponement Increases product flexibility Strategic stock Increases product availability Revenue management Increases control of product demand Dynamic assortment planning Increases control of product demand
Silent product rollover Increases control of product exposure to customers Table 2: Overview supply chain strategies (adapted from Tang, 2006)
Based on his understanding the different strategies come along with several objectives in order to reach a certain goal. Once conducted, postponement strategies for example are used to enhance flexibility and enable more opportunities for activities for a company. Differently to Tang (2006) based on rather generic products due to standardization, postponement as a management strategy is a possibility that focuses on the delay of the point of product differentiation in order to enable a customisation (Caux et al., 2006). This strategy lead to a higher product variety and has been seen useful in order to successfully manage normal demand fluctuations (Tang, 2006). McIntosh et al. (2010) divided postponement into six different types: (1) manufacturing, (2) assembly, (3) packaging, (4) labelling, (5) time, and (6) place. Contrary, a higher product variety, based on market understanding, lead to more complex forecasting activities (Wan et al., 2012). Furthermore, the usefulness of modularity and postponement approaches in food industry can be doubtful (McIntosh, 2010). However, although most of these studies link the diverse management strategies to complexity, they are lacking in the determination on how and especially to what extent these strategies have an influence on DSCC.
Critical factors are mainly focused on performance outcome, but do not clearly investigated the relationship between sales strategies and DSCC. Furthermore, the approach of Panagopoulus and Avlonitis (2010) unconsidered the impact of promotional activities on downstream complexity in total. Based on the information gathered in the previous section, this studies will be conducted on the research framework in the following section 2.4.
2.4 CONCEPTUAL MODEL
The research question mentioned in the introduction (see section 1) mainly contains two questions that need to be answered during this study. The first question that occurs focuses on how companies experience DSCC. Therefore, it is important to understand which certain complexity drivers are perceived by the companies and to what extent the specific characteristics of each complexity driver affect these companies. This study contains the assumption that the dimension on how these complexity drivers are perceived leads to a certain level of DSCC. While previous studies investigated and found out that the level of complexity influences the actual performance of a manufacturing plant (Bozarth, 2009), this study focuses on the question of how conducted management strategies mitigate the different complexity drivers (positive, negative or no effect on the diverse complexity driver) or which strategies are used in order to cope with complexity. Tavares Thomé et al. (2002) for example illustrated the direct effect of sales and operations planning approaches on performance by investigating the moderating role of process complexity. Assuming a given relationship, based on previous researches, between the two variables DSCC and management strategies, the model shown below in Figure 1 was proposed. In order to investigate the research topic, the following sub research questions need to be answered:
Q1: How do companies experience characteristics of DSCC?
Figure 1: Influence of management strategies on the manageability of downstream complexity
3. METHODOLOGY
This research was conducted in order to gain an understanding of the relationship of implemented management strategies and their influence on the DSCC in the field of food processing companies. As the above mentioned topic is a relatively new research field, hardly any research has been done so far. In order to gather an in-depth knowledge a case study approach was selected to investigate the complex issue in a real-life company’s environment (Crowe et al., 2011). Van Wynsberghe and Khan (2007) highlighted the explanatory, descriptive and explorative function of case studies to investigate occurring events and/or phenomena. Therefore, it is planned to conduct a multiple case-study with semi-structured interviews to collect adequate data and insights. These interviews are planned to be performed on a face-to-face basis in the natural setting.
3.1 UNIT OF ANALYSIS
3.2 CASE SELECTION
For the selection of suitable companies from the FPI in order to conduct the case study, the research group set-up a long-list of 67 organisations that operate in the food industry and are based in the Netherlands, Germany and China. On the basis of company profiles, found in primary and secondary sources on the internet, the researchers assessed and decided whether a company additionally fulfils the specific characteristics of the FPI. Typical assessment criteria are (1) plant characteristics, (2) product characteristics as well as (3) production process characteristics (Van Donk, 2001) and can be derived from the above mentioned chapter 2.2. Based on the long-list 56 companies were contacted and invited to participate in the case study. According to Karlsson (2009) a significant multiple case study should consider at least three to thirty different cases. The contacting of the diverse companies resulted in eleven organisations willing to co-operate during the study. Whereby, one of the companies did not fulfil the beforehand defined requirements in a second closer evaluation and was not considered any longer. Which finally resulted in a multiple case study with overall ten companies (see Table 3).
Case ID Field of business activity within FPI Country
A Dairy products The Netherlands
B Snacks Germany
C Milling The Netherlands
D Beverage Germany
E Dairy products China
F Bakery China
G Potato processing The Netherlands
H Potato processing The Netherlands
I Poultry processing The Netherlands
J Dairy products The Netherlands
Table 3: Overview participating companies
3.3 DATA COLLECTION
two interviews with different persons were conducted per company, only in exceptional cases one extended interview was permitted. One interview was done on the management level with preferably a Supply Chain Manager and/or a Marketing Manager (external perspective). The second interview was conducted on the operational/plant level and had preferably a Planner and/or a Production Manager (internal perspective) as an interview partner. Each interview lasted for a duration of about 60 minutes and was conducted by an interviewer and with the second researcher as a minute taker (in exceptional cases without a minute taker). In order to fully capture the whole information, each interview was recorded, based on permission by each company and interviewee. Subsequent to the company visits each interview was transcribed and sent back to the interviewee for verification. As the interviews were conducted in three different languages, the transcriptions were translated into English. Each face-to-face interview was followed by the additional request to fill in a short survey, based on a Likert-scale with five different dimensions from (1) “very low” to (5) “very high”, in order to provide additional information on how the interviewee perceived complexity (scoring from very low to very high) in his or her everyday work.
The quality of the case research is guaranteed by its construct validity, internal validity, external validity and reliability (Karlsson, 2009). In order to ensure the construct validity of this study the different variables (discussed in section 2) were built up on a thorough literature research. Moreover, multiple sources of evidence, such as interviews with different interviewees per case, guarantee the construct validity of this case research. As a general rule these interviews were conducted by two researchers, in exceptional cases with a single interview the transcription has been verified by the informant. Internal validity is met by the usage of an independent variable (management strategies) with an effect on a dependent variable (DSCC) based on literature. External validity, the replication logic of a multiple case study, can be ensured that the results of this case study can be generalised to diverse companies of the FPI facing similar market conditions. The reliability of this study relies on the usage of case study protocol and database.
3.4 DATA ANALYSIS
measure and case. The additional survey helped to determine the dimension of each measure. Thereby, the measure could have scored from very low to very high. The procedure to analyse management strategies that were conducted by the participating companies (discussed in section 2.3) was slightly similar, focusing on the identification and impact. The collected data base through the interviews and the dimension for each measure were the foundation for the within case and cross case analysis, in order to identify and link existing complexity drivers and possible coping management strategies.
Driver Characteristics / Measures
Uncertainty Reliability of demand
Predictability of demand
Reliability of forecast (per stock keeping unit)
Diversity Number of stock keeping units in sales
Number of different customers Number of different products
Size Number or volume of sales
Order sizes used in sales
Variability Fluctuation in sales volume (maximum & minimum level)
Fluctuation in storage space utilization (maximum & minimum level) Workload spread during week
Structure Variations of sales channels (direct or indirect) Number of different processes
Speed Frequency of releasing sales orders
Logistical efforts Order throughput time
4. RESULTS
This following result section provides the findings of the study. The section is divided by the six different complexity drivers known from theory and already previously discussed (see Chapter 2.1). Thereby, the findings for each complexity driver will be presented in the following order:
• Characteristics and level of the perceived DSCC
• Choice and application of diverse management strategies
4.1 UNCERTAINTY
Case ID Quotation Level
Reliability of demand
C “We do not really have variation in demand [...] everything is relatively stable”
“Bread is of all ages, from early on until now, everyone eats bread”
-
D “Beneficial for us is […] a sales driver we can always rely on” - F “Our main customers are the residents. Their demands are relatively
stable.”
“Main challenge […] is of course the competition.”
o
B “I think that it varies quite a lot depending on the customer. […] But as you probably know, the discounters have a lot of market power.”
+
Predictability of demand
E “The customer demand is relatively stable because the birth rate is predictable.”
-
G “There is a variety in turnover […] it significantly depends on the harvest.” + I “Hard to predict due to the short delivery lead times and the external
influences.”
“How the end customers react. [...] it is unpredictable”
+
Reliability of forecasts
E “The plant will receive a monthly demand forecast and reschedule it as a daily production plan.”
-
F “It is not so hard to forecast the customer demands because our main customers are the residents “Our retail store forecasts the customer demand based on previous sales data.”
-
G “There is a variation in sales […] and our supply is also uncertain, since it goes the opposite way. If the harvest is well, the sales drops.”
+
J “It changes very often, all of a sudden a new order comes that have to be produced directly [...] It is every day changing every day is there something.”
+
Uncertainty is mainly driven by the fact that a solid predictability of the future customer demand is rather difficult, which affects demand forecasting. Company E stands out in terms of the predictability of demand. The birth rate on their sales market is a predictable measure and positively influences the forecasting reliability. Company F instead focuses on a certain market and profit from reliable historical data in order to keep uncertainty low. Whereas, companies G and I emphasised a higher uncertainty in order to predict demand due to external factors which are difficult to influence. External factors include customers’ reactions, as it is difficult to predict the actual demand beforehand. Moreover, environmental influences, like a crop failure, are uncertainties. Company J is challenged by frequent changes of their sales planning due short-term orders by their customers (see Table 5).
Strategies
Case ID Quotation Strategy
B “We exclusively produce snacks […] worldwide offers a lot of potentials.”
“Focused on the discount market and I cannot imagine that it is planned to change our prioritisation of our target market.”
Market Segmentation
F “Our main customers are the residents. Their demands are relatively stable.”
I “Market differentiation, do not focus on retail but also on other markets, to be able to switch.”
F “We have a department that takes the responsibility of contacting with these big customers.” “We invite the top managements of these companies […] also send them some of our new products […] we keep a good relationship with these big customers.”
“We provide the customers with the VIP card, which can provide a discount. This can help to develop a kind of consumer inertia.”
Prioritisation
I “Sometimes we discuss it with the customer if we made a planning together with the customer, otherwise we have to deal with it and take it as a consequence of doing business.”
“Get as close as possible to your customers, try to know what they are going to do.”
Prioritisation
B “Fortunately our company works closely works together with other companies. […] Co-operations (purchasing, research and development, sales) are communication platforms in order to gain market information. […] and share our knowledge and experiences among each other.”
Demand Forecasting
G “We use our sales and operations planning process (IT). That is how we manage the complexity.”
Table 6: Overview strategies related to complexity driver “uncertainty”
4.2 DIVERSITY
customer portfolio, by deploying intermediaries in order to reach the consumers, and/or with a limited dispersion of their customers (see Table 7).
Case ID Quotation Level
Number of different customers
A “Approximately 5 -10 customers.” -
F “We have our own retail store […] Customers come to the retail store to buy the products.”
“We have some large customers […] may order a large number of products at one time.”
-
J “We don’t have customers who are directly the consumer, that are in general all intermediaries.”
-
B “We do not refuse to accept orders from customers or potential customers.”
“We try to enlarge our spectrum of potential customers.”
+
C “Our focus is on small industry, which is our biggest segment in terms of volume.”
+
Number of different products
A “The product is the same but the packaging is different. But this make it not more complex.”
-
D “Every product that we offer in cans could also be offered in bottles. […] The basic product composition […] is always the same.”
-
E “First intermediate product is prepared before the demand forecast. The rest processes are proceeded after acquiring the demand forecast.”
-
C “We have an enormous amount of products. We are really a company that when the customer asks, we can produce it, want to make it.”
+
G “We have around 1400 end products. If I produce an end product, derivative, make it unique, it is for particular customer(s). […] The more unique, the less flexible you get.”
+
I “Terribly complex due to the many products we have. […] Concerning all customers around 300 different products are produced a day. Variation in assortment is also fairly high”
+
Number of stock keeping units
C “We do not experience perishability with our own products. […] is produced today or tomorrow is also send off today or tomorrow.”
F “Our products need to be consumed in a short time” - H “Final product is deep frozen […] that is not very exiting once it is frozen
and can be stored for years.”
-
A “A huge peak, because they all want, […] but no one knows exactly how much that is. We have […] order sizes of 6-7 weeks in stock. To be flexible.”
+
C “1/3 or the lifespan is for production, the other 2/3 is for the customer. So that is a risk, you cannot put anything on stock. The complexity is way bigger.”
+
E “In case of out-of-stock due to the delivery, we set 20% of the customer demand as the delivery safety stock at each distribution centre.”
+
-- = very low - = low o = neutral + = high ++ = very high Table 7: Overview quotations for diversity
A large customer base means regularly also a larger variety of products. A main contributory factor for increased difficulties with diversity is the product assortment, which three companies (C, G and I) indicated they need to handle. These companies offer a wide range of unique products to fulfil special requests of the individual customer. Contrary companies (A, D and E) with a consistent product structure face less problems in handling diversity (see Table 7). The number of stock keeping units can guarantee flexibility for the companies, but can also be critical concerning the remaining shelf-life of the products. Three companies (C, F and H) manage diversity better than the rest. The companies C and F benefit of their fast product turnover with hardly products kept in stock, while company H face less problems due to the product structure. Contrary companies (A and E) that are challenged by peak in demands have to manage stocks in order to cope with DSCC (see Table 7). Strategies
Case ID Quotation Strategy
B “Main challenges that need to be handled on a competitive market is to stand up to the competitors. […] a reason why we try to enlarge our spectrum of potential customers in order to compensate potential losses of customers.”
Market Segmentation
F “We have a department that takes the responsibility of contacting with these big customers.”
Prioritisation
F “Produced more bread than customer demands, we freeze the rest parts to keep them. […] we will refreeze these breads to satisfy the customer demand.”
Strategic Stock
G “Make-To-Stock strategy […] If necessary, we can deliver fast.” A “Project were we look if can produce it in cans but with a sleeve. We
have now lithographed cans, that are just metal sheets, what for us is made and you can’t change that anymore.”
Postponement Labelling
I “Every supermarket/customer has its own specific look, ‘own’ dish, ‘own’ assortment, ‘own’ herbs etc. So the logistic postponement disappeared.”
Table 8: Overview strategies related to complexity driver “diversity”
4.3 SIZE
Relatively minor difficulties with order sizes were perceived by companies with predetermined and standardised order sizes (company C) and/or minimum order sizes (company H) that they offer to their customers and which simplify downstream activities. Company B contrary offered a huge variety of order sizes to their customers and consequently had to deal with more challenges (see Table 9).
Case ID Quotation Level
Order sizes used in sales
C “95% is delivered in bulk, those are big trucks that can hold 25 tons.” - H “This 200 Tons batch size (minimum) is determined on the basis of these
setup times, to get a balance between the setup times and order/batch sizes.”
-
B “It is almost impossible to provide an average batch size. […] We have some customers who only order a single palette every half a year, for others our products are produced and delivered on a daily basis.”
+
Strategies
Objectives concerning the relationship between the own company and the customer tend influence the handling of downstream activities. As indicated by company H their efforts to rationalise the product assortment and link their minimum order sizes to a balance with the set up times required, lead to fewer difficulties concerning ongoing activities. Contrary company B that offers a large variety of different order sizes is confronted with a lot more problems in order to fulfil customer requirements (see Table 10).
Case ID Quotation Strategy
B “Generally, we currently offer every batch size.” Relationship objectives H “We have a predetermined product portfolio, and sales consider the
need of the customers”
Table 10: Overview strategies related to complexity driver “size”
4.4 VARIABILITY
Case ID Quotation Level
Fluctuation in sales volume (+/- level)
H “Imagine that there is a very bad year in the Netherlands, but you do have constant demand: […] We will deliver a different size as the final product.”
--
C “We do not really have variation in demand [...] we make various quality groups, that go into the mill and those we blend customer specific in the end.”
-
A “Kind of things are not predictable […] that’s because the problems in Russia, we expect that we can sell again to Russia in July. But if the politics don’t cooperate then we have a problem.”
+
B “We try to enlarge our spectrum […] in order to compensate potential losses of customers. This can always happen due to the fact that someone else produces at a lower price.”
“Rebate campaigns definitely affect us a lot. […] But as these rebate campaigns come along in large volumes it is still attractive for us to agree this deals.”
+
I “External influences, […] in fine weather the demand increases. The price, the weather, other promotions, what’s on television, no action; it could all influence the sales.”
+
-- = very low - = low o = neutral + = high ++ = very high Table 11: Overview quotations for variability
Strategies
Case ID Quotation Strategy
H “Everything that is produced, is sold and will be consumed by the market.” Market Segmentation B “From a sales perspective, a large and diverse customer base
worldwide offers a lot of potentials. […] potential losses of customers. This can always happen due to the fact that someone else produces at a lower price.”
D “During our annually meetings with our food retailing customers we discuss and determine on how often our products should be included in sales campaigns. […] will be communicated at least three to six month in advance.”
Relationship objectives Demand Forecasting H “Long term partnerships with the customer, there is an increase in
predictability. Mainly, the prognoses match the actual sales.”
I “Plans how to deal with a promotion (remark: together with the customer). However, it is needed to have a clear forecast which is close to reality.”
G “We build decentralized stock points in that region. […] can get the products, when necessary, in a few hours.”
Strategic Stock Table 12: Overview strategies related to complexity driver “variability”
4.5 STRUCTURE
Case ID Quotation Level
Variations of sales channels (direct or indirect)
C “B2B […] market that I operate is rather traditional.” - G “We are in the B2B, so we don’t deliver to the consumers.” - I “We are directly linked to the retailers. […] And after the retailers, the
end customers are positioned.”
-
J “We don’t have customers who are directly the consumer, that are in general all intermediaries.”
-
D “Our sales division is structured in three to four different subparts.” + F “We have our own retail store [...] a relatively large number of salesmen”
“In addition, we have some large customers.”
“We also sell our products online. [...] mainly sell products that have a long shelf life.”
+
E “Intermediate customers are the local infant stores and international supermarkets. […] We cooperated with nearly 20,000 infant stores and supermarkets that faced to customers directly.”
“In addition, there is also an on-line sales channel.”
“Besides, our products are also sold to the local wholesalers. […] We cooperated with […] 1500 wholesalers.”
++
Number of different processes
A “We have 1 main process and from there we have different article numbers, end articles.”
“We have here packaging lines and bag and box lines.”
-
B “We have to decide and act fast and that is what the management does. […] it sometimes makes the handling for up- or downstream activities more complicated.”
“Generally, the communication within the company functions relatively trouble-free. It is more or less the challenge to develop and implement a structure for the communication that suits our current company size.”
+
C “When a big order has to be send out, it is not possible for the sales person to simply take care of that. […] he also needs a purchaser who has to translate the current raw material price.”
+
Companies that are confronted with a fast moving business environment have to decide and react fast. Only two companies (B and C) were more challenged by the different process steps they have to take in order to fulfil downstream activities, while company A benefits from its simple process structure (see Table 13).
Strategies
The choice of which type of sales channel should be used highly influences the further handling of related downstream activities. Companies (B and C) that are built on indirect sales channels, operating in a business-to-business environment, are confronted with fewer difficulties regarding their activities. Whereas, the usage of multiple sales channels, including direct sales, was indicated (companies D and F) to be more difficult to manage (see Table 14).
Case ID Quotation Strategy
B “Considering end consumers we use an indirect sales channel as our products first of all are sold to a retailer before they are offered to the end consumer.”
“Probably online retailing would be an option for the future, as a lot of people start to buy their things online.”
Indirect Sales Channel
C “Because the customer you deliver to, also has a customer he delivers to. So it could be possible that the complexity we put in the system also translates in his system.”
D “Online retailing, which is deliberately spent only less effort on.”
“Department […] has recently been outsourced […] We already built up our own network to a certain extent, but realised that to deploy someone with a better network leads to even better results.”
Dual Sales Channel
F “We also sell our products online. […] mainly products that have a long shelf life [...] For the bread and cake, if the order quantity is relatively large (over 1000) and the distance is not so far.”
Table 14: Overview strategies related to complexity driver “structure”
4.6 SPEED
Whereby, company B and C offered much freedom to their customers and quickly react on short-term orders, but additionally face problems concerning impatient customers (see Table 15).
Case ID Quotation Level
Order throughput time
G “In general we produce on stock, Make-To-Stock. We don’t want our products to get too old, about hitting date.”
“We cannot deliver from The Netherlands in 24h. Because of that, we build decentralized stock points in that region.”
--
A “We have certain agreements, with a lead time, so hey you should order 8 weeks before. But the agreement is also that we make it when they ask it.”
-
B “Speed plays a very important role for discounters […] Correspondingly our reaction time must be very quick as well. [...] So if an important call a production within one day is in most cases possible.”
“Creating a time schedule from the order receipt to distribution the lead time of the packaging material is mostly the indication.”
+
C “If an order comes in before a certain time, we are able to deliver the next day. But we are also, in the background, continuously working on our stock levels.”
“When a customer wants something, and it will take longer than he would like then he will start pushing.”
+
F “Relatively high-required responsiveness of bread and cake increase the complexity. Customers always want the fresh products.”
+
I “Delivery lead times are short, very short, there is no production time between the order and the delivery [...] If we get an order, we should already have produced it in order to deliver on time.”
+
Logistical efforts
A “Distribution centres were the product is stored. And there are different transport companies contracted and linked to these distribution
centres.”
-
D “The logistic handling should not have any boundaries as it is at the moment. Logistical concerns we face are more flexible. If we receive an order today, we already deliver the next day.”
E “Final product […] will be sorted as SKU according to the sales demand. […] SKUs will be delivered to 30 regional distribution centres, which located at different cities”
“The agencies take the responsibility of distributing the SKUs to the final customers.”
-
H “[…] does the transportation, big transporter, no complexity.”
“Packaged, palletized, and wrapped and through a cold storage area in trucks. After that it is moved to a central storage location […] and from there it will be distributed to distribution centres of […] customers.”
-
A “We have to make a balance between on the one hand making products nearby the marker. That’s because of cost savings, flexibility.”
“We calculate that we need 5-6 weeks […] because of its shipping.” “We calculated not a long time ago, the timeframe that it is produced and enters China is 20 weeks. [...] What we sometimes do is as it goes fast in China then we send product with airplane.”
+
F “After production, the bread is directly distributed to the retail store. […] Bread and cake need to be delivered to the customers within four hours after production.”
+
I “Products are distributed all over the world […] Well, it is the combination of perishability, a short delivery lead time and a divergent product structure.”
“Supermarkets close later […] 70% of its orders after midnight, needs to be delivered during the afternoon.”
+
-- = very low - = low o = neutral + = high ++ = very high Table 15: Overview quotations for speed
Three (A, E and H) out of four companies (A, D, E and H) that were confronted with less complications due to the logistical efforts that were required to fulfil downstream activities forwarded their logistical handling to a third-party. Company D admitted that its current capabilities are still sufficient in order to cope with challenges that occur due to sales activities. The Companies A and I faced a higher difficulty level based on the wide dispersion of their business activities, both operate worldwide. Furthermore, the companies F and I have to cope with late ordering and short lead times (see Table 15).
Strategies
C as they offered short lead-times. For both companies (B and C) prioritisation revealed to be a good approach in order to decrease difficulties that occur with order throughput times. Company C made use of categorising techniques to determine the importance of specific customers. Rebate campaigns can negatively affect order throughput and increase the logistical effort required as they most likely come with high volumes (company B). Outsourcing of distribution activities reduces the own activities required in the logistical process by forwarding risks to an external logistic partner (companies B, C and H). Inventory held for sales increase the flexibility to react as indicated by company G, which enormously mitigates difficulties regarding the order throughput time (see Table 16).
Case ID Quotation Strategy
A “We do most make to order […] it’s also the agreements that we have with our customers.”
Relationship objectives C “If an order comes in before a certain time, we are able to deliver the
next day.”
B “So if an important call a production within one day is in most cases possible.”
Prioritisation
C “Escalating case, and we have to identify the importance of the customer to us. We have various categories (A – C)”
“Ask the customer to drop by and ask him to indicate what he wants, what kind of win-win situation can we take from that.”
B “Rebate campaigns come along in large volumes.” Promotional
activities B “We hired a third party logistic provider in order to ensure a smooth
process.”
Transport & Distribution D “Logistic partner exclusively take action after placing an order.
Thereby, we exactly provide information about the requested product, the specific batch and the exact amount the logistic partner needs to pick for the order. [...] Some of our bigger customers collect their order products themselves.”
H “[…] does the transportation, big transporter, no complexity.”
G “Make-To-Stock strategy [...] The plants can get the products […] in a few hours. We ensure that there is always stock of products.”
5. DISCUSSION
In order to discuss and understand the results of this case research the DSCC, the management strategies and the FPI context are set into relation with the research question. Based on knowledge from literature as well as possible expectations the outcome of this investigation will be clarified.
5.1 STRATEGIES AND THEIR INFLUENCE ON DOWNSTREAM SUPPLY CHAIN COMPLEXITY
The conducted case research revealed a first insight on how certain management strategies used in the FPI affect the level of DSCC. Although all participating companies operate in the same industrial sector, differences regarding the complexity level among the companies varied quite a lot. The analysed differences can mostly be explained by the different sub-sectors the companies operate in as well as the respective position they possessed along the supply chain. Obviously the companies involved during the study are widely spread along the whole supply chain in terms of their position. Depending on their position along the supply chain the companies face various challenges and problems. Whilst conducting the interviews particular attention was paid in order to identify positive as well as negative peaks and similarities on how DSCC was perceived and how the strategy choices of the companies cope with complexity. In a previous study De Leeuw et al. (2013) identified and indicated six mechanisms in order to cope with supply chain complexity. A few of these mechanisms can be discovered as a part of strategies to accommodate DSCC in this study.
ascertained. Multiple external factors, like the possible reaction of customers on rebate campaigns, thereby influence the level of uncertainty which is difficult to predict.
De Leeuw et al. (2013) thematised the usage of information exchange and communication to accommodate with complexity in a different context. Based on the study results this perception seems to be applicable in the FPI. During this study companies scored low in complexity which invested in their customer relationship, through customer prioritisation, in order to reach the basis for a fluent information exchange and create more stable business environment for the company. An example for such an organisation is company F, which frequently make contact with the managements of their top customers. Companies that scored high in uncertainty used S&OP-Processes (Sales and Operations Planning Process) to enhance their demand predictions and forecasts which is in-line with the advises of Hoole (2005) advises, but which is not a guarantee to fully succeed to cope with uncertainty (company G). Some participating companies went even further and produce exclusively on either a “make-to-order” or “make-to-stock” strategy. In case they produced upon order, these companies had agreements on long lead times with our customers.
Packaging and/or labelling postponement strategies support the manageability of a large product assortment as these techniques rationalise the variety. In this respect, companies that applied postponement techniques in the context of FPI during their production, packaging and labelling process faced fewer difficulties compare to other companies who do not put it to use and remained with their highly customised product assortment. As rationalisation could not exclusively been done with products, the prioritisation of customers lead to a reduction of product range and therefore positively affects the level of complexity. De Leeuw et al. (2013) illustrated a similar perceptions in their study. Additionally, contributing to the rationalisation theory, companies perceived lower complexity levels if they only offered limited and predetermined batch sizes. Managerial decisions concerning relationship objectives with customers and transport/distribution include these kind of effects.
Variability affects complexity, mainly driven by fluctuations in sales volumes. According to the participating companies of the case research through rebate campaigns. It cannot be clearly predict on how customer react on special products, either the customers buy large numbers and more than expected or products become typical non-seller. In case of a tremendous peak in demand, stocks support the flexibility of the company and assist to cope with complexity. Same counts for seasonality, although this was a less important topic to most of the companies. Stock keeping seems to be a suitable instrument in FPI as the majority of the participating companies were hardly confronted with perishability problematics. De Leeuw et al. (2013) revealed this technique in their study only regarding to the manageability of uncertainty, although it is suitable to accommodate variability as a complexity driver.
goes somehow in-line with the results that have been illustrated in earlier studies (De Leeuw et al., 2013). Moreover, a company is influenced by certain outsourcing activities. The study revealed that companies with outsourced warehouses and logistics processes were less challenged by complexity. The area of observation for companies to participate during this study was rather limited, as only three countries as possible locations were considered. The generalisability of outcomes of this study, might be influenced by regional specialties and/or different governmental regulations which they need to handle in order to run their business. From this perspective is it not fully understood, on how the external factors influenced the outcomes of this study.
5.2 CONTEXT OF FOOD PROCESSING INDUSTRY
The typical characteristics of the FPI were not significantly critical related to DSCC for the majority of the companies. Companies were able to cope with perishability of their end products, which had several reasons. On the one hand, once products are processed though the production process they are often plied with preservatives in order to extent the shelf-life of the end-product. As a consequence, products can be stored for a relatively long time without confronting any issues of perishability. The majority of the participating companies deals with fast turnover, resulting in low or no stock keeping units. Therefore, these companies forward the perishability problematic relatively fast towards their customers responsibility. On the other hand, an essential concern about food is the product quality, as it relies on the environmental influences during storage and transportation (Rong et al., 2011). Companies deep-freeze their semi-finished and end-products in order to deal with quality issues and to enlarge the shelf-life of their goods. As both methods discussed above cannot be used endlessly, it optimal amount of stock keeping units is always a trade-off between flexibility and the occurring storage and transportation costs. These challenges can also be linked to the uncertainty issues discussed above, as a closer cooperation and communication with the customer can help to reduce the complexity (De Leeuw et al., 2013).
6. CONCLUSION AND FURTHER RESEARCH
6.1 CONCLUSION
in order to cope with complexity in the FPI. Additionally, this study presented evidence that typical characteristics, such as perishability of end-products, have an insignificant influence on downstream related activities. The theoretical implication is a better understanding of the effect of different strategy choices on the DSCC in the first step, but also indicates a follow-up job further investigate further details which are not understood so far.
6.2 MANAGERIAL ADVICE
Based on the findings of this research, some managerial recommendations can be derived. Proportionate companies that conducted prioritisation strategies and applied them well in order to gather information, were less confronted with uncertainty and variability. These companies had relatively stable and recurring demands, which enabled a better predictability of their customer demands. Promising practices were a partly integration or at least a frequent interchange once it came to activities like forecasting.
The application of direct sales activities should be carefully evaluated, as it tends to increase difficulties with further required activities in the process. Evaluation means, whether the potentials that could be generated exceed the additional activities and the emerging complexity, as a direct sales channel comes along with more than a few extra commitments.
6.3 LIMITATIONS
This study has certainly various limitations. First, the majority of interviewees that were involved during the study are positioned relatively at the beginning of the supply chain within their companies, like purchasing or production manager. These persons were able to provide information regarding upstream and manufacturing processes in detail, but were lacking in in-depth knowledge concerning downstream activities and their challenges. This limitation prohibits a fully identification of all possible aspects regarding DSCC and management strategies in order to cope with complexity. It needs further investigations to precisely understand complexity in a downstream supply chain. Second, during the study it became apparent that the majority of the participating companies perceived less difficulties with the perishability of their end-products. This was mainly caused by a sample selection that only included a few companies with relatively short shelf-lives. This requires a broader view whether similar strategies can be used in such a company environment. Finally, the assessment of the diverse complexity level are based on individual perception which might influence the significance of the used management strategies. Therefore, it will require further insights of how processes work in order to generalise and answer on which management strategies are suitable in each individual situation.
6.4 FURTHER RESEARCH
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APPENDICES
APPENDIX A INTERVIEW QUESTIONAIRE AND PROTOCOL
Interview: xx-xx-2015
Place: Opening
• Introduction of interviewer and interviewee • Confidentiality assurance
• Permission to audiotape
Overview – purpose of the study
Structure of the Interview:
(a) General Information:
• Job-title of participant • Main products
• Short description of production process (from the main product) • Number of employees (plant and organization)
• Turnover plant in terms of money and volume • Main customers and geographical dispersion • Main suppliers and geographical dispersion
• Position within the supply chain (from far upstream to far downstream) (b) Supply Chain Complexity
Complexity driver Definition
Uncertainty The lack of predictability and reliability of demand and of supply chain in process
Diversity The number of different elements in a system (products, suppliers, customers, activities)
Size Relative number or volume of elements (products or activities)
Variability Sudden, large and fluctuating changes in requirements imposed on the system over time
Structure The interconnections between multiple systems, levels, processes, etc. within and across elements
Speed Required responsiveness across the supply chain (speed at which activities must be performed)
• How do you experience o uncertainty o diversity o size o variability o structure o speed?
(c) Coping Strategies
• What kind of strategies do you have in place in order to deal with supply chain complexity in terms of the complexity drivers discussed above?
• What strategies do you have in place to manage your suppliers? • What strategies do you use to manage your demand?
• What strategies are used internally (manufacturing) to cope with complexity? (d) Food Processing Industry
• For your organisation, what are challenges of doing business within the food processing industry?
• How do industry specific characteristics might influence the level of complexity you experience?
(e) Organisational Structure
• Would you describe your organisation is formal or informal? How does this show in terms of rules and regulations? (both in decision making and production)
• To what extent do you feel your organisation can be labelled as innovative / creative and communicative?
APPENDIX B SURVEY
Food Processing Industry Characteristics
Very
low
Low
Neutral
High
Very
high
1. Variability of supply of raw materials 2. Variability of quality of raw materials 3. Variability of price of raw materials 4. Risk of obsolescence of the rawmaterials, semi-manufactured
products and ‘end’ products
5. Restrictions Food safety regulations
6. Variability of yield
7. Variability of processing time
8. Divergent product structure
9. Sequence dependency production
10. Batch sizes
11. The need of producing at maximum
capacity
Setup time
Organizational Structure
What is the number of hierarchical levels in your organization?
Does your organization use an integrated Information system? Yes
No
Are suppliers integrated into your information system? Yes
No
What is the batch size of your main products?
In how many countries is the organization currently active? (own a facility)
What is the number of production facilities in your organization?
