Fresh Connection Supply Chain

Simulation

1
 Strategy
&
Strategy into Action
Maturity scan:
Strategy

Stage of Characteristics
evolution

Stage I: Ad hoc decisions, fire fighting problems, no clear

Ad hoc strategy

Stage II: Functional organization with each function making

separate decisions in its own silo, based on a functional
Functional vision and policy

Stage III: Shared cross functional strategy and vision, translation

to all functional areas not yet implemented on tactical
Integral level

Stage IV: Shared cross functional strategy and vision, clear

translation to all functional areas, guideline for all
Visionary tactical measures

3
A Supply Chain and its
traditional conflicts

• High inventory turns

VP Supply Chain
• Maximum flexibility

Components Finished product

Supply Production Distribution

VP Purchasing VP Operations VP Sales

• Lowest purchase • High utilization % • High service level

price
• Long runs – minimize • Safety stocks
• Full truckloads changeovers
• Low unit costs

4
Competitive strategy

What must your supply chain excel at?

Benefit driven by customer

value
Flexibility
• customization
• variety
Cost: • volume
• low cost

Quality : Time
• top quality • delivery speed
• consistent quality • on-time delivery
• development speed

5
 Companies should know their
Order Winners (and Order
Qualifiers)

Competitive factors: Performance objectives:

If customers value these Then we need to excel at these
Low price Cost
High quality Quality
Fast delivery Speed
Reliable delivery Dependability
Innovative products and services Flexibility (product/service)
Wide range of products and services Flexibility (mix)
The ability to change the timing or
quantity of products and services Flexibility (volume and/or delivery)

• An order winner is a characteristic that will win the bid or customer's purchase.
To provide order winners, firms must be better than their competitors.
• An order qualifier is a characteristic that is required for a product or service to be
considered by a customer. Firms must provide the qualifiers to get into or stay in
a market. To provide qualifiers, they need only to be as good as their
competitors.

Source: Hill, 2000 6

 Supply Chain strategy

• Supply chain strategy must fit with competitive strategy

Competitive
Strategy Cost Quality

Time Flexibility
Competencies
Supply Chain
Strategy
Resources Processes

7
Source: Sunil Chopra, Peter Meindl, ‘Supply Chain Management’, 3rd ed., 2007
 Achieving strategic fit

• Step 1: Understanding the customer and the company’s

value proposition

• Step 2: Understanding the supply chain capabilities

• Step 3: Achieving strategic fit

8
Source: Sunil Chopra, Peter Meindl, ‘Supply Chain Management’, 3rd ed., 2007
 Supply Chain Performance

• Two key points

– there is no right supply chain strategy independent of
competitive strategy
– there is a right supply chain strategy for a given
competitive strategy

• All functions in the value chain must support the

competitive strategy to achieve strategic fit

9
Source: Sunil Chopra, Peter Meindl, ‘Supply Chain Management’, 3rd ed., 2007
 10
Target
A closer look
at the
components
Components overview

• Thare are 5 components (raw material, packaging material)

in The Fresh Connection

• Make an overview of the most important characteristics:

– Direct purchasing costs
– Transportation costs
– Value per pallet
– Weekly volume in pallets
– Batchsize in pallets
Product characteristics are important
for designing a supply chain
configuration

Type Value per Purchase value Need per week

pallet in pallets

Pack 518 109K 7

PET 32 292 K 188

Orange 400 406 K 35

Mango 900 72 K 3

Vitamin C 150 1K 0,1

How does this influence inventory policy and supplier

selection?
Product characteristics and
policy

Volume/week

Trasnportation
100 handling and
warehousing

Price and
10 availability

Transportation and
1 availability

100 500 1000

Value/pallet

In fact this is all about Total Cost of Ownership

What is Total Cost of
Ownership?

• In supply chain management, the total cost of ownership of the

supply delivery system is the sum of all the costs associated with
every activity of the supply stream. The main insight that TCO
offers to the supply chain manager is the understanding that the
acquisition cost is often a very small portion of the total cost of
ownership
(APICS Dictionary, 12th edition)

• In other words: quantifying all procurement related costs of a

supplier or a component
What is Total Cost of
Ownership? (cont)

• What related costs can you mention for the Fresh

Connection components besides direct
purchasing costs?
What is Total Cost of
Ownership? (cont)

• What related costs can you mention for the Fresh Connection
components?
• Direct purchasing costs
• Transportation costs
• Quality costs
• Interest
• Inventory & payment terms
• Handling costs
• Administration costs
• Warehouse costs
Explore TFC

Calculate this costs for one of the components in %

How to influence this costs
What does this mean for your supplier policy
Total Cost Management

Purchase
Price
Warehousing
Transportation Purchasing
Inventory Payment Administration
Carrying Terms
Costs Warranty
Obsolescence
Packaging
Production
R&D Specifications Capacity
Expediting

Transaction

18
 Supplier
Management
Procurement Strategies

• Impact of procurement on business performance

• 2005 profit margins for Pfizer (24%), Dell (5%),
Boeing (2.8%).
• Reducing procurement cost by exactly 1% of
revenue would have translated directly into
bottom line, i.e., net profit.
• To achieve the same impact on net profit through
higher sales
– Pfizer would need to increase its revenue by 4.17
(0.01/0.24) %
– Dell by 20% and Boeing by 35.7%
• The smaller the profit margins, the more
important it is to focus on reducing procurement
costs.
Appropriate Strategy

• Depends on:
– type of products the firm is purchasing
– level of risk
– uncertainty involved
• Issues:
– How can the firm develop an effective purchasing
strategy?
– What are the capabilities needed for a successful
procurement function?
– What are the drivers of effective procurement
strategies?
– How can the firm ensure continuous supply of material
without increasing its risks?
Kraljic’s Supply Matrix

• Firm’s supply strategy should depend on

two dimensions
– profit impact
• Volume purchased/ percentage of total purchased
cost/ impact on product quality or business growth

– supply risk
• Availability/number of suppliers/competitive
demand/ make-or-buy opportunities/ storage risks/
substitution opportunities
Kraljic’s Supply Matrix
Kraljic’s Supply Matrix

• Top right quadrant:

– Strategic items where supply risk and impact on profit
are high
– Highest impact on customer experience
– Price is a large portion of the system cost
– Typically have a single supplier
– Focus on long-term partnerships with suppliers
• Bottom right quadrant
– Items with high impact on profit
– Low supply risk (leverage items)
– Many suppliers
– Small percentage of cost savings will have a large
impact on bottom line
– Focus on cost reduction by competition between
suppliers
Kraljic’s Supply Matrix

• Top left quadrant:

– High supply risk but low profit impact items.
– Bottleneck components
– Do not contribute a large portion of the product cost
– Suppliers have power position
– Ensure continuous supply, even possibly at a premium
cost
– Focus on long-term contracts or by carrying stock (or
both)
• Bottom left quadrant:
– Non-critical items
– Simplify and automate the procurement process as
much as possible
– Use a decentralized procurement policy with no formal
requisition and approval process
 Mapping
the supply chain
Mapping the supply chain

Step 1:

Make a picture of The Fresh Connection supply chain:

• Suppliers
• Inventories
• Productions steps
• Customers

And connect the different entities in a correct way

 Inbound Outbound
Orange
OR 1L

Mixing OR-C 1L
Mango Orange

Food and
OR-M 1L Groceries in
Mango The Fresh
Vit C Connection
Vit C OR pet
Bottling

Pack 1L OR-C pet

Pack 1L
LAND Market
In The Fresh
OR-M pet Connection
PET

PET

Overflow Overflow
Dominick’s in
The Fresh
Connection
Mapping the supply chain

Step 2:

Fill the picture with important leadtimes:

Mapping the supply chain

Step 3:

Fill the picture with other important elements:

• Lotsizes
• Servicelevels
• Obsoletes
• Capacities, usage and overflows

This is your business on 1 A4

Mapping the supply chain

Step 4:

Highlight the biggest issues and problems:

Getting a grip on the situation

Shelf life and
Inventory
Management
Themes

– Shelf life
– Lot sizes in Production (same principle for
Purchasing)
The concept of Shelf Life

obsolete

Shelflife realisation= 85%

85%

Shelf life agreement= 70% Internal shelflife

Shelflife is 20 weeks (start at the moment of bottling)

Batch sizes in production and purchasing
Chances of a stock-out
situation – large batches

O
Q

Time

– In case of large batch sizes, the company runs the risk of having an
out-of-stock situation three times
– But products are less ‘fresh’
Batch sizes in production and purchasing
Chances of a stock-out
situation – small batches

O
Q

Time

– In case of small batch sizes, the company runs the risk of having an
out-of-stock situation ten times
– But products are more ‘fresh’
Case Study
ZARA