Supply chain management supermarket performance

SUPPLY CHAIN MANAGEMENT

ABSTRACT:

The main purpose of the report is to analyze the performance of supermarkets with supply chain management and analyze how these supermarkets where able to withhold pressure and could succeed by developing various strategies implementes by them.

Since Analyzing all the supermarkets is not feasible we will study how the supply chian management helped Sainsbury’s during critical times.If we have to study the strategies implemented by Sainsbury’s during critical times then we have to study the Sainsbury’s financial market during 2000-2003 and 2008-2009. These two time periods were the critical moments handled by the Sainsbury. Analyzing the time period 2000-2003 shows how it could withstand the market when they wee on the verge of collapsing in late 90’s and Analyzing th time period 2008-2009 shows how Sainsbury’s were able to effectively handled the econimic crisis.

A trend Analysis is done to demonstrate the pattern of Sainsbury’s performance over the years 2005 to 2009. An Analysis of developments in the supermarket wee also developed for the years. In addition, analysis is done on how the company were ready to face any pressure by the downturn or any other reason. These analysis are very useful inorder to aviod the impact on the financial performace. These will atleast help them to decrease impact of these on the financial sector.

1.1 INRODUCTION:

Definition:

“Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers” – (Harald, 1996).[1].It comprises of all activities associated with the flow and transformation of goods from the raw materials stage to providing it to the end user along with the associated information flows i.e., it deals with the whole process of creating each element of a product to the final consumption of the product. Material and information flow both and down the supply chain.

The ultimate goal of any company for using the supply chain management would be to reduce the inventory supposed that the raw materials we needed are available. As the number of companies interested in improving their supply chain management are increasing many we b based application service providers are competing with the software systems provided with web interfaces for the company. These web based application service providers are ready to provide all or part of the SCM services for the companies who rent their service.

There are 3 different types of supply chain management flows:

The product flow

The information flow

The finance flow

The product flow:

It corresponds to the flow of goods to customer from supplier.

The information flow:

It corresponds to the flow of transmitting orders and updating the delivery status.

The finance flow:

It corresponds to payment schedules, credit terms, consignment and title ownership arrangements

There are 2 types of SCM software”

planning applications

These applications analyzes all the different ways to fill in an order and selects the best way to fill in this order. These applications used advanced algorithms for this.

execution applications

These applications mostly deal with the information on the goods like tracking the physical status of the application , managing financial information of all the companies involved (like payments done, payments pending etc.,) and they also deal with the management of the materials.

In some cases we need supply chain management applications which share data both inside and outside the enterprise. For these type of application they are developed from a data model. Proper data model is created so that all the inside data of the enterprise will not be distributed to the outside of the enterprise, To avoid any corruption of data this data is stored in database systems or data warehouses.

By providing a means to share data there can be huge benefits. These type of applications have the potential to improve time to market of products, they reduce the costs they also provide assistance in managing their resources and plan their future needs.

As the number of enterprises turning towards the websites and for the web based apps are increasing these websites became a good marketplaces. They are even ready to offer e-procurement market places where manufacturers and suppliers can trade, they also provide facility to auction bids with suppliers.

An overview of the supply chain system can be shown by the following diagram:

source: http://www-935.ibm.com/services/uk/bcs/html/bcs_scmsol.html

Some Definitions of Supply Chain:

A network of autonomous or semi-autonomous business entities collectively responsible for procurement, manufacturing, and distribution activities associated with one or more families of related products.

–Jayashankar

Supply Chain Management is the integration of key business processes across the supply chain for the purpose of adding value for customers and stakeholders

–Lambert

[1] Harland, C.M. (1996) Supply Chain Management, Purchasing and Supply Management, Logistics, Vertical Integration, Materials Management and Supply Chain Dynamics. In: Slack, N (ed.) Blackwell Encyclopedic Dictionary of Operations Management. UK: Blackwell.

A supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system.

–Lee and Billington

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.

–Ganeshan and Harrison

According to Wikipedia.org

Supply Chain Management (SCM): Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose of satisfying customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption

(http://en.wikipedia.org/wiki/Supply_Chain_Management).

Supply chain management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management. It also includes the crucial components of coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. More recently, the loosely coupled, self-organizing network of businesses that cooperate to provide product and service offerings has been called the Extended Enterprise.

—Council of Supply Chain Management Professionals (CSCMP)

1. 2 Need for Supply Chain Management:

From the past few decades there is a rapid increase in supply chains due to globalization. The products produced by the companies are no longer confined to a small areas. The globalization has inceased the extent to which products can be marketed and distributed. Companies have been trying to market their products all over the world. As the extent to which the marketing is done increases the supply chain grows bigger and bigger and becomes complex, this changes requirements for the Supply Chain Management. This asks for the change in software used for the supply chain.

In the past, maketing planning deistribution, manufacuring retailing and purchasing organizations each of the used to be operated independently. Each of these organiations followed their own plans which produced conflicts between the organizations. Most of them concentrated on producing maximum output so that it would lower costs. They forgot to consider impact on inventory levels and distribution capabiities. And the orders are taken with very little information. All these problems were because of the reason that there is no intergrated plan between the organizations. To solve these problems a strategy should be made which would provide integration between all the organizations which is call the Suppply Chain Management.

1.3 Evolution and scope of supply chainmanagement:

As the suppy chain grew longer, the order times and the delivery times increases. These increase in times will cause lot of problems like less production flexibility i.e., once an order is placed it is very difficult to change it, and it asks for higher levels of inventory. Inorder to solve these problem we need to speed up the supply chain. Even though we can speed up the supply chain to reduce these problems it is not always appropriate as we keep speeding up the supply chain the amount of the problem solved decreases i.e., after speeding up the supply chain to some extent, further speeding up of it might not yield better result. When this limit is reached this method no longer works. So we need to change and restructure the supply chain. This means we need to discuss and evaluate and reconsider every strategic level decision we made before.

We can define the supply chain as the flow of information and material to and from suppliers and customers. The scope of Supply Chain Management (SCM) is to:

1. Reduce the total supply chain cycle time and costs.

2. Speeding up the supply chain process and its flexibility to customers.

3. Increase the capacity, utilization, and profit.

4. There are four fundamental principles for SCM :

(a) Use the most simpler way of information flow from producer to the comsumer.

(b) Use the most simpler way of material flow from producer to the comsumer.

(c ) Prepare a smoothe possible way of production and usage.

(d) Reduce the lead times and the need for inventories so that there will be enough time so solve any problems if appeared

Evolution of Supply chain management:

There are exactly six major movements that can be seen in the evolution of supply chain management. They are Creation, Integration, and Globalization, Specialization Phases One and Two, and SCM 2.0.

Creation:

The concept of supply chain management came to great importance with the creation of assembly line in 20th century. During this period the the supply chain management manily needed large scale changes like re structuring and downsizing driven by cost reduction programs .

Integration:

The development of Eectronic Data Interchange (EDI) in 1960’s and the developmet nt of Enterprise Resource planning (ERP) systems in 1990’s were the greatest break though in this period. However with the use of internet-based collaborative systems. This period has both the increasing value and cost reductions through integration.

Globalization:

This period is supply chain management is used organizatons with the goal of increasing their competitive advantage and reducing costs through global sourcing. This movement gives attension to global systems of supplier relationships and expansion of supply chain management over national boundaies and over into other continents.

Specialization -Phase One: Outsourced Manufacuting an Distribution:

During 1990’s companies were focusing on a apecialization model. These model which soleley focus on the core competencies. This mode works for design, manfacture, distribute , sell and provide service for the product. The set of partners might change depending on the region and availability of materials. So each product produed may have its own unique characteristics.

While the industry solely gets its focus on the core. It frequently sells all the non-core operations to other companies increasing the supply chain management.

Specialization -Phase two: Supply chain management as a service

This movement began in 1980 where industries focused into aspects of supply planning, collaboration, execution and performance management. The ability to quickly create products by using the best partners to contribute to the overall vale chain itself, which increases overall effeciency.

Outsourced technology for supply chain began in 1990’s and primarily focused on transportation and collabpration. It progressed from Application service provide in 1998 -2003 to On Demand model from 2003-2006 to Software as a Servie modell currently in focus.

Supply Chain Management 2.0

This movement describes the development in the supply chain management its methods and tools used in this decade. Web 2.0 uses wolrld wide web that is meant to increase collaboration, interction comng users. The core part of it was to navigate through the information available on the web . It is a path to the SCM results, processes , methods, tools and delivery options to guide companies for quick results due to effects of globalization and rapud fluctuations in prices.

Goal and Principle of SCM

GOAL:

Providing Quality products and support to customers at the least possible total cost

SCM Principles:

1. Try to know th product closest to the customers and speed conversion across the supply chain.

2. Manage the raw materials wisely to reduce the total cost of owning materials and services.

3. Develop supply chain that supports multiple level decision making

4. Guage the success of the product reaching the customer effectively and effeciently

5. Listen to market vibes and change the supply chain accordingly

6. Customerize profitability of customer

7. Serve serment customrs based on service needed and adapt the supply chain to serve with profitability.

Cycle time reductions:

By considering constraints as well as its alternatives in the supply chain, it helps to reduce cycle time.

Inventory costs reductions:

Demand and supply visibility lowers the requirements of inventory levels against uncertainty. Ability to know when to buy materials based on the customer demand, logistics, capacity and other materials needed to build together.

Optimized transportation: By optimizing logistics and vehicle loads.

Increase order fill rate: Real-time visibility across the supply chain (alternate routing, alternate capacity) enables to increase order fill rate. Analysis of the supply chain management can help to predict propagation of disturbances to downstream.

CASE OD SAINSBURY’s

Sainsbury having reputation for its high quality grocery chain in UK. It was shaws supermarket in the US . In mid 90’s it had a annual revenue of $27 billion from 450+ stores, it was a crisis time of Sainsbury’s, everyone thought that Sainsbury may no longer keep up as most of the market profits drifted towards it longtime rival Tesco with also an competitive pressure from Asda. Sainsbury had 11 million customers at that time who were looking for products with wide variety of choices and high quality products with good customer service but with no higher prices. Suppliers were disappointed with the unsteady order flow and the shareholders have seen 30% drop in earnings.

When executives were looking for the reasons for the failures it was clear that they had an outdated supply chain management with 30 year old WMS(Warehouse management system)which was not sufficient to handle 2000 suppliers, 35000 SKU’s(Stock Keeping Units) and 800 million cases of product each. And the applications developed for the sainsbury where are in developed independently using the available data. As the number of applications increased the system grew complex and in one suh case when a order was placed differently all of the depot systems crashed. Having more than 400 applications developed inhouse which are complex and old was not helping either.

The change came in 2000 after Sir Peter Davis joined as CEO. He realized that most of the bussiness is being affected by the IT systems. Davis stopped all the inhouse projects and outsourced all the IT function to Acceture. The primary goals were to halve the IT operating costs and produce user friendly applications. The transformation accounted for $1.8 billion which would update all the software applications and the hardware and also provide strong data security and low cost of ownership.

Accenture could not do everything for Sainsbury’s. Even though it provided with all the core technology it was important that it integrate all the best technologies to lower the the efficiency. Sun Microsystems Inc provided the necessary help for sainsbury’s in this. With an experience of developing more than 5000 supply chain managements ,having more than 100 software partners it also had cutting edge technologies like wireless mobility and Auto ID(automatic identification of parts and matrials) which fitted Sainsbury’s needs perfectly.

At present Sainsbury is one of the top three retailers in UK. It has more than 800 stores and has a vast amount of online shopping service which offers both the food and nonfood products. It now has around 18.5 million customers every week of which 100,000 customers are through online.

Even though various thing accounted for the success of Sainsbury’s. There are 5 important things that contributed greaty to the success

1) Low cost of ownership

Sainsbury placed a limit on the containable total costs. Accenture provided then lot of savings in hardware expenditure by providing them with the Sun Fire V880 servers(servers that are widely used ffor warehouse management). These servers replaced all the servers with all the servers from all the Sainsbury UK depots. The total savings amounted for $7.5 million.

The IT service costs are also minimized because of the simple and standardized architecture with V280 servers. And also they were operaiting their servers on solaris OS which is a reliable OS. Which provided for 99.95% uptime according to the contract provided by the Accenture.

2) Partner led business model

Accenture and Sun Microsystems Inc., have greatly contributed to the success of the Sainsbury’s While Accenture provided all the core technologies for Sainsbury’s, Sun Mircosystem’s contributed for the advancement and easy to handling of all the applications developed. While Accenture was providing a great deal of flexibility and great choice, Sun provides assistance for to help customers integrate and streamline their business processes.

3) Data Integration

Accenture had done really one is providing with the core compenents of the sainsbury’s. This can be easily said because not many problems had showed up while integrating various supply chain applications on top of he Solaris and other Operating system. Sun also provided the right architecture which helped a lot in providing the right framework.

The JES(Java Enterprise System) was the middle layer for all the infrastructure at Sainsbury’s. Which provided services like web access, identity management and directory services. The JES has three fundamental elements

(a) a new software

(b) new systemetic approach

© a new business model.

When the three of these combines we can provide system. Sun worked with SeeBeyond so that it can provide with the simple architecture and also a flexible one. The JES provides with a wide variety of features. JES provided the essential component like version control, updating at regular intervals of time which intime reduces the IT overhead and maintenance costs.

4. Robust security

In early 2000 when Sainsbury’s were using the windows PC’s the front office was attacked by a worm(type of computer worm which speads rapidly to all the computers in the network). Sainsbury’s was out of action for several hours which accounted for a huge loss. If the similar thing happened with the supply chain then it can tolerate it.

After this incident Sainsbury’s and accenture focused on the security and they replaced all the winows PC’s with the stable solaris Operating system and Sun’s high reliability servers. After that Sun introduced several layers of security for strengthening the case for all the new softwares developed like Auto ID.

5) Open standards

All the IT operations outsourced to accenture were to be done in open standards. So that it would not be a problem for future plans. And also it enables to use various commerically availble software to be used without minimal issues.

Sun suppports all the standards of Electronic Product Code(EPC) which would be very helpful for the future generaion supply chain networks.. With the deal made with Intel rival AMD made the point of open systems, because of the high reliability of UNIX servers.

“Open systems are the systems that allows third parties to make products that plug into it. For example, the PC is an open system. Although the primary components are controlled by Microsoft, Intel and AMD, hardware devices and software applications are created and sold by other vendors for the PC. The term “open systems” referred to the Unix world because Unix ran in more types of computer hardware than any other operating system. “[www.your definition.com]

The first phase of supply chain transformation completed in 2004. Sainsbury’s incured profits in varius sectors and with very flexible and standard systems placed allowed the company to elimiate the compexity of various issues and it could cut down the IT operating costs by several folds.

During the 2003 fiscal year there was a increased revenue of 2% and boosted operating costs by 9.4%. The online sales grew by 35% and set a standard ground for the coming years.

Issues faced in 2004:

In october 2004 Sainsbury’s reported its first ever loss after a failed IT project. It created a huge uproar in market. Sainsbury’s wrote down £140 million in IT assets and £120 million in automate distribution. Due to the overhal the stock price hae went very low. To get back things to normal it axed 750 head office jobs while taking on 3000 staff to stock shelves.

And the company started to concentrate on rebuilding its IT team inhouse and negotiations have been done wih Accenture. Sainsbury brought back Swan Infrastructure (the company setup to run transformation program) for £553 million.

Problems with the Accenture started in here when Sainsbury’s found that Accenture has been give major responsibilty of all the problems. And Accenture distanced itself fom the supply chain problems and stressed that its contract did not cover the problem areas.

Now if we think about how sainsbury survided over years and hows it doing now we need to know how it has gone through the downturn because of the economic inflation. Which is discussed in the paragraphs belowL

Income Statement

2009 (£m)

2008 (£m)

2007 (£m)

2006 (£m)

Sales

18,911

17,837

17,151

16,061

Gross Profit

1,036

1,002

1,172

1,067

Total Operating Income

18,968

17,867

17,168

16,062

Balance Sheet

2009 (£m)

2008 (£m)

2007 (£m)

2006 (£m)

Goodwill

114

114

112

109

Stocks

689

681

590

576

Cash & Equivalent

627

719

1128

1080

Total Current Asset

1591

1610

1915

3845

Total Current Liabilities

2919

2605

2721

4810

Long Term Debt

2,177

2,084

2,090

2,178

Cash Flow

2009 (£m)

2008 (£m)

2007 (£m)

2006 (£m)

Net Cash Generated from Operating Activities

1,206

998

830

780

Proceeds from disposal of Property, plant and equipment

390

198

106

164

Dividends paid to shareholders

218

178

140

131

Cash at end of year

599

601

765

842

Sainsbury Key Financial s 2006-2009

Source: London Stock Exchange (2009)

Despite the drip in the gross profits for year 2008 Sainsbury’s profits continued to increase because of the various strategies placed by Sainsbury’s. The table shows the Sainsbury’s performance over the past few years.

Maclaney and Atrill stated, ‘Profitability ratios provide an insight to the degree of success in achieving the purpose of the business’. The table below demonstrates Sainsbury profitability ratios.

2009 (%)

2008 (%)

2007 (%)

2006 (%)

Remarks

Gross Profit Margin (GPM)

§ Industry – 3.53%

5.48 (0.14% decrease from 2008, 1.35% decrease from 2007

5.62 (1.21% decrease from 2007)

6.83

(.19% increase from 2006)

6.64

GPM increased from 2006 to 2007 by 0.19%. In 2008, it fell by a margin of 1.21% from 2007. GPM in 2009 continued to fall in small s.

Net Profit Margin (NPM)

§ Industry – 0.92%

3.56 (0.59% increase from 2008, 0.53% increase from 2006)

2.97 (0.06% decrease from 2007)

3.03 (1.60% increase from 2006)

1.43

NPM increased by 1.60% from 2006 to 2007. During the downturn in 2008, it fell by only 0.06% from 2007. However, it increased by 0.53% in 2009.

Return on Capital Employed (ROCE)

9.46 (2.40% increase from 2008, 1.87% increase from 2007)

7.06 (0.53% decrease from 2007)

7.59 (4.70% increase from 2006)

2.89

ROCE almost tripled from 2006 to 2007. In 2008, it fell by 0.53%. In 2009, the firm showed the largest increase over the past four years.

Sainsbury Profitability Ratios 2006-2009

Source: London Stock Exchange (2009)

The ratios above shows a decline in profitability in 2008 when compared to 2007. The reason for the decline is due to the economic slowdown of UK which led to the changes on policies and practices for a way to overcome the inflation and increases in food prices. However in 2009 the profitability increased by approximately 3% overall. This was possibe by instigating the purchasing behaviour of the customer’s and to attract them by reducing the wasteges by revamping and intensily increasing promotions.

The Gross Profit margin decreased slightly by 1.35% and net profit margin increased by 0.59% over 2008 and 2009. The return of the capital increased by 20% mainly due to property disposal and using that to finance the overall operations. From 2007 to 2008 it decreases slightly due to oil related costs and increased business rates.

Investment Ratio Analysis

2009

2008

2007

2006

Remarks

Earnings per share (EPS)

16.60

(Decreased by 2.50% from 2007 and 2.6% from 2007)

19.10

(Decreased by 0.10% from 2007)

19.20

(Increased by 15.40% from 2006)

3.80

From 2006-2007, there was a 20% increase in EPS. From 2007-2008 there was 10 pence margin between the s. It decreased in 2009 by 2.50%

Diluted Earnings per share

16.40

(Decreased by 2.20% from 2008 and 2.50% from 2007

18.60

(Decreased by 0.30% from 2007)

18.90

(Increased by 15.10% from 2006)

3.80

DPS remained moderately stable during the downturn but decreased slightly by 2.20%

Beta Ratio

–

0.73

(Increased by 0.18% from 2007)

0.55

(Decreased by 0.28% from 2006)

0.78

Beta ratio showed a slight decrease in 2007 but increased by a mere 0.18% in 2008.

Sainsbury Investment Ratios 2006-2009

Source: London Stock Exchange (2009)

Earnings per share fell by 10 pence during the economic downturn and declined further by 26% in 2009, therefore shareholders gained lower rate per share in 2008-2009. Diluted Earnings Per Share slightly declined by the same rate from 2008-2009. Beta ratio tells that the there is a little drift in the shares when compared to the market since it remains at less than one. In 2008, beta ratio increased a little due to downturn of the economic comditions but still the beta ratio remained under one.

Final Analysis:

Sainsbury’s operates in a highly competittive environment. There are 4 major supermarkets Tesco, Asda, Sainsbury’s, Morrisons which account upto 75% of the UK’s market which can be clearly seen in the picture below.

All the 4 supermarkets follow the same low cost strategy. As the consumers are benefitting there is a increase in demand and the profit is steadily increasing. Each one of them is trying for the short time strategies so that they can gain the customers. But from the past few years the market is steady and there is no drift towards any supermarket. All o them having a steady state of market share. There is neither a decrease nor increase in ther market share.

Market Share of the Too Four Supermarkets in the UK

Source: www.marketresearch.co.uk

Changes in the UK Financial Market:

Due to econmomic crisis their were many changes occuring in the market.

Increase in unemployment:

The UK labor market was severely affected by credit crisis. This create lot of lay offs and unemployment increased from april 2008 to september 2008. The number of unemployment rose to 164,000 which is the highest recording since 1990. The unemployment rate was 5.8% for these 6 months. Due to this their was a sudden declination on the demand and the market was hit.

Source: http://www.economicshelp.org/blog/economics/uk-economy-2009/

Due to inflation the costs increased and the market shrink due to less demand as consumers has a difficult time buting things.

Due to downturn of the economic crisis the supermarkets can no longer limit themselves for just a few food p