Case 2.

Inventory Management
a. Continuous Review Policy 1 (HDTV sets)
Assume a distributor using a Continuous Review Policy: inventory level is
continuously reviewed, and if an order is placed, the order arrives after the
appropriate lead time.

Assume further the following:

 The distributor orders HDTV sets from a manufacturer and sells to
retailers.
 Assume daily demand to the distributor to be normally distributed with
a mean (= expected daily demand) of 147 sets and a standard
deviation of 80 sets. This is all demand information available.
 If a retail order is placed when there is no inventory on hand to fill the
order (so: when the distributor is stocked out), the retail order is lost.
 The fixed ordering cost for any order the distributor places to the
manufacturer is 800 Euro.
 The cost of a HDTV set is 300 Euro (= product cost).
 The daily inventory holding cost for the product is 0.25% of the product
cost.
 The replenishment lead time for an order placed by the distributor is 4
days.
 The expected service level is 95% (assume the corresponding z-value
to be 1.65).

Questions

Calculate the reorder level R, the (optimal) order quantity Q, the expected
average inventory level AVINV, the expected order frequency or time between
orders ETBO and the expected annual inventory turns EAIT.

b. Continuous Review Policy 2 (refrigerators)

Imagine a large retailer ordering refrigerators from a distributor, and using a
Continuous Review Policy: inventory level is continuously reviewed, if an order is
placed, the order arrives after the lead time.

Assume further the following:

 The daily demand at the retailer is normally distributed with a mean (=
expected daily demand) of 140 units and a standard deviation of 64 units.
This is all demand information available.
 If an interested customer arrives at the retailer and no inventory is on hand
(so: when the retailer is stocked out) the potential sale is lost.
 The fixed costs for an order the retailer places to the distributor is 1792
Euro.
 The cost of a refrigerator is 128 (= unit cost) Euro per unit.

1
 The daily inventory holding cost for a unit is 0.2 % of the unit cost.
 The replenishment lead time for an order placed by the retailer is 6.25
days.
 The expected service level is 95%: assume that the corresponding z-value
is 1.65 (rounded to two decimals).

Consider optimal reorder level R, optimal order quantity Q, expected time

between orders ETBO, expected average inventory level AVINV, and
expected annual number of inventory turns a year EAIT.

Questions

1. Calculate the five indicators above (R, Q, AVINV, ETBO, EAIT)

2. Draw a graph (diagram) showing the development of the inventory

level over time. Include:
- on the time dimension: lead time, expected time between orders,
- on the inventory dimension: R, Q, and expected average inventory
level.

3. Assume that replenishment lead time can be reduced (e.g. from 6.25 to
4 days). What is the impact on the five indicators (R, Q, TBO, AVINV,
AIT)? Please explain.

c. (Q, R) strategy
Assume that you are a retailer, ordering a product from your supplier,
using a (Q, R) strategy. The product is bound to a certain lifetime:
demand from your customers is variable and is likely to reduce strongly
in the near future, but it is uncertain when.
Assume a situation of continuous replenishment, a situation in which,
always, a couple of orders are underway from your supplier to your
inventory at retail, hence: the order lead time is typically longer than the
time between subsequent orders.

Questions

1. What will be the impact of an unexpected increase in demand level on

the inventory level in the short, in the medium and in the long run?

2. Draw diagrams of the situations as described above, showing

(characterizing) how the inventory level is expected to develop over
time.

3. What will be the impact of an unexpected increase in the order lead time
on the inventory level in the short, in the medium and in the long run?

2
4. Draw diagrams of the situations as described above, showing
(characterizing) how the inventory level is expected to develop over
time.

d. Retail strategies
Imagine a large vertically integrated firm, with a production and assembly unit,
a central warehouse, 20 regional distribution centres, and 500 different retail
locations.

The firm has established the appropriate retail service levels for its different
SKUs that will maximize overall net profit (using a 97% overall service level as
a baseline). It has established those levels based on the factors: Per unit
profit margin (“cross margin”), Annual sales (volume in units) and Forecast
error. This has resulted in SKU plots typically looking like the one depicted
below (retail locations are similar).

SKU = Stock keeping unit = A unique type of item

FR = Fill rate = Service level between two parties (here: retailer and
customer)
CV = Forecast error in customer demand

Questions

1. Assume now that everything else is equal for each SKU (lead time,
stage in product life cycle, expiry date, likelihood of having a substitute
or finding it at a competitor, or at a different price, customer
(dis)satisfaction due to (un)availability, etc, etc).
How can the firm use the typical SKU plot to decide on the inventory
level of an SKU at the different stages (“before assembly”, “central

3
 warehouse”, “regional distribution centre” and “retail location”) in the
supply chain?
Explain.

2. Assume that the firm is considering a new channel: online sales and
direct shipment. From a supply chain perspective, what type of SKUs
would provide, relatively, the largest advantages versus disadvantages,
when sold online and shipped direct, as compared to sales through a
traditional retail? Explain.
Hint: for this last question consider existing SKUs as well as new
SKUs, and elaborate on how different Supply Chain related factors play
a role.

4
 Case 2. Beergame and Order Model
(adapted from iseesystems.com)
The following structure, often called the “Over-reaction and amplification
structure” has appeared in a wide diversity of organizations. In case you know
the beergame: it is this very structure that is in the center of the dynamic that
arises in that game. The exposure to the dynamic came up in the context of a
manufacturer of bicycles. The manufacturer experienced swings in inventories
and this led to high costs. At the time iseesystems got involved, the prevailing
explanation for this was that the swings resulted from the fact that demand for
that particular type of bicycle had a strong seasonal component: usually more
bicycles are sold in the summer season than in the winter season. It was
discovered that the manufacturer first created the seasonality and then passed it
on to its suppliers who amplified it. The basic structure is quite simple:

On Order with Supplier Inventory

orders deliveries demand

target inventory

inventory correction

The dynamic is probably best understood by imagining that you are taking a
shower on the top floor of a high building. This particular building gets its hot
water from a central source located in the basement. This means that when you
turn on the shower, it takes a while before the hot water reaches you. It also
means that any corrections to the knob settings, the temperature, will take a
while before they are fully felt. Suppose that on a cold morning you go into the
shower as soon as, to the touch, it feels hot enough. After starting to use the
soap and shampoo, you feel the temperature increasing. No problem, you just
crank down the knob. But: you do not feel any effect (thanks to the long pipe), On
the contrary it is even getting hotter. So you crank it again. Still no effect. One
more time: and suddenly the water is freezing. Feeling very cold, you give the
knob a crank upward. No effect. One more, no effect again. One more and
…..scalding!!! And with your body full of soap and shampoo you jump out of the
shower. Essentially the same dynamic was being played out at the bicycle
manufacturer. This, perhaps with different names on the boxes and pipes, can be
found in the context of many organizations. This is a basic planning problem
related to resources being represented. The explanation for the dynamic is that in
placing orders, or adjusting shower controls, only the current state of things was
taken into account. In the shower you over-crack because you are not taking into
account the accumulation of all your cranking. As a result you end up ordering
much more hot water than you really need. Similarly, the bicycle manufacturer

5
did not take into account what already had been ordered, what was in the
pipeline. Doing something radical to fix the situation in this kind of case leads to
disasters. This was precisely the case with the bicycle manufacturer ordering
parts. It gets worse when you put together two or more players who are ordering
regardless of “pipelines” and future demands.

Questions

1. Play the Beergame from the Ithink software.

Use different scenarios and optimize.

2. Play the order model from the Ithink software. Give an explanation for the
effect you see. What improvements can be made? Define a better
ordering strategy. Go to the double orderer and answer the same
questions

Notes on Business Dynamics

Systems Thinking

Most strategic planning tools deal with static elements. They can assist us
performing what-if analysis and create different business scenarios. They do not
track, however, the flows of resources over time (such as the movements in
inventories, human resources, market share and cash). The analysis of stocks,
people, money and other assets over time and the problems imposed by the
management of those resources is a challenge that all executives face.
Executives should be brought in a position to use tools that can help them focus
on processes not just on numbers, tools that help them find real causes of
problems, that help them analyze the driving forces of a business/organization
and its environment. Therefore an easy language is required, a language
showing operational relationships, not only statistical ones, a language that can
show how the structure by which our business/organization is actually functioning
or going to function, will work out dynamically. The session will introduce a visual
language appealing to executives and improving the ability to understand, plan,
control and guide a business/organization. This is a way of thinking. Systems
Thinking is the art and science of making reliable inferences about behavior by
developing an increasingly deep understanding of underlying structure. This is
essential when analyzing and designing supply networks.

6
Tools for Systems Thinking

One tool that analyses such systems dynamics is Ithink from HPS (Hanover,
NH). The program is based on a formal method that was developed in the late
1950s by Jay W. Forrester of the Sloan School of Management at MIT
(Cambridge, MA). An Ithink model consists of a set of interrelated graphical
variables, which can be connected using a diagram editor. The Ithink simulation
language is used to develop the exact definition of the relationship to be
analyzed. The development of a business model is usually a three-stage
process, First of all, it is important that a team of executives share their views of
the business. Ithink supports the first modeling stage, which is known as rough
modeling, through Causal-Loop Diagrams, which offer heuristic models that do
not distinguish between the different types of variables and connections. A
Causal-Loop Diagram is then transformed into a flow diagram, using the
graphical simulation language. This second stage is where the actual analysis of
a process takes place and proposals for improvement show up. Finally, in the
third modeling stage, several scenarios with different settings can be run.
Changes to the diagrams are made easily so that the what-if analysis is not just
related to numbers but moreover to the business processes. Functional areas co-
operate so that the different pieces of the system make music.

Business Dynamics

Business Dynamics is based on Systems Thinking and tries to offer practical,

fact-based approaches to explain how enterprises deliver performance over time.
The rigorous ST method here explains how to quantify the growth, decline and
interdependence within the organization's resources and capabilities as well as
the continuous interactions with competitors and other external factors. This
method creates a clear and practical picture of the strategic architecture driving
earnings and other performance outcomes, not just for commercial firms, but for
non-profit cases too. Management can so be well-equipped to answer three
crucial questions in their strategy development: why has the business performed
as it has to date, where is performance headed in the future if we carry on as
now and how can we alter this future for the better?

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 Case 3. A VMI Partnership
(adapted from Chaffey)
Retailers have long sought greater collaboration in their supply chains, but few
have managed to achieve it. One that has is Tesco, the UK’s largest grocery
retailer, which has built a reputation as one of Europe’s most innovative retailers
in its use of information technology.

As with many retailers, Tesco has long used electronic data interchange (EDI) to
order goods from suppliers and the network links almost all of Tesco’s 2500
suppliers.

The EDI system started operating in the 1980s and its use was initially limited to
streamlining store replenishment. In the 1990s, Tesco took its first steps on the
road to collaboration and began using its EDI network to help its suppliers better
forecast demand.

Most suppliers received EDI messages with details of actual store demand,
depot stockholdings and Tesco’s weekly sales forecasts.

According to Barry Knichel, Tesco’s supply chain director, this forecasting project
has been successful as average lead times have fallen from seven to three days.
‘Nevertheless, the information flow is strictly one way,’ he says. ‘We still do not
know the true value of this sales data because we never get any feedback.’

From the start of the 2000s, Tesco thus started its Tesco Information Exchange
(TIE) project in an attempt to achieve much more sophisticated two-way
collaboration in its supply chain. ‘This really was a big development for us,’ he
says. ‘The guiding principle was to combine our retailing knowledge with the
product knowledge of our suppliers.’

A large Tesco store may carry 50,000 products while a supplier will have at most
200. An important aim of the TIE project was thus to shift responsibility for
managing products down to the relevant supplier.

‘Suppliers clearly have a better understanding of their specific product lines, so if

you can engage the supplier to manage the supply chain you are going to get
much better product availability and reduce your inventory,’ says Jorge Castillo,
head of retail business for GE Information Services, which developed the
extranet technology behind TIE.

Suppliers pay from 500 Euro to 500,000 Euro to join TIE, depending on their
size. This then allows them to access the TIE web site and view daily electronic
point-of-sale data from Tesco stores. According to Mr Castillo, TIE lets suppliers
monitor changes in demand almost in real time and so gives them more time to
react. Besides this the lead times have fallen down further from three to less than
two days. ‘Before, Tesco’s suppliers would not have seen a problem until Tesco

8
got on the phone to them,’ he says. ‘Now, it is the suppliers who get on the
phone to Tesco and they can see much earlier on if a product is not selling well.’
The data can be analyzed in a number of ways to allow suppliers to see how
sales perform by distribution center, by individual store or even by TV region -
important for promotions.

The management of promotions is a complex process requiring close

cooperation between supplier and retailer. However, it has traditionally been
difficult to do well because of the lack of shared data to support collaborative
decisions. ‘Promotions can be a nightmare,’ says Mr Knichel. The present
promotions module allows retailers and suppliers to collaborate in all stages of
the promotion: initial commercial planning, supply chain planning, execution and
final evaluation.

According to St Ivel, one of Tesco’s bigger food suppliers, TIE has saved 30 per
cent of its annual promotional costs.

About 2400 suppliers, representing about 95 per cent of Tesco’s business, are
using TIE today. A collaborative data module aims to allow ‘seamless’ planning in
which the planning data on the screen is jointly filled in by both retailer and
supplier. Mr Knichel sees this as radical change for the retail industry as
suppliers and retailers have traditionally worked to separate agendas. He feels
TIE has much potential to streamline Tesco’s supply chain and to help suppliers
improve their service levels and promotions. But retailing is a traditional industry
and many suppliers are set in their ways.

‘Only four suppliers have fundamentally changed the way they work as a result of
TIE. Nevertheless, they can bring products to market much faster than any of
their competitors,’ he says.

Questions

1. What benefits does the Tesco’s information exchange offer to Tesco?

To its suppliers?

2. What may be the disadvantages of TIE for Tesco and/or the suppliers?

3. Discuss reasons why only four of Tesco’s suppliers had fundamentally

altered the way they work as a result of TIE (even though they use TIE).

9
 Case 4. Global Flower Value Chain
Innovations, trends in the global flower value chain

The different related texts distributed illustrate the trends of application of

information technology for trade and supply chain management in the world
wide flower industry.

a. FloraHolland and its processes

Based on various texts by Kambil and Heck

FloraHolland is the central institution in the world wide flower trade and
distribution (www.floraholland.com). Information technology plays a critical
role in shaping competition in the industry, competition with other auctions but
also with suppliers and growers who have possibilities and reasons to go
more “direct”.

IT directly affects the value networks. When IT was not well adopted during
the 1990s at FloraHolland, at that time Aalsmeer and Naaldwijk, for online
purchasing and sales, a competitor came up led by the East African Growers
association. This competitor, allowing online auctioning through the so-called
TeleFlower Auction, posed a real threat to the Dutch auctions. Finally the
Dutch auctions had to allow foreign growers participating in the auction and
giving more facilities to buyers, for instance allowing them to trade in different
halls and online. This implied huge investments in technology and change of
work processes. Finally Floraholland and its provider Auzcis were able to
jointly succeed and even export the auction model which is often used as a
standard. The model was exported to Brasil for instance an auctuion called
Holambra.

The flower industry has been one of the leading industries in the Dutch
economy. Since the middle of the 1970s, the production and distribution of cut
flowers have burgeoned. Growers are typically family businesses that grow
flowers in specialized greenhouses, heated and lit by the country's abundant
supply of natural gas to create an ideal climate for growing flowers.

Dutch growers over the years have been facing increasing competition for the
lucrative European markets from low-cost foreign competitors such as Kenya,
Spain, Israel, India, and Colombia. While Dutch growers experience
increasing land costs, environmental regulations and political trends to reduce
subsidies for gas prices, the foreign competitors have lower labor costs, fewer
environmental regulations and lower trade tariffs. The global diffusion of
agricultural technologies and cheaper air transport make international growers
more potent competitors. In response to these economic pressures, Dutch
growers have shifted their product mix to include high value-added flowers
that serve year round "impulse" buyers, in contrast to just serving the
"occasions market (others have merged, moved to other countries and quite
many have placed importance on all sorts of innovations - JS). Buyers for
various wholesalers and retailers participate daily in the Dutch flower auctions

10
to purchase flowers which are then repackaged and resold to end-consumers
or retail stores. As supermarkets and large retail store chains have become
outlets for flowers, buyers purchase larger volumes and are becoming more
sophisticated in coordinating purchases across different auctions. There are
also economies of scale in the purchase and distribution of flowers, leading to
greater buyer concentration.

FloraHolland provides a setting where price is determined and where the

growers' supply of flowers meets the buyers' demand. The auctions use the
"Dutch" auction method for price determination. This method uses a clock,
where the clock hand starts at a high price and drops until a buyer, by
pressing a button, stops the clock to bid and accept (part of) the lot. The clock
was invented by a Dutch cauliflower grower in the 1870s to reduce the time
growers spent at markets. The Dutch auction is very efficient. It frees growers
from the price determination process and the task of bidding at frees growers
from the price determination process and the task of bidding and allows them
to focus on production. The auction also provides a central location for buyers
to meet suppliers, allowing for efficiencies in the logistics of product
redistribution and quality control.

The auctions constitute a critical part of the trading process that begins when
growers harvest the flowers. Here is a typical example, also from Kambil and
Heck.
Growers harvest roses for export to the United States by mid morning on any
given day. By mid afternoon, machines will have sorted the roses by as many
as 200 varieties, and by the length of the stems. These roses are gathered,
labeled for quality, and packed in uniform plastic tubs for transport. By 10 PM,
the flowers arrive at the auction house where they are placed in cold storage
overnight. The next morning at 4:30 AM, they are transported to the collection
hall, inspected, assigned lot numbers, and assembled onto "stapelwagens" or
uniform carts for transport into the auction hall. The stapelwagens are then
towed into the auction halls where their contents are auctioned, beginning at
6:30 in the morning in auction rooms with up to 500 buyers (note that today
some clocks are virtual and stapelwagens do not need to come into the hall:
buyers in these halls do not even see the flowers -JS). The computerized
auction clocks in the room provide the buyers with information on the grower,
product, unit of currency, quality, and minimum purchase necessary (buyers
can also trade online or simultaneously in different rooms). See
http://www.aucxis-etrade.com/nl/case-studies/projectieveilen-te-floraholland.
Once the auction is completed, each lot of flowers is tagged with a computer
print out of the sale and distributed to the buyer's area in the auction house
where they are repackaged and boxed for air or land transport. Flowers
exported to New York are transported on a special eight-hour flight, which
departs Schiphol airport at 7:10 p.m. and arrives in New York at 8:10 p.m.
local time. The cargo is then unloaded, inspected, cleared by customs and
shipped to nearby warehouses or to other wholesalers for distribution the next
day. Thus roses from an Aalsmeer greenhouse (nowadays: from Kenya and
other East African countries - JS) can be sold in New York within 48 hours
after they are cut. Similarly, redistribution to other European countries by land
occurs within 48 hours. Timing is crucial as the product declines in value

11
towards zero within 10-12 days after the harvest. See the distributed video as
well.

Many new technologies are emerging which can affect how FloraHolland and
other parties in the global supply chain conduct business. FloraHolland and
others have to decide if they can change the way they are doing business as
they respond to emerging new competition in the marketplace. How are value
chains affected?

Next, they have to consider what applications will be needed, which ones will
give them a competitive advantage or which need to be there out of
competitive necessity. To what extent can IT be an answer to the problems?
What are the IT strategies to be followed to succeed in the industry? What
associated changes need to be made. Not only FloraHolland is challenges,
other players as well : buyers, growers (local Dutch and foreign) and third
parties (for logistics, quality control, technology, freight forwarding, inspection,
etc.) and even governments are faced with similar questions.

b. Competition is transforming the buying and selling of flowers

From the Economist, May 10, 2007

A BUNCH of flowers can appear beguilingly simple, but it is a miracle of

distribution. Its delicate blooms may have grown on farms scattered round the
world, yet they arrived at your local florist within days of harvest. Along the
way, crowded with millions of others, your stems may have been part of the
endless parade under the fluorescent lights of the Dutch flower auctions.

Run by co-operatives of local growers, the auctions embody logistical

virtuosity. Each lot of flowers--30% of them grown abroad--is unpacked,
placed in buckets of water, wheeled under an electronic clock before a gallery
of bidders, and then packed up again and shipped to its new owners, all
before 9am each day. Over 17m stems are sold each day beneath the 39
descending-bid clocks at FloraHolland and Bloemenveiling Aalsmeer, the two
biggest flower auctions. Jacques Teelen, boss of FloraHolland, boasts that
within 36 hours a flower can reach any florist in Europe.

Late last year FloraHolland and Bloemenveiling Aalsmeer announced their

intention to merge. The new entity, to be known as FloraHolland, would be by
far the largest flower marketplace in the world. In 2005 the two firms sold
more than 12 billion flowers and plants and had combined sales of $4.6
billion. Encompassing more than 98% of the Netherlands' flower business--
and nearly one-seventh of the global trade—the proposed deal has attracted
the attention of the Netherlands Competition Authority, which will decide this
summer whether to allow it. Mr Teelen admits that winning approval will be
difficult, but says the merger is "strategically necessary".

Before the second world war, cut flowers were grown near markets. Later,
improved varieties and better transport allowed growers in southern Europe,
Israel, and parts of Africa and South America to supply northern European
and American markets. What was once a seasonal business was transformed

12
into a year-round industry: roses became a Valentine's Day fixture. And Dutch
firms took on a special role as their norms for everything from bucket sizes to
environmental certification were adopted worldwide.
But as new competitors emerge in other parts of the world, the Netherlands'
flower auctions need to team up in order to compete, Mr Teelen believes.
Flower centres are emerging in Dubai, Tel Aviv, Kunming and elsewhere--
many of them closer both to producers and to promising new markets. And
big retailers such as Wal-Mart and Omega have started buying flowers
directly from tropical growers.

Even so, the auctions still serve a useful purpose by providing transparency in
pricing, says Amy Stewart, who surveyed the industry in a recent book,
"Flower Confidential". Price discovery at the auctions helps the entire industry,
she adds, yet it could be more efficient. As a result, she says, "the merger
makes a lot of sense."
It could also help the Dutch firms to maintain their position as the buying and
selling of flowers goes virtual. Around 80% of the stems sold at auction are
exported from the Netherlands, so the Dutch co-operatives have been
experimenting with a response obvious to traders in other markets: 15% of
auction turnover at Bloemenveiling Aalsmeer is now through remote bids, and
FloraHolland is testing video auctions of potted plants.

Why should chrysanthemums grown in Thailand travel to the Netherlands on

their way to the Japanese market? FloraHolland already supports settlement
in Kenya and other big producing countries, taking advantage of its reputation
for quality control and reliability (sellers are paid within ten days and physical
custody of the flowers ensures delivery to buyers). Almost one-third of
FloraHolland's turnover is brokerage between big buyers and sellers,
bypassing the auctions.

What is happening, in short, is "a disconnecting of the commerce and the

logistics," says Mr Teelen. So the proposed merger should make cost savings
possible through systems integration, says Eric van Heck, a professor at RSM
Erasmus University in Rotterdam who studies virtual auctions. But competing
virtual flower auctions are already operating, and the changing structure of the
trade, with big purchasers buying on longer contracts, presents opportunities
that the conservative Dutch co-operatives may fail to exploit. A futures market,
for example, would enable growers and buyers to reduce risk by hedging,
though it would also complete the unromantic commoditisation of the rose.
But Mr Teelen says FloraHolland has no plans to provide such services.
"The transformation from marketplace to marketspace is not easy," says Mr
van Heck. He warns that the merger could initially slow down the Dutch firms
and weaken their position. Whether or not regulators allow the deal to go
ahead, the Dutch firms' supremacy cannot be taken for granted. Greater
competition means the bloom could easily go off the rose.

13
c. Case “Arena Flowers”
Based on texts by David Chaffey, May 2013

Arena Flowers is an online florist based in London. The business was

incorporated in July 2006 and we went live with a transactional website in
September 2006. The company delivered £2 million net sales in year one and
broke even within the first 12 months of trading. At the time of the interview
they are forecasting sales of £4m in year two and to make a healthy profit.
The head of design and development Sam Barton explains how he sees
opportunities to keep growing both sales and profitability at a similar rate
going forward through various initiatives.
For example, the company has developed a Facebook application that
provides 15% of the site traffic – an opportunity that has been missed by
many of its more established rivals. Average order values (AOVs) have
developed from an initial £30 and have grown month on month. The current
level is £42. Ways of increasing AOV have included options to add a vase,
make a deluxe bouquet and through selling Prestat’s chocolates alongside the
flowers.

The essence of the Arena proposition is to cut out middlemen and buys direct
through FloraHolland or from growers, so it can get great prices and the
flowers are exceedingly fresh. There are no ‘relay’ fees and, because of the
high stock turnover, they get fresh flowers in daily and these go straight to the
customer, rather than sitting in a hot shop window.

Arena offers free delivery on all products and were the first online florist in the
UK to offer FFP-accredited, ethically sourced flowers. That has been a good
‘unique selling point’ and enables Arena to offer something different from
other suppliers such as supermarkets.

d. Royal FloraHolland: Holland's Wall Street For Flowers, From

Forbes.com, by Shellie Karabell, April 30, 2018

Think of Holland and the enduring images that come to mind are windmills,
wooden shoes and…tulips. Tulips are not indigenous to the tiny nation. They
come from -- depending on whom you talk to – somewhere in central Asia,
Kazakhstan or Afghanistan, but were given to a Dutch merchant by the then
leader of Turkey in 1593. The name “tulip” derives from “tuliban,” the name of
the turban worn in the area, appropriate enough for the little bulbs.

Tulips have long been a force in Holland’s economy. Indeed, they were even
the source of the world’s first investment ”bubble” back in the mid-17th
century, when their value had escalated so precipitously that one bulb could
cost as much as a house, and thousands of people lost everything when, in
1637, a plant virus brought the whole value system crashing down. Cartoons
depicting this folly abounded in Dutch museums; artists added tulips to their
paintings as an aside commentary meaning “foolish.”

14
Today the tulip continues as a mainstay of the country’s economic life, but it
plays a much more important role as the cornerstone on which Holland’s
leadership as the largest purveyor or plants and seeds in the world is built. It
all takes place at FloraHolland, the world’s largest flower auction, where today
more than half of the world’s flowers move from grower to distributor and then
on to you, the retail customer. It is indeed Holland's "Wall Street for Flowers."

Beauty Meets Business

Royal FloraHolland is a showcase for Dutch expertise in logistics. More than

12 billion plants and flowers – including more than 90% of Holland’s own
output -- change hands each year at Royal FloraHolland’s four marketplaces
throughout the country. The contribution to Holland’s economy is profound:
More than 250,000 jobs are the product directly and indirectly of the flower
markets.

Flora Holland itself is a cooperative with 4,500 members, 9,000 suppliers,

2,500 customers, and 3000 employees. The largest of the markets is at
Aalsmeer, just below Schipol Airport, south of the center of Amsterdam. Here,
in a huge concrete bunker-like building, hundreds of mini-trucks hauling
wagons full of plants and flowers whizz around other workers on smaller
vehicles in an area the size of 200 soccer fields – more than 775 square
meters. (The entire area on which the Aalsmeer installation sits is roughly the
size of Monaco.) The plants arrive daily, usually overnight, for the flower
auction five days a week, which starts at 6 a.m. and ends around 10 am.
Elsewhere in the building, Royal FloraHolland customers – flower sellers
ranging from mom and pop outlets to mega chains such as Tesco in the U.K.
– are bidding against the clock on the millions of plants and flowers being sold
each day.

The auction works in reverse: Rather than bidding up the price, Royal
FloraHolland’s auction bids down. The bidding system is based on a clock
that runs backwards: Bidding starts at 1 Euro and goes lower; buyers stop the
clock at the price they want to pay and then advise how many plants they
want. The average price for flowers between 2011 and 2014 was 22 cents; for
house plants about 1.60, and for garden plants 93 cents. Then the clock
resets. The process moves at lightening speed: In the time it takes you to
read this paragraph, Royal FloraHolland would have sold perhaps ten lots of
flowers.

To the casual observer, it all seems quaint in an efficient sort of way: bidding
done on computers, more than half of the auction participants doing their
bidding off premises, and yet here are the actual flowers right under your
nose. Within hours they could be in a bouquet on your dining room table. And
flowers are such an all-purpose commodity (wedding, funerals, birthdays,
Valentine’s day…) they practically sell themselves.

Disrupted By The Internet

15
But that’s another surprise: The flower business and Holland’s leadership
position in it has been “disrupted” by the Internet, the economic crisis ,
competition from new low-cost growers, and changing consumer tastes.
Shortly after 2009, Royal FloraHolland’s consistent growth trajectory – on the
up since the cooperative was founded in 1911 – ground to a halt.

A report on the market conducted by Rabobank and presented in January of

2015 by Royal FloraHolland itself, showed consumer spending on flowers for
the previous five years had been absolutely flat while customers were drifting
towards cheaper cut flowers from super markets rather than specialist florists,
due in large part to constraints on disposable income in the wake of the
economic crisis. Then there’s increasing competition from low-cost flower
producing countries near the equator: Colombia, Ecuador, Ethiopia, Kenya
and Malaysia – all of whom have lower production costs. Better and cheaper
transport – improvements in sea containers, for example – meant these low-
cost producers could also export globally.

It’s an effective combination and it is eroding the flower market: in 2003,

Japan (one of the world’s top three flower importers along with Western
Europe and the U.S.) imported 10% of its flowers from Colombia; in 2013, that
number had increased to 26% , according to the Rabobank study. By
comparison, Japan’s import of flowers from Holland had dropped from 8% in
2003 to just 2% in 2013. The Dutch share of the global flower market had
dropped from 58% in 2003 to 52% in 2013, with exports going mainly to
Germany, France and the U.K. -- still dominant, but shrinking fast. (By
comparison, 65% of the cut flowers purchased in the USA in 2013 came from
Colombia, up from 55% in 2003.) Furthermore, with growers able to deal
directly with retail customers via the Internet, the entire Royal FloraHolland
cooperative auction business model was becoming less relevant.

Overhauling The Bouquet

The report crystalized and quantified the problems the floriculture community
had known for a while and was already addressing: Lucas Vos, Chief
Commercial Officer of Maersk shipping was hired as CEO at Royal
FloraHolland effective January 1, 2014. Vos lost no time in creating an action
plan to overhaul Royal FloraHolland – reaching out more to the end
consumer, boosting marketing efforts, cutting costs and streamlining logistics.

Royal Flora Holland says one of its goals is to facilitate a 20% increase in the
consumption of flowers and plants in Europe. So far the results seem
promising. Last year the European market for flowers and plants grew 0.5% to
32.4 billion euros. It was a steep climb: 2013 saw the worst of the economic
crisis, when consumption value dropped below 31 billion euros.

After-tax profits for Royal FloraHolland in 2014 were 9.6 billion euros vs. the
15.6 bilion peak in 2011.

Emerging markets such as Brazil Mexico, China, and India are driving growth
– despite

16
becoming flower producers themselves. Thus far, increasing domestic
consumption fueled by higher incomes creates enough demand to keep the
international market from becoming flooded despite this new production.

There is also an emphasis on creating a higher level of tourist experience at

the auction facility itself. Royal FloraHolland created a digital tour with
information and videos about flowers and have installed a “green screen”
where visitors can take photos and videos against the virtual backdrop of the
flower auction and distribution and then upload them easily on social media.

Changes in the auction process are driving change in this 125-year-old

procedure: direct sales (from grower to buyer) have plateaued. The size of the
purchases at the auction is getting smaller, but the leading to a more finely-
meshed operation. The market consolidation of buyers and growers leads to
further sophistication in the floriculture industry.

The Royal FloraHolland financial report shows operating costs have come
down, but not without a price. When the company announced it would cut 200
jobs in 2014, in Vos’s first months on the job, workers went on strike. Vos held
his ground and began working on the Royal FloraHolland “2020 Plan,” to
strengthen the organization and keep it relevant. Steps include increasing
quality control, managing supply and demand more efficiently, providing more
services to suppliers and more information to retail customers about the state
of the global flower market, and exchanging information.

In a video for Royal FloraHolland members, Voss described 2016 as “The

Year of Acceleration,” in which the cooperative would consolidate the auction
process even more in order to become more efficient; creating new
membership categories with tiered membership rates; further streamlining the
logistics role at the auction hubs, and information-sharing to create a
marketing plan to increase consumption of flowers and plants among
consumers.

It is a tall order, but there are other benefits, and not just to the world of
flowers, as these plans proceed. A market as large as this can have an impact
on sustainability – on labor, on the chemicals used in growing, on
transportation and CO2 emissions – which will in turn create beauty beyond
the garden walls.

e. Auction report shows increase in prices of flowers and plants

From: the Florist, May 11, 2018

According to a recent report from Royal FloraHolland, in 2017 the prices

growers received for flowers and plants at Royal FloraHolland were 3.9%
higher.
The Dutch flower auction realised a product turnover of € 4.7 billion in 2017,
an increase of 1.2%. Average prices increased by 3.9% in comparison with
2016. The number of units sold shows a slight 1.8% decline to 11.7 billion
units. The products were delivered by approximately 5,700 growers and

17
purchased by 2,500 clients. This is shown in the Royal FloraHolland annual
report 2017 that was published on 24 April 2018.
Last year saw a shift from regular auction sales to direct sales between
growers and clients. In 2017 regular auction sales represented 43.7% of the
total turnover, whilst 56.3% came from direct sales - direct sales of cut flowers
show an increase of 5.7%. Houseplants and garden plants increased by 3.1%
and 11.9%, respectively.
Steven van Schilfgaarde, CEO Royal FloraHolland said: “In 2017, we
committed fully to digitisation on the one hand, with the launch of our digital
marketplace Floriday as the most important milestone. We are committed to
reinforcing the clock. I am convinced of its power."
 
FloraXchange

In 2017, Royal FloraHolland acquired the majority control of FloraXchange, a

large digital trade channel primarily for plants. Agreements were made about
the future development of the platform and the required investments. This is
also part of the digital strategy.
 
Priorities

Steven van Schilfgaarde added, “In addition to making Floriday successful,

the improvement of daily services to members and clients, and the enabling of
an optimal, integral logistical control were already mentioned in 2017 as the
three priorities in relation to our growth strategy. We do this from a financially
healthy basis. Also in 2017 figures were good." An agreement for a new long-
term financing has been reached in 2017. At € 377 million, revenues were
nearly the same as in 2016 and regular operating profit amounted to € 22
million. The financial ratios are at a proper level and constitute a solid
foundation for the future.
 
Sustainability

Sustainability is an integral part of the auction’s annual report this year. Royal
FloraHolland says it works continuously on the improvement of its own
sustainability profile and plays an important role in improving supply-chain
sustainability and transparency, and Royal FloraHolland is one of the partners
in the Floriculture Sustainability Initiative (FSI). FSI's ambition for 2020 is to
have 90% of the members' flowers and plants production or trading be done
sustainably. In 2017, that percentage was 33% for flowers and 53% for plants.

Questions

1. Who owns FloraHolland?

2. Why does FloraHolland use a Dutch (downward) auction and not an
English one?
3. e-Business allows for separation of logistics and trade, to what
extent has this happened in the FloraHolland case? Explain by
comparing the texts.

18
4. Why can a true online florist like Arena serve more customers than
a bricks and mortar florist?
5. How does Arena add value to the product?
6. How is Arena able to reach higher service levels than the florists
who have gone online in the Fleurop network (www.fleurop.nl)?
7. Why is Arena not merely focusing at selling more flowers, but rather
at increasing AOV?
8. From the perspective of a large florist (a classical one and a
modern one like Arena): what are the advantages of sourcing from
the FloraHolland’s Auction as compared to a downstream
intermediary (wholesales)? On what factors does it depend? Any
disadvantages?
9. Nowadays technology can easily connect a florist to growers, is it an
option for a florist to buy (source) directly from growers (e.g. in Holland,
e.g. in Kenya)? What are the challenges?

19
. The 787 dream was to systematically reduce development time from typically six to
four years and cut associated costs from around $10 billion to $6 billion. The result
has been cataloged more like a nightmare. The project is reported to be billions of
dollars over budget and three years behind schedule.

Dell model – to reduce financial risk by 80% outsourcing increased risk. Did not
anticipate the risk involved.
Outsourcing to sub-contractors

Toyota strategy
Shorter span time

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