Case Study – Direct Food Supply (DFS

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Company background DFS is a rapidly growing food distribution and wholesaling company located in the North East of England. It was founded by Mr Abbas, who started the business from a small storage room with only 3 employees back in 1985. From the mid 80s to the late 90s, DFS experienced tremendous growth in business volume (sales). In order to meet the increasing demand for its services, Mr Abbas began an ambitious expansion plan in 1999. In order to fund this expansion, Mr Abbas decided to join forces with three other major investors - Mr Jones, Mr Mehdi and Mr Dimitry. As part of the plan, the company’s operations were relocated to a bigger, dedicated site in an industrial estate near Gateshead. DFS subsequently employed more staff, extended its existing production capacity to include facilities such as industrial chill rooms (30 pallet* space), freezers (200 pallet space with racking system) and a massive dry good storage area (480 pallet space with racking system). Expansion work was completed towards the end of 2000, and the “new” DFS became by far the largest food supply and distribution company in the North East of England.

*pallet - a small, low, portable platform on which goods are placed for storage or moving

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Since 1999, the four significant owners have all remained as major shareholders. Each holds the same proportion of ownership at 25%. Of the four of them, two (Mr Abbas and Mr Jones) are involved in the day-to-day running of the company in their official capacities as co-Managing Directors. Annual turnover was £5m in 2004. Till today, DFS remains primarily involved in supplying raw materials and packaging to an extensive range of fast food outlets mostly within the North East region. The North East Fast Food Outlets Supply and Distribution Market Traditionally, the fast food supply and distribution market within the region has been dominated by DFS. Competitive pressure was relatively low as there were a limited number of competitors (mostly general distributors) who supply raw materials and packaging specifically to fast food outlets (i.e. local fish & chip shops, burger bars, pizza outlets, Indian & Chinese takeaways). This was despite the steadily growing number of fast food outlets in the North East of England. The few notable competitors in the area were “QUICK Supply” and “Express Food Distribution”, both rather well-established but with relatively smaller market share in the region compared to DFS. All three organisations (DFS, QUICK and Express) operated quite independently, each with their own “list” of fast food outlet customers (partly due to the fact that the growing fast food industry being able to absorb their combined expanding capacities). Since the mid 2000s, however, DFS’ two competitors are becoming more aggressive in their expansion, especially in trying to capture market share from DFS. Even so, in
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order to keep margins high, all three organisations are unwilling to become engaged in an all out price war. Another significant development that is of particular concern to DFS is the fact that many new competitors have entered the market in recent years. This is hardly surprising as supplying raw materials to numerous fast food outlets around the North East is a highly lucrative business. This increasing market pressure on DFS both from current and new competitors have persuaded the company’s four major shareholders to respond by undertaking a bold restructuring of the business. This mainly involved the creation of a sister trading company named Sopco. Essentially, Sopco imports branded goods that are in high demand from suppliers outside of the UK. By negotiating sole distribution rights to those goods/brands of products within the UK, Mr Abbas and the other three major shareholders hope that they will be able to limit the expansion of its competitors, especially in preventing them from taking market share from DFS itself. This is because, with sole distribution rights, all competitors would have to purchase these goods (that are demanded by their customers - the fast food outlets) from Sopco. Therefore, the strategy is to make use of Sopso to supply the entire supply and distribution market with such goods, including its sister company DFS. The positioning of both DFS and Sopco in the North East fast food outlets supply and distribution market is depicted in the diagram below.

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Diagram 1: The North East Fast Food Outlets Supply and Distribution Market

Sopco itself is a small outfit consisting of only three employees and is managed by the other two major shareholders (Mr Dimitry and Mr Mehdi). It has, however, significant buying power from both inside and outside of the European Union. In effect, buying in large quantities (bulk) allows them to offer their goods at the cheapest prices. It is hoped that the combined market share and buying power of both DFS and Sopco will prevent competitors from being able to purchase similar substitutes/alternatives at lower prices without sacrificing considerable amounts of quality. It must be noted, however, that even though Sopco is a sister company, it has no intention of selling any of its prized goods to DFS at a discount. This is to maintain its selling power in the market by being able to cover as many food distributors and wholesalers as possible. This will steadily increase Sopco’s cash flow, which is highly attractive for all four major shareholders. Hence, Sopco’s operations mainly involve taking orders from food distributors and wholesalers in the UK, ordering them with the suppliers and manufacturers and facilitating direct deliveries to these customers. Currently, Sopco supplies about 70% of DFS’ total food and packaging products. Even with this seemingly good overall strategy adopted by DFS to keep its competitors at bay, these rivals have also responded with a number of rather aggressive strategies of their own, thus creating a highly competitive environment. The Current Competitive Environment
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In terms of the increasing competition within the fast food distribution market, the number of competitors in the North East of England increased to nine in 2008. One of the biggest newcomers was “Premier Foods”. This competitor has opted for a highly aggressive market entry strategy. It is offering the lowest prices by pricing their goods even lower than the break-even margins (i.e. at loss-making prices) so that it is able to sign up new customers quickly. In fact, it did manage to wrestle some of the shared customers away from DFS using this strategy of “underpricing”, but the overall quality of their service remains poor, especially in terms of on-time delivery and flexibility. DFS, on the other hand, has retained the strategy of differentiating itself from competitors by being distinctive in quality of service. Other new competitors (Joe’s Supply It, The Flying Singh, Get-It-Delivered), who have only entered the market in the past two years, are much smaller in size and have much simpler operations. These competitors typically operate from cheap shop lots using manual-labour (often with members of their respective extended families as workers). As they service only a small list of customers within a relatively small area, they are able to respond to customer orders very quickly and are able to offer frequent, as-and-when-needed delivery service. Conversely, with many hundreds of customers to service across the region, DFS can only offer regular, fixed-time-of-theweek delivery even with its bigger and more extensive fleet of trucks. Even more worryingly, since the 2008 economic crisis, many more fast food outlets are choosing and/or considering sourcing cheaper raw materials and packaging in order to cut costs. This is because intense competition, frequent discounting and the popularity of “set meal deals” have reduced most fast food outlets’ profit margins considerably. In response, some newer competitors such as The Flying Singh have begun directly sourcing low-quality but extremely cheap goods from Eastern European and Asian countries (and, in effect, bypassing Sopco). These low-quality goods have proven to be very popular and are increasingly “acceptable” to many fast food outlets, especially those who are struggling for survival. In hard economic times, cost may be the sole consideration when sourcing raw materials even at the expense of reputation and quality.
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DFS, on the other hand, has very strong and long-standing relationships with its high-quality and well-known branded suppliers. Even with its superior economies of scale in operations as well as bulk buying power, the average costs of these high quality goods are still considerably higher than the generic, low-quality materials sourced by DFS’ new competitors in smaller quantities. The dilemma is that, if DFS terminates such long-standing relationships, the discounts and good trading terms developed over many years will be lost. Also, DFS has to consider its strong reputation for high quality and dependability. At the same time, DFS’ directors are fully aware of the fact that, as a business, it needs to take into account the demands of an ever-growing list of customers for more cost-effective raw materials and packaging. In fact, according to feedback from DFS’ own delivery drivers, some of its customers have been buying more types/amounts of products from cheaper suppliers such as The Flying Singh and lesser from DFS lately. This intense market pressure applied by new competitors has forced DFS to establish another depot in Middlesbrough to expand its market geographically. A purpose-built warehouse with state-of-the-art facilities was built on a piece of newly purchased land (30 pallet space chill room, 200 pallet space freezer and 800 pallet space dry goods, all with racking systems) in 2011 in order to realize its new strategy and push its products and brands market further south. This strategy of expanding its market to different regions is an ambitious one, especially as the threat of losing further market share in its primary North East region still needs to be addressed.

Supply Chain Management and Logistics DFS orders goods mainly through Sopco. Essentially, Sopco processes DFS’s orders to suppliers (manufacturers) through its own order-placing system. The upstream manufacturers, on the other hand, deliver their goods directly to DFS but issue invoices to Sopco to charge them for the deliveries. In turn, Sopco pays these manufacturers and then invoices DFS. Therefore, both order information and money “flows” from DFS to Sopco and then on to the various manufacturers.
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Sopso employs two independent logistics companies to transport the goods from various UK manufacturers or UK ports (for deliveries from other countries) to DFS. “Falcon Transport” is the chosen independent contractor to deliver dry goods, whilst “Speedy Arctic Transit” delivers all frozen and chilled goods. Both companies have their own storage warehouses to store Sopco’s orders for a short period of time in order to make sure they deliver according to schedule. Put simply, goods are stored in their own warehouses after collection from UK manufacturers/ports and then redelivered to DFS from such sites. Falcon Transport and Speedy Arctic Transit could be considered as “consolidating” hubs where most goods are accumulated. This is because DFS could order goods from other manufacturers (who are not linked to both Falcon and Speedy in any way) that could be sent to either Falcon’s or Speedy’s warehouse first before being delivered together using the same transport. The flow of material and information between manufacturers and DFS and the role of the two logistics companies is depicted in the diagram below.

Flow of Dry goods Falcon Transport

UK and Foreign Manufacturers Flow of information and money Sopco

Flow of Frozen and Chilled goods Speedy Arctic Transit
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DFS

Flow of information and money

Diagram 2: The “Upstream” Supply Chain for DFS

Within its depots in Gateshead and Middlesbrough, DFS uses an ordering, stocking and Customer Relationship Management system called “Sage Line 50” where the reorder levels, inventory, sold quantities and other useful information can be obtained. The purchasing team places orders based on forecasting future demand and supply and also the level of current inventory. Sopco, as the sister company, can have access to a hard copy of the DFS stock information and reports on request. DFS doesn’t keep any information from manufacturers in its “Sage Line 50” software, while Sopco does not keep any information relating to DFS’ customers. Sopco keeps all information from manufacturers and suppliers and also information from two logistics companies in their system. As we can clearly see, the information management activities in DFS closely involve Sopco and these two logistics companies. In fact, DFS only retains limited information from its suppliers, such as purchase order and proof of delivery, which is obtained when the goods are actually delivered to DFS’s doorstep. When they arrive, ordered goods are off-loaded, cross-checked with documentation and then inspected for quality purposes at the delivery point. Under the current supply chain arrangements, even though products that are supplied by both Falcon and Speedy have predictable delivery timeslots (as they do keep high levels of stock in their respective warehouses), DFS is finding it difficult to predict when their orders will actually arrive. This is because when they order goods from other suppliers to be delivered to either Falcon or Speedy, so that all ordered
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goods can be delivered at the same time to their Gateshead and/or Middlesbrough sites, these other suppliers are often unable to provide a specific delivery time and date (especially those that supply goods from foreign countries through UK ports). This often results in Falcon and Speedy having to postpone delivery in order to wait for the arrival of such goods to their respective warehouses. DFS found that even when ordering direct with these other suppliers (bypassing Falcon and Speedy), the outcome is still the same. There is much uncertainty as to when such goods will actually arrive on their doorstep. As a consequence, DFS’ warehouse operations managers have complained that planning cannot be done effectively due to such uncertainties. There are times when their employees are all at work but there are few goods to be handled, while at other times, there are many pallets of goods arriving but insufficient workers scheduled to be on duty at those times. The situation above is affecting DFS’ ability to deliver goods to its customers on a more flexible and dependable basis. The alternative would be to keep consistently high levels of inventory, which incurs significant storage and other overhead costs – a situation which the accounting department and also DFS’ directors find increasingly unacceptable.

Accounting
Given the intense competition currently faced by DFS in the fast food outlets supply and distribution market, Mr Abbas and Mr Jones (in their role as co-Managing Directors) have expressed their concern regarding the company’s increasing overhead costs. The typical approach to budgeting that the company has taken for many years is to simply add a small increment to each department’s actual spending for the previous financial year (to account for inflation), while making some adjustments for any specific cost increases or reductions. Given the current
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competitive environment, there is increasing concern about how to keep costs under control. At a recent board meeting, Mr Abbas said the directors should take a harder line with their managers and supervisors if DFS is to become more competitive in terms of cost. He suggested that for the next financial year, managers who exceed their budgeted spending should be penalised in some way, including the possibility of them losing their jobs. He commented, “We should stop listening to their excuses! If they can’t do their jobs properly then they should go! We need to set the cost budgets at the absolute minimum possible; don’t ask them what they think, they’ll pad the budgets out.” Mr Jones has also expressed concern about the management information pack that is supplied to the directors at the board meeting. “While the updated accounts information given such as the Profit and Loss account, Balance Sheet and other budgetary information is useful, I think we need to a adopt a broader set of indicators to judge the performance of the business particularly given all the plans we are currently considering”.

Marketing
The Marketing Department provides the link between DFS and its customers. First established in 1995, it was originally set up by Verity Thompson and Guy Smith. Following DFS’s expansion a decade ago, a further two employees were recruited Rachel Hemming and Connor Brown. Both Rachel and Connor had experience of working in the food marketing industry and were given the task of developing the company’s website. Nevertheless, after eight years of working for DFS in 2008, Connor was appointed the new Marketing Manager for Premier Foods, reducing the team to three. After three years of working with only three members of staff, in 2011 a further two employees (Joey Atherton and Emma Dunlop) were recruited with the expansion of the Middlesbrough site. Information on their specific job roles is given below:
Name Position Background Job role Length of 10

service Verity Thompson Marketing Director Verity worked as a marketing manager before joining the DFS in 1995 Guy worked in a number of junior marketing roles after leaving university, before joining DFS in 1995 A graduate from Northumbria University (BA Business Studies), Rachel worked in the marketing department of a food manufacturing business as part of her placement and joined DFS in 2000 Joey met Rachel whilst at Chartered Institute of Marketing (CIM) event and joined DFS in 2011 From business and/or marketing programmes at Northumbria University and joined DFS September 2011 To oversee all marketing and sales activities within DFS To assist Verity to overseeing marketing activities within DFS 17 years

Guy Smith

Assistant marketing Director

17 years

Rachel Hemming

Online and Sales manager

To work with Google and the web designers to promote DFS and look after their online interests

12 years

Joey Atherton

Marketing and sales coordinator

Marketing and sales support

Less than 12 months

Emma Dunlop

Placement student

Ad hoc research projects and interim admin support

Less than 12 months

Despite the new appointments, the team have been struggling to keep on top of their workload. Much of their time is spent answering the phone and dealing with incoming calls from advertising agencies trying to sell them advertising space. This has resulted in the team adopting a more reactive rather than proactive approach to marketing. Furthermore, since November, Emma Dunlop has been absent on sickness leave. This has had a major impact on the department as Emma had just started some research with existing DFS customers exploring levels of satisfaction. Emma’s absence has also impacted the number of electronic enquires, with many of the incoming emails not being looked at or actioned since November 2011. To make
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things worse, there has never been a systematic approach to recording incoming enquires. DFS is a well-established brand, with most of its business is based in the North-East region. Since 1985, DFS has carried out B2B (Business-to-Business) advertising with its customers; however, most of its business has come from word of mouth. DFS has also benefited from strong links with the Chartered Institute of Marketing. In fact, Verity and Guy have delivered a number of presentations to the Institute about the importance of customer service. However, to date DFS has not conducted any research into price and this remains an area of marketing that both Verity and Guy have little experience in managing. Verity Thompson has identified some key marketing challenges for DFS. Despite traditionally having little competition, Premier Foods now poses a real threat to DFS’ current business. A list of the most prominent problems is as follows: 1. Lack of clear articulation between the business objectives and the marketing objectives; 2. No systematic process for new product development; 3. Lack of a Marketing Information System, with ad hoc reports being commissioned and no organised system for pooling and disseminating information to decision makers; 4. Little awareness of satisfaction or dissatisfaction; 5. Limited KPI’s to benchmark the team’s performance against; 6. No clear brand strategy for the NCF branded range; 7. Lack of an expansionary budget.

Human Resource Management
DFS has paid little attention to the development of a strategic approach to the management of its human resources. In particular, there has been no significant focus on a strategic and integrated approach to sustaining organisational success by improving staff performance through development of staff capabilities.

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In addition, as a result of the increased competitive pressures facing the business, it has become apparent to the co-Managing Directors that the paybill for the company is simply too high. Having considered the current pay bill and inadequate arrangements for pay and performance that are currently in place, the directors have invited a specialist HR consultancy to provide expert advice on ways forward to address the following issues: 1. To significantly reduce the company’s overly high pay bill. Directors are looking for a 10% reduction this year with any subsequent rises to be “rigorously based on performance and only performance”. 2. There are no records of reasons for the awards of bonuses at senior levels. Bonuses have been agreed at un-minuted meetings between employees and senior staff. There is minimal accountability within the current organisation. 3. The co-Managing Directors cannot see how the objectives and performance of different departments have been reflected in performance objectives and rewards. The current numbers of employees within the business with their existing levels of remuneration are as follows:

Co-Managing Directors (2) £120,000 + bonuses of up to 50% of salary related to operating profits of the company. Other Directors (2) £80,000 + bonuses of up to 30% of salary related to operating profits of the company. Managers (5) £35000-£60000 with the actual salary being based on annual performance review. Supervisors (5) £20000-30000 with the actual salary being based on annual
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performance review. Operatives (50) £7-£8 per hour (for a 40-hour week). In addition, all employees are members of the Company Pension Scheme, with DFS currently contributing 10% of salary for each employee.

For the past ten years, the minimum and maximum figures for each pay grade have been increased by the inflation rate (RPI) recorded in January. Most employees above the operative level have become used to a performance review increase of around 5% a year, but this arrangement is entirely informal and increases far in excess of this have been offered in the past for particular successes. Current salary levels within the business (for all roles) are considered to be higher than the average market rate and, although the current numbers of staff are justified in respect of current workload, it is considered that these numbers could be reduced through both reorganisation and the introduction of more effective performance management systems. The business is not unionized and the operative jobs at DFS are highly sought after. Employee turnover and levels of absenteeism are low throughout the company. Workers and managers are said to value the “family atmosphere” at DFS and the organisation has no difficulty in recruiting staff.

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