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Supply Chain - Frozen vegetables
Nowadays the market environment is constantly changing. In this environment the product is not competing but the supply chain. Companies should be aware of the new rules of competition so globalization, merge, acquisitions, and prising must be taking into serious account by the companies during their strategic decisions. Customers are those who deciding what the market is needed. The survival of a company or the competitive advantage for a company can be achieved, according to porter, with offering better price, differentiation or by combination of the these two. Similarly the Competitive advantage in any organization lies in its ability to perform crucial activities along the supply chain better than its competitors.
I was decided as an entrepreneur to design a new supply chain for frozen vegetables in order to be in position to compete the supply chain of the other importers and local suppliers with greater success. Frozen vegetables may be commercially packaged or frozen at home. Wide ranges of frozen vegetable are sold in supermarkets, usually packaged in either rectangular boxes or plastic bags. Common frozen vegetables found in supermarkets include spinach, broccoli, cauliflower, peas, corn, many others, and mixtures of these and other vegetables. Cyprus market is supplied with frozen vegetables coming not only from the local production but also from abroad.
By using upgraded logistics and by better management of the supply chain I am hopping to get cost advantage over my competitors. Since my company is not well experience in this field of the market will make a contract with an experienced company in logistics for the shipping, transportation, storing and distribution of the frozen vegetables. Parallel with this my company will offer an on-line service (website) where some retailers will order directly from the only warehouse that I will own.
The first thing that I will do as a Single-line wholesaler is to choose my first-tier suppliers - from abroad (Upstream) and then the first - tier customers-retailers (Downstream). Then my company will make an agreement with a third party logistics (TPL) expert company in logistics. This company owns two big and technological advanced warehouses in Nicosia (Dali) and Limassol (near the port) and a fleet from special refrigerator trucks. According to our agreement, this company is responsible to bring the frozen food by ship ant then to them from the port to their warehouse in limassol and from there to distribute some of them to the other warehouse in Nicosia. It is also responsible for the distribution from warehouses to the retailers.
Any organisation when dealing with a product, purchasing might look for the most reliable suppliers, inventory management for low unit cost, warehousing for fast stock turnover, materials management for easy handling, transport for full vehicle loads, and etc. The above is what we really need in frozen vegetables supply chain. But in order to avoid any problems that will occur when the separate aims of the above activities come into conflict we must integrate the supply chain. Some of these conflicts that might occur in my supply chain are the following:
- Purchase - By sending fewer but larger orders of frozen vegetables to my supplier we will reduce my administration expenses but at the same time this will increase the stock level and raises the amount of money tight up in the warehouses of the TPL company,
- Warehouse - By reducing the stock of frozen vegetables in the warehouse in order to save money probably we will lead in shortages where with there turn will lead us to the increase of the cost of expediting and transport for emergency deliveries, and
- Transport - By using sea transport of frozen vegetables rather than air freight will reduce my costs but at the same time will increase the time and the amount of stock remaining in the supply chain.
The performance of the supply chain can be improved with the integration of various tiers in the chain. Integration is prerequisite for effective sharing and utilization of information between different companies in the chain (First - tier supplier - wholesaler (TPL Company) - first-tier customers). Companies in the same supply chain must realise firstly that they compete in the market not with other products but with other supply chains and secondly that actually have the same overall objective which is the satisfaction of the final customer. If the final customer is satisfied then all companies in the supply chain will benefits (more revenue).
One of the most common problems in supply chain is the so-called bullwhip effect. Even small fluctuations in demand or inventory levels of the Retailers (supermarkets) in the chain are propagated and enlarged throughout the chain. This is happening because each company in the chain has incomplete information about the needs of others and it has to respond with a disproportional increase in inventory levels and consequently an even larger fluctuation in its demand relative to others down the chain.
Due to the fact that our company is a new one in the market we will try to put the best bases for achieving the best possible supply chain and at the same time to eliminate the possibility of the bullwhip effect. The first thing will be the establishment of a long - term agreement with our first - tier supplier. With such agreement we will create a good relationship (partnership supply relationship) and as a result the supplier will put all his effort to keep its agreement in terms of dependability, cost, speed, volume flexibility and quality since he will be the major supplier of the company in Cyprus and will also benefit in many aspects from this cooperation (Entry in Cyprus market).
Our company will create through recruitment process a culture free from self-interest in order individuals work together, effective teams for cooperating for the common good. The production manager of the supplier, the purchasing manager of the wholesaler, the TPL company manager with his warehouse manager and transport manager and the marketing department of our company must have close collaboration by having in regular basis organisational meetings (teleconferences). This collaboration will be enforced by using the technology that is already available to all (Fax, e-mail, teleconferences, etc). A Radio Frequency Identification (RFID) system will be used for better inventory measurement and accuracy. At the same time an on-line system that will connect all the parties in the supply chain for faster information transmition and continuous control of the flow of the products (frozen vegetables replenishments etc) will be used among the cooperative parties in the supply chain (first- tier supplier, TPL company, wholesaler and retailers). Rewards will also be a helpful incentive. Visibility must also be excellent in order to have good communication in the supply chain in order information will flows efficient and effective. Customer Relationship Management will also be adapted to improve the experience to retain customers and ensure repeat business. The marketing department will be constitute by experienced people who by using special systems for better forecasts will receive and analyse all the information about the customers demand. These people will collaborate also with the managers of the retailers for the forecasting of the demand. This will help a lot the better planning, producing of frozen vegetables and ordering of the right quantity, minimising of inventory level and increasing of stock turnover of frozen vegetables.
First-tier Wholesaler First-tier
Product (Frozen Vegetable flow)
1.2 Customer service/customer value
Customer service is a measure, which shows how well logistics is performing. The Customer service can mean the quality of the frozen vegetables, or promises which is the on time delivery of the frozen vegetables into supermarkets, or the fast respond which is the time that the customers waiting to be served, or accessibility to the frozen vegetables in supermarkets etc. The customer service is very important for my supply chain since at the end this will indicate our strategy.
Nowadays customers push the trigger, customers have the options and customer decides the variety. Customer more often pays in order to acquire a benefit. Frozen vegetables quality is often the primary reason that customers buy them or not. It's a constant battle to ensure that the frozen vegetables that retailers display in supermarkets meet their consumer needs and requirements.
1.2.1 ABC categorization
The ABC categorization is in fact very common in a variety of circumstances. In our case the ABC Analysis cannot be applied directly but it may still be useful when a situation requires for recognizing priorities and determining the importance of product profitability or customer's loyalty. When an ABC categorization after a year will carried out, the method separates important products from less important ones. The 20% of inventory items need 80% of attention since these 20% will give the 80% of company's revenue. Similarly the 20% of my customers will be loyal and buys the 80% of the products and therefore provide the 80% of company's revenue to make it viable. To these customers will have to give more attention in order to keep them satisfied.
1.2.2 Key Performance Indicators
My company Key Performance Indicator is "Increased Customer Satisfaction", that KPI will be focused differently in different departments. The Manufacturing Department may have a KPI of "Number of Units Rejected by Quality Inspection", while the Sales Department has a KPI of "Minutes a Customer Is on Hold before a Sales Representative Answers". Success by the Sales and Manufacturing Departments in meeting their respective departmental Key Performance Indicators will help my company to meet its overall KPI. The importance of pre-transaction, Transaction and post transaction activities is crucial for the implementation and the success of KPI.
One of the most important aims of the procurement is to find good suppliers, work closely with them and developing beneficial relationships. I found my supplier from a catalogue in internet. This supplier is a French manufacturer and has all the qualifications that I was looking for. It has a good reputation in his country about the quality, the on time delivery of its products. It is also well known for its reliability of its agreements and about its long term relationships with its local and foreigners partners. This supplier has the ability and capacity to supply accurately my company with frozen vegetables in acceptable prices and in good financial agreements. On the other hand there is an alternative choice from Italy but as it mentioned before a single sourcing for the time being will be selected.
With the single sourcing my company will create stronger relationship and commitment for the success of this relationship. Economies of scale and price discounts will achieved with fewer but large orders. The communication will be easier, a fact that will reduced administration costs since simpler procedures will be adapted.
The orders will take place automated by using the electronic data interchange (EDI). This system will be connected with the server of my company. When the purchasing department receives the information for replenishment the system automatically will send the order to the supplier. This method is the most fast and efficient method for repeating orders. Due to the fact that all the parties involved in the supply chain will connected with an on-line system a continuous control of the flow of the frozen vegetables along the supply chain will be done at any time.
1.4 Description of the product
The product is the frozen vegetables. Frozen vegetables may be commercially packaged or frozen at home. Wide ranges of frozen vegetable are sold in supermarkets, usually packaged in either rectangular boxes or plastic bags. Common frozen vegetables found in supermarkets include spinach, broccoli, cauliflower, peas, corn and mixtures of these and other vegetables. They may be cut or processed some other way into a shape or form that is convenient for cooking or eating, and sometimes seasoned. There is a great variety of brands and prices of this product, though many supermarkets have their own store brands, too.
Frozen vegetables have some advantages over fresh ones, in that they are available when the fresh counterpart is out-of-season, they have a very long shelf life when kept in a freezer, and that they often have been processed a step or more closer to eating. In many cases, they may be more economical to purchase than their fresh counterparts. Since they are already cooked, and will likely be cooked more once they enter the household, they are believed to be more sanitary than fresh vegetables.
While many consider frozen vegetables to be inferior to their fresh counterparts, the opposite is actually true in many cases. Vegetables purchased in the produce section of supermarkets have spent multiple days in transit, and many of the original nutrients will have leeched out. Frozen vegetables are frozen at their freshest, maintaining their nutrients. Freezing does change the taste and texture of the vegetables, however, making them less savoury to consumers.
The strategy of my company will be both Cost Leadership strategy and Differentiation strategy.
1.5.1 Cost Leadership Strategy
The main aim will be the adapting of a positive strategy concetrated in minimising as posible of the logistics costs mostly through the integration of the frozen vegetables supply chain. Many objectives in supply chain are important to achieve the cost competitive advantage such as cost,quality, dependability, speed and flexibility but for the time being my company will focus or give more emphasis in cost, quality and of course dependability. Towards this my company made a good financial aggreement with a supplier in France famous for their products quality, having ISO 9000 and HACCP. Also for the dependability and cost minimisation an angreement with expertice in logistics is allready made.
1.5.2 Differentiation Strategy :
Since there will be an alternative solution for the final customers( individuals or small retailers ) to order there frozen vegetables by using internet tools will be a different way that local market didn't used to. The website owns to my company and is specially designed for this purpose. The E- commerce will help individuals and small retailers to buy prodacts in lower prices that they used to while at the same time this might lead my company to higher profits since the same facilities more or less and technology sharing systems will be used for this purposes. The final consumers and the small retailers will benefit for the lower prices since no delivery will take place from that warehouse. Individuals or retailers must come to the warehouse that is located next to the TPL company's warehouse in Nicosia to get their orders.
1.5.3 Supply Chain Strategy
At upstream the processes will desighned to be a Lean strategy. The main aim will be the removal of all unesessary links from the supply chain, the elimination of possible order delay and the use of technologically advanced information transfer systems for achieveing efficiency in products flow. Human resource, facilities, inventory, equipment and time will be minimised in the most possible degree. The exploitation of the big retailers electronic system like EDI for the shelf replenishments or for the amount of products that is leaving from there stores and the on-line communication for sharing any information through supply chain there will provide efficiency in processes, the orders will set immediately, the exact customer demand will be known and errors or mistakes or miscommunication will be also avoided. The inventory stock that will be tightening up will be eliminated as possible. Except from the flow of the right and on time information significant role in lean strategy has the TPL company transportation system.
At downstream the processes will designed to be both Lean and agile. The use of the technology mentioned above can both reduce the costs but also increase the customer service. Customer service and cost minimisation will also be achieved by the effective transportation of the products through the TPL services. The same thing fit in the case of selling frozen vegetables from website. Customer satisfaction and low costs are dominant themes for any company. The agile part of the strategy will increase the customer service and customer satisfaction by increasing the speed of company's reaction and by its ability to tailor logistics to demands from individual customers.
1.5.4 Push-Pull strategy
In our case the push strategy it applies to that portion of supply chain where demand uncertainty is relatively small and thus managing this portion based on long-term forecast is appropriate aiming for the economies of scale. The demand forecasts orders will coming from the retailer but as it mentioned before the marketing department of my company will also in cooperation with retailers for providing as possible more accurate forecast. On the other hand, the pull strategy is applied to the portion of the supply chain time line where uncertainty is high, hence it is important to manage this portion based on realised demand (website orders). The main aim is to have as possible lower stock in warehouses but at the same time some stock will be held in company's owned small warehouse or to TPL warehouse for the immediate satisfaction of website orders. The whole strategy will supported by the fast information flow mechanism to transfer information about customer demand from Point of sale to the various participants in the supply chain.
1.6 Key drivers of logistics
The key drivers in the supply chain of frozen vegetables include facilities, inventory, information, transportation, price, service rendered.
As it already mentioned above there will be an agreement with a TPL company expertise in logistics. As a company, we own a head office located in central location visible and accessible to every one who wants to cooperate with us and a small warehouse in industrial area in Nicosia next to the warehouse of TPL Company's warehouse. This warehouse is located there strategically thinking in order to avoid extra transportation of frozen products from TPL Company's warehouse. For the time being the warehouse will work mostly as a picking point for individuals or small retailers which like to put their orders through the website. It allocates the special truck for bringing the frozen food from TPL warehouse, special refrigerators for approximately small quantities due to the fact that any extra quantities can acquired in minutes from the TPL warehouse, personal for checking the input and output quantity with simple bar code system, labours that preparing the on-line orders every day and skilled labour with forklift for lifting or uplifting purposes inside this warehouse. There will be no distribution towards retailers or individuals from this point but anyone of them will be in position to come with their trucks or vehicle to pick up their products. The TPL company owns two warehouses in Limassol (near the port) and in Nicosia (Dali industrial area). These warehouses are strategically located to serve any retailer in Cyprus (Nicosia, Famagusta, Larnaca and Pafos area). There are big enough to store and handle the frozen vegetables with care. Warehouses have the appropriate equipment such as special - electronic control refrigerators for storing and keeping in good condition the products, Radio-frequency identification (RFID) applied into a product for the purpose of identification and tracking using radio waves. At any time the stock level of the products can be identified very easily. Generally these warehouses are having all equipment and personel that are needed for receiving, checking, sorting, putting on shelf, loading and picking. All the above had played a significant role in the selection of the TPL company since they represent the basic strategy for accessing customer markets, and also these will have a considerable impact on revenue, cost, and level of service. The locations of the facilities are the possible paths by which the product flows through to the final customer and also involves a commitment of resources to a long-term.
Inventories exist at every stage of the supply chain as either raw material, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose is to buffer against any uncertainty that might exist in the supply chain. The push strategy that the company will follow is a strategy for minimising the stock level (money tight up) by the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels. The opposite is happening in my warehouse in case of website orders with the pull strategy due to the fact that the stock held there is the minimum could be since the respond is for the specific orders only. In any case the forecast of demand, information transmitted and orders that placed will increase or decrease the inventory hold in the supply chain.
The ability to transmit information throughout the supply chain can allow to companies to monitor the true demand and to reduce the inventory level throughout the supply chain and to achieve better integration between participants and processes in the supply chain. The major bet here is to make information on end-customer demand available to upstream operations. Electronic points of sale (EPOS) systems are used by many retailers and especially supermarkets. Sales data from check outs are consolidated and transmitted to the warehouses of each area and from then to my company and to the supplier manufacturing operations in France. The information will be shared also to the different participants of the supply chain by using the electronic data interchange system.
The supplier in France is responsible for the transportation of the frozen food to the port in France and at the same time is also responsible for the shipping of the products. Responsible for the receiving, transportation and distribution of the frozen food from Limassol port will be the TPL Company. The strategic decision of my company will be to import the products in large quantities by ship every two or three months. Of course this method will hold a relatively large amount of inventory to buffer against the inherent uncertainty throughout the supply chain. The latter will be balancing with the fact that is the cheapest way for importing products plus that will taking into account that the frozen products when they have the right treatment (refrigerators etc) can bear for long period according to their expired date. The routine and scheduling of the equipment from the TPL Company will provide more efficient supply chain.
My company will sell to my retailers in relatively low prices that will allow to me and my retailers at the same time to get profit. The price of the frozen vegetables will also be the lower in the market. (Cost leadership strategy)
1.6.6 Service rendered
My company will promote offers from time to time. Even lower prices for retailers when they make larger orders or the orders of the year. Offers buy one and take another one or the half price products will be given for a period for those retailers or individuals that put their orders on the website.
As it is mentioned above the electronic point of sale (EPOS) systems are used by many retailers especially supermarkets. The retailer manager analyse these information. These information are comparing with the past information and statistics for forecasting of the demand. Then as a retailer will forward their orders using electronic mains such as e-mail, fax or where there is the capability by the EDI system, to my company and more specific to the warehouse. The warehouse by using the RFID system will check the existing stock levels of the product prior to put the last order to the supplier using as before electronic mains such as e-mail, fax or where there is the capability the EDI system.
The calculations that are following were done according to the numbers provided and may not fully apply to our imaginary supply chain (e.g. our lead time will be greater)
Average Demand = D = 20,000 units a year
Lead Time = L = 2 weeks
Reorder Cost = R = € 100 an order
Holding Cost = Hc = 7% on unit cost = 0,07 X 20 = € 1,4 a unit a year
Standard Deviation = σ = 200 units
Unit Cost = Uc = € 20 a unit
Service Level 95% or 98%
For 95 % Z = 1.64 and for 98% Z = 2.05
The reorder size EOQ is equal to:
EOQ =Q = √2RD/H = √(2 X 100 X 20,000)/1,4 = 1690,3 units
The Variable Cost = Total Reorder Costs + total Holding Costs = DR/Q + HcQ/2
Vc = D X R + Hc X Q = 20,000 X 100 + 1.4 X 1690,3 = € 2,366.42
Q 2 1690,3 2
1,183,21 = 1183,21 è OK
We can see that the total Reorder Costs equal the total Holding Costs è There is no problem.
The Stock Cycle Length will be equal to T = Q/D = 1690,3 = 0,0845 years or
20,000 1,01 months or
4,39 weeks or
The variable cost a year can also be found by:
Vc = H X Q = 1,4 X 1690,3 = € 2,366.42
The fixed cost is equal to Fc = Uc X D = 20 X 20,000 = € 400,000.00
The Total Cost a year is equal to Tc = UcX D + Vc è
Tc = 20 x 20,000 + 2,366.42 = € 402,366.42
Conclusion: The above results say that we should order 1690,3 units every 1,01 months è ≈ 12 times a year . That is the optimal policy.
If the order is greater than 4000 we can get a discount of 5%.
Unit Cost = Uc = € 20 a unit X 0.95 = € 19
Holding Cost = Hc = 7% on unit cost = 0,07 X 19 = € 1,33 a unit a year
We assume that our orders are 5000 units.
Vc = D X R + Hc X Q = 20,000 X 100 + 1.33 X 5000 = € 3,725.00
Q 2 5000 2
400 ≠ 3325
This time it is obvious that the total Reorder Costs are not equal to the total Holding Costs.Actually the re-order cost decreases while holding cost increases.
We can then check the Total Cost :
Tc = Uc X D + Vc è Tc = 20 X 0,95 X 20,000 + 3,725.00 =
380,000.00 + 3,725.00 = € 383,725.00
The total cost now decreases by € 18,641.42 and there is a great possibility of changing my decision!
95 % Service Level
For 95 % Z = 1.64
Standard Deviation = σ = 200 units
Safety Stock = SS = Z X σ X √ LT = 1,64 X 200 X √ 2/52 = 64,32 units
EOQ = Q = 1690,3 units ≈ 1691 units
Reorder Level = LD + Safety Stock = 2/52 X 20,000 + 64,32 = 833,55 units
So the best policy is to order ≈ 1691 units whenever the stock falls to 834 units.
Cost of Safety Stock = Safety Stock X Holding Cost = 64,32 X 1,4 = € 90.04
98 % Service Level
For 98 % Z = 2.05
Standard Deviation = σ = 200 units
Safety Stock = SS = Z X σ X √ LT = 2,05 X 200 X √ 2/52 = 80,40 units
EOQ = Q = 1690,3 units ≈ 1691 units
Reorder Level = LD + Safety Stock = 2/52 X 20,000 + 80,40 = 849,63 units