The major objectives of integrating the
supply chain within the food and beverage sectors are cost reduction and customer service
(Figure 1). The theory that customer service and cost trade off each other still prevails.
In fact, the opposite is true. The high levels of efficiency required for excellence in
customer service, derived from focusing on customer needs, core processes and a simpler
business, also drive cost down to industry-leading levels.


Fig.1 Model of an integrated supply
chain

 

The benefits of integration
It is important to be clear on the objectives of an integrated supply chain, since it is
easy to be seduced by technology such as Electronic Data Interchange (EDI), bar coding or
Electronic Funds Transfer. The result is that the implementation of these enabling
technologies is seen as the primary criteria for success. Winners of KPMG’s Awards for
Excellence in supply chain management have demonstrated many indicators of what
constitutes an integrated supply chain, including:

  • provision of high levels of quality and
    service to both internal and external customers at low cost
  • management by business process rather than
    function
  • rapid response to changes in both market
    conditions and customer requirements
  • minimal inventory and work in progress,
    along with low levels of obsolescence
  • partnership with customers and suppliers
  • innovation and exploitation of information
    technologies

Internal integration
Integrating people, processes and Information Technology across both the internal and
extended supply chain poses a difficult challenge. Experience shows that success is
dependent upon all three components being aligned to the requirements of specific supply
chains. The challenges posed by internal integration are discussed in terms of physical
infrastructure, business processes, Information Technology, organization and people.

Physical infrastructure
The physical infrastructure of manufacturer-retailer supply chains is
changing. Cost pressures are forcing suppliers to rationalize their own manufacturing
sites. At the same time the number of suppliers selling to a given sector is also
contracting. The net effect is both a contraction of suppliers and manufacturing sites.
Similarly, the number of retailers continues to reduce. These changes increase integration
between fewer parties and more clearly distinguish the types of supply chains. The main
types are:

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  • branded manufacturers supplying all retailer
    sectors
  • own label suppliers supplying the major
    retailers
  • the producers who combine the two types

However, the physical infrastructure
between the producer and the end customer is becoming less integrated with the
introduction of intermediate warehousing. Suppliers deliver direct to a large intermediate
warehouse where branch ready orders are picked. These are taken to a Regional Distribution
Center (RDC). There they are cross docked and then delivered to store. The benefits of
such a plan are debatable. A more attractive long-term solution may be increased
integration between producers. This means that a single truck can pick up goods from
multiple suppliers, instead of each supplier delivering direct to each retailer.

Business processes
A major obstacle to supply chain integration is internal functional barriers. Many
companies are attempting to address this issue by moving to process management. This
emphasizes the importance of aligning a company to its market value chain to respond to
market pressures. By doing so, it enables companies to link their operations more directly
with their strategy, and increase interaction with customers and suppliers. Processes
should flow from a clear understanding of a company strategy and its critical success
factors. Within food and beverage companies, there are four categories of business
processes:

  • the market value chain
  • new product introduction/development
  • resource management functions
  • strategic management

Often the easiest processes to identify
relate to the supply chain with one or both ends outside the company. Processes for
developing new products require a structure and activities that combine creative and
operational skills. The ‘soft’ processes, which usually relate to people, planning,
communications and culture, are difficult to define. However, they are critical to
long-term success. The application of a process approach can yield significant benefits.
Major food brands are coming under increasing pressure from dominant multiple grocers.

These grocers increasingly dominate the
point of contact with the customer. The dynamics of large branded businesses now require
greater capabilities in managing product distribution and display. The distinctive visual
impact of the brand is a critical factor in the competition for vital shelf space and
consumer attention. This has resulted in a continuous change in packaging with an
increasingly rapid response time.

Pack change involves almost every part of
the operation. Traditional methods, carried out by many functional departments are slow,
costly and too error prone for the new performance requirements. One solution is to set up
a specialist group to manage pack change as a complete process rather than a series of
separate events. The process would typically start with the initial commercial briefing.
It would end with the handover of the final plates to the printer. Having a single process
owner, with control and visibility of the whole process, provides the platform for
investment in systems improvements and application software.


Fig.2 Management of the supply chain
requires management of business processes

 

Information Technology (IT)
The majority of UK food and beverage manufacturers believe that Information
Technology (IT) is the solution to their problems. However, IT should be seen as an
enabler, not a battering ram. One of the key dangers is that IT may develop into an end in
itself and ignore the need for strategic thinking about processes. For example, some
companies have tried to resolve their lack of accurate sales forecasts by purchasing new
sales forecasting application software. This is done without the review of processes and
key posing of questions such as what forecasts are required by whom and when, and do
current performance measures inhibit the forecasting process? However, IT is an essential
support and catalyst for supply chain integration and should provide:

  • information on the cost, quality and outputs
    of an activity as a basis for continuous improvement
  • information on a process which leads to a
    deeper understanding of the activity interaction and causality as a basis for system
    improvements
  • speed of communication and computation to
    enable frequent exploration and adjustment of activity plans and priorities in order to
    limit the impact of forecasting errors
  • a direct link into the systems of market
    partners in order to extend the boundaries and scope of supply chain management

A recent KPMG Management Consulting
research report concluded that just over one third of respondents regarded their IT
infrastructures as an enabler to supply chain integration. Over 50 percent regarded it as
a hindrance. If IT is to support supply chain integration then internal systems should be
integrated and allow some form of integration with external systems. While the integration
within a given sphere such as production, transport or warehousing may be good, much
effort is being devoted to integrating the different elements together. This is led by
software vendors who recognize that they need to offer both industry specific solutions as
well as a range of applications. This will allow effective internal supply chain
integration.

The use of inventory at different stages of
the supply chain to buffer against uncertainty of demand and supply is under attack. This
is because developments in telecommunications and computer processing power make it
feasible to substitute information for inventory. This trend is likely to continue as
information becomes cheaper and inventory more expensive, particularly as product life
cycles reduce. It has also lead to a new generation of Advanced Planning and Scheduling
Systems (APASS). Manufacturing Resource Planning (MRPII) and Enterprise Resources Planning
(ERP) systems are very good at processing transactions like sales orders and invoices.
However, they cannot look down upon the supply chain as a whole. Therefore, although
integrated, they have a number of shortcomings, including:

  • focusing on optimizing individual elements
    of the supply chain, not the whole supply chain
  • the sequential planning of individual
    elements that can take days
  • unexpected changes that cannot be handled
    readily
  • ‘what if’ planning that is difficult or
    extremely arduous

This new breed of APASS is aimed at
planning the supply chain as a whole. They should effectively sit above the transaction
systems with which they need to integrate. The aims of these systems are to:

  • allow rapid optimization of the whole supply
    chain
  • perform ‘what if’ calculations on the total
    supply chain
  • ¥ re-plan in the event of unexpected
    changes in supply and demand
  • ¥ schedule based upon real life constraints
    such as fixed vessel capacity or limited ‘in process’ shelf life

One such company that uses this type of
tool is a UK-based premium brewery. They have implemented supply chain planning software,
which allows them to model, plan and manage their supply chain from the barley field to
the bar.

Stock levels and costs have reduced
dramatically, and demand on brewery capacity is more evenly spread. Before the investment,
which was part of a major supply chain re-engineering project, they were operating at
91-92 percent capacity. Already it is heading towards 96 percent and this is expected to
increase further. These types of systems are not just relevant to producers of ambient
goods, they are particularly relevant to manufacturers of chilled products that have a
limited shelf life. In this case, mistakes can be costly and result in expensive wastage.

Organization and people
Internal and external integration across the supply chain is highly
dependent upon the quality, attitude and vision of top management. The motivation for
integration needs to be driven by an understanding of the necessity for change and a
vision of the company’s future. This message must come from the company leaders in simple
language that combines rationality and powerful symbols. A key issue in achieving
integration is the removal of the barriers of traditional cultural beliefs of command and
control, and the constraints of a hierarchical organizational structure. These are often
embedded in the fabric of the management systems and need the leverage of top management
to remove them. This is important because the development of partner relationships between
manufacturers and retailers can stumble due to a company’s cultural and organizational
issues, rather than from a lack of awareness of the benefits for all parties and a
commitment to a common goal.

Organizational ingredients required for the
successful development of partnerships involve alignment between organizations and the
degree to which political rivalry between departments will override process efficiency
considerations. For alignment, organizations can assist the process by forming close
relationships between key people at various levels in both organizations. The political
issues can be addressed through implementing goals based on successful partnership
achievement and the adoption of process ownership.

External integration
Historically most supply chain integration was internally focused and aimed at
streamlining the companies’ own logistics processes. In the future, the biggest gains are
likely to be derived from external integration in which suppliers and customers work
together to optimize the whole supply chain. Although ECR initiatives have tended to focus
on the manufacturer – retailer relationship, the supplier – manufacturer relationship is
of equal importance. The latest KPMG UK Food Manufacturers Survey identified the main
objectives of joint programs from a manufacturer’s perspective. The chart below shows the
main objectives of both joint customer and supplier programs.

An example of how a manufacturer and
supplier can improve relationships, reduce supply chain costs and improve service is a
major soft drink producer’s concentrate production facility in Cork. This soft drink
producer has a deal with one of its suppliers to have a key ingredient piped through the
wall from the supplier’s facility on an ‘as required basis’.

Good information flow is a pre-requisite to
supply chain integration. The majority of European food manufacturers and retailers
transmit and receive order transactions via EDI. Continuous replenishment transactions,
such as purchase acknowledgements planning schedules are the second most popular EDI
supported process group. The third group covering EDI supported file maintenance
transactions such as price changes and item details still has some way to go before
reaching the levels of usage of order cycle transactions. The greatest short term
potential for EDI expansion is in the transmission of Regional Distribution Center (RDC)
vehicle booking slot information and exchange of proof of delivery information back to the
supplier.

The movement of materials in and out of
RDCs will become increasingly critical given the trend towards smaller, more frequent
deliveries.

Common problems such as inflexible
information systems, conflicting resource priorities and reluctance to share information
are hindering the rate of increase of sharing information.

In addition, the lack of standardization
will make supply chain integration more difficult. A major manufacturer could invest
considerable resources in integrating the supply chains with different retailers based
upon different approaches and standards. The result would be that his/her overall cost
structure increases. His/her position will be in direct contrast with an own label
supplier dealing through only one or two of the major retailers.

A significant issue, which impacts the
integration of the supply chains of certain sectors is the management of promotions. In
particular those types of promotions that have a major supply chain impact such as ‘buy
two, get one free’ call for high levels of integration between all parties. Promotions
need to be managed carefully since the cost penalties are high. Also the promotion of one
line can have an impact on associated lines both during and after the promotion. Supply
chain integration offers certain companies significant benefits in helping them plan,
manage and evaluate promotions.

An existing barrier to access of
information generated by grocery retailers is that of supplier size. This is because much
of the current information flow is with the larger, ‘preferred’ suppliers. Cost will still
impose a barrier even when retailer Electronic Point of Sale (EPOS) data is readily
available to all suppliers.

The future
The exploitation of IT in non-transactional processes shared between suppliers,
manufacturers and retailers is likely to increase. It will combine existing technologies
such as the internet, document management and workflow tools. An example of such a
process, which could yield significant time and quality benefits, is new product
introduction/pack changes. This process involves supplier personnel, the manufacturer and
the retailer executing processes in parallel. This is done where packaging samples and
documents need to be exchanged and reviewed on a frequent basis. Integrating shared
processes is likely to be an area of major investment in the future.

Dr. Dunham is an engineer with 13 years
consulting experience at KPMG Management Consulting. He has worked for many of the leading
European and UK food and beverage manufacturers in the areas of Information Technology,
cost reduction/performance improvement, benchmarking and supply chain processes. KPMG is
the leading advisor to the food and beverage sectors. It produces an annual industry-wide
survey on Food Manufacturers and are sponsors of ‘Awards for Excellence in supply chain
management’.