Managing Supply Chain Complexity in a Tea Manufacturing Company - Essay Example

Name: Tutor: Title: Managing supply chain complexity in a tea manufacturing company-case study: Tehindo Tea Manufacturing Supply Chain Management Course: Date: Introduction The Tehindo Company is involved in the manufacture and distribution of two main products, Goteh which is the ready-to-drink jasmine tea and Fteh, the ready-to-drink fruity tea. However, the two products differ in their complexity issues within their supply chain management processes. This report provides analysis of issues or challenges facing Tehindo tea manufacturing’s supply chain management. Question 1: Supply chain configuration Supply chain configuration means that a company is involved in the selection of suppliers, processes and transportation modes at all stages of its supply chain from the many alternatives that change according to costs, lead-time and different other measures (Ocicka 2009). Over time, decisions about supply chain configuration have been made based on the quantitative measures, such as the inventory, procurement and transportation costs. However, other subjective criteria involving the strategic alignment of business practices specifically for partners within the supply chain network have had a significant influence in the configuration and reliability of today’s supply chain (Nepal, Monplaisir & Famuyiwa 2010). From the supply chain network of Tehindo Company, it is quite clear that the company is involved in two main interrelated businesses which are: manufacturing and distribution of tea products. In particular, the manufacturing processes are managed through the ten manufacturing plants that are located in all the three Indonesian Islands; Bali, Java and Sumatera. In West Java, there is one of the factories that are mainly used to produce OWP and supplies the entire distribution centres, while other factories are involved in the production of both RGB and OWP products. However, the supply policies are strategically implemented based on the geographical proximity where the two factories within Sumatera supply the entire market area found on Sumatera Island and the factory in Bali supplies Bali as well as the Nusa Tenggara market region. Downstream, various products are distributed via 11 regional sales centres within Bali, Java, Kalimantan, Sumatera and Sulawesi. Basically, each of the regional sales centres has several other sales offices and warehouses. The distribution of tea products is accomplished through four different distribution channel configurations. In the first distribution channel, some products directly delivered to consumers whenever a large order is needed by an individual or a specific organization intended for big events such as parties or conferences. The second distribution channel is where products are delivered from the sales centre through the retailers such as, restaurants, a shop or a supermarket who finally sell them to the end customers. The third distribution channel involves delivering the products via the wholesalers and retailers to the end customers. Finally, Tehindo Company has recently decided to work in collaboration with a third-party distributor as its outsourcing practice to manage the distribution of its tea products. The diagram below shows the supply chain configuration of Tehindo Company (Pujawan & Mahendrawathi 2009). OWP Question 2: Challenges facing bottled jasmine tea and fruit tea By comparing the bottled Goteh and Fteh in terms of the challenges faced in managing their supply chain processes, it is notable that Goteh or the bottled jasmine tea popularly known in Indonesia and contributes more revenue to the company. This is because it is consumed by all the company’s market segments. On the other hand, Fteh or a fruit flavour tea is packaged either in bottles, cans or tetra packs, it is basically produced to meet the needs of teenagers, and thus its distribution is done through the modern retain chains which include Alfa, Carrefour, Indomaret, Giant, Superindo, Sogo and Torseba Yogya. Since Goteh has very limited product variants compared to Fteh which has various product flavors such as guava, strawberry, black currant, lemon and apple as reflected in the product variants for the two, it is relevant to mention that the challenges of managing the supply chain process for Fteh are so many. From the soft drink industry perspective, it seems that the company incurs more costs in packaging of Fteh which is seen to have more glass bottle and number of flavours than Goteh. This is because managing more return glass bottle of Fteh product is more complicated than Goteh with less of such product. This implies that Tehindo Company is required to ensure a smooth flow of its Fteh and Goteh bottled products downstream and the empty bottles upstream. The increased variety of Fteh makes it difficult to accurately and effectively carry out demand forecasting, the inventory control as well as purchasing of the packaging materials needed to deliver the product. As a way to avoid massive forward buying, Tehindo Company expects the retailers and wholesalers to exchange the empty bottles for other full bottles. This should take place when orders made in the two-week period since the price increase is initially announced until that particular time the actual increase is implemented. However, such occurrence is not obviously possible for the One Way Product (OWP). Based on the sales volume, it is worthwhile to note that Goteh performs better than Fteh. This is simply because Goteh is generally sold through the traditional market unlike Fteh which is sold via the modern retail chains. It cannot be doubted that the changing orders particularly for Fteh to the sales centers and factories is to a lager extent affected by the promotional activities that are mostly conducted by modern outlets or retail chains. Although such promotional activities may increase the sales of Fteh tea product to consumers, the increase in demand may as well lead to shortages in situations where one member of the supply chain fails to respond as expected (Pujawan & Mahendrawathi 2009). Question 3: Temporary increase in demand/orders From the company’s information about market demand, it can be noted that orders from wholesalers and retailers are affected by various factors. In particular, when the company announces that it will increase the price for products in two weeks before the actual increase date, the wholesalers and retailers tend to opt for forward buying. As a result, orders become high during this period of two weeks prior to the price increase but drop later for a short after the increase. In addition, whenever there is anticipation of demand increase because of events such as during celebration days and New Year, orders tend to become quite high. The main cause of temporary demand and order increases with in the Tehindo’s supply chain is price increase set or announce by the company two weeks prior to the actual increase. However, it should be noted that price increases that the company sets does not necessarily affect the final consumption of the product. Therefore, it is quite clear that the temporary increase in prices and orders are not caused by high demand from the consumers but only used as a strategy to respond to the increases in price from the factory. This makes the retailers and wholesalers to hide the larger inventories for a temporary period of time, while during New Year celebrations as well as other significant events, really increased in demand for the company’s products is experienced from the final consumers. A report from The Economic Intelligence Unit (2009) states that economic uncertainty and changes in energy prices as well as intensifying global completion have made the large multinational corporations to look for strategic and operational advantages. The most demonstrably operational components associated with business success, is understanding the efficiency of the global supply chains specifically, information and resources, the network of people, activities and technology applied in the production and delivery of finished products. Question 4: Recommendation in the second meeting Following the coordination meeting held on Friday, June 27, 2008 between the marketing, distribution and production departments, the distribution manager of Tehindo clearly stated that some stores had been out of stock of certain types of Fteh for some days. This implies that the customers of this product suffered a great deal during this period that some types of the Fteh were out of stock. The operations manager also noted that Fteh or fruit tea is produced in many variants and this could be the major reason for the shortage. However, such a big shortage had never been experienced with the main product, Goteh. Furthermore, the distribution manager claimed that too many variants of Fteh lead to more difficulties in the production and distribution activities. This has negatively affected the performance of the company because they often experience out of stock situations for some variants, instead there is excess of inventory for a few other Fteh products. In the second meeting, if I were the supply chain manager of Tehindo in my view I would suggest that the rest of the managers should support the idea of the operations manager about focusing on Goteh. This is because Goteh has never experienced such a significant shortage that happens to Fteh product. Over and above, the sales volume of Goteh product is high and its demand fluctuation is low. Therefore, it is necessary for the company to focus more on the production of Goteh product that is consumed by all people than spending more resources and time on a variety of Fteh that is consumed by teenagers only. The management should direct more resources towards the Goteh product and reduce the variants of Fteh that go out of stock. I would say that by reducing the product variety of Fteh product, the company will be able to spend less time on product changeover. Furthermore, the companies will no longer experience issues associated with logistics and inventory control specifically for the finished products as well as the raw or packaging materials. Question 5: Information distortion and the bullwhip effect The fundamental question here is whether the information distortion within the supply chain of Tehindo Company affects the performance of its supply chain. Information distortion in Tehindo supply chain happens when the company announces its price increase two weeks before the actual increase date. As a result of the announcement, wholesalers and retailers tend to involve more in forward buying, causing orders to be high within the two weeks prior to the actual time for price increase, and later drop in price for a short time after that particular increase. It is also quite clear from the information provided about market demand that orders become high whenever there is anticipation of demand increases resulting from events such as religious celebration time and New Year vacations (Pujawan & Mahendrawathi 2009). Bullwhip effect is defined as the effect which shows variation in demand as being higher upstream along the supply chain compared to the downstream variation. Such a variation, therefore, in demand orders is referred to as information distortion (Lee, Padmanabhan & Whang 1997). Information sharing and demand forecast are considered the two major causes of information distortion. In particular, bullwhip effect occurs when forecasts as well as their corresponding orders along the supply chain become more and accumulate. Changes in demand causes problems in capacity planning, workforce and production scheduling as well as inventory control. This leads to a reduction in customer service, high safety stock and supply chain costs (Hendriks 2010). Heikkila (2002) examine that fluctuating demand cause distortion of information to upstream suppliers, while bullwhip effect is an occurrence where orders to supplier are seen to have larger variance than the sales made to the buyer. It should be noted that there is fluctuation in prices which in turn causes changes in order within the supply chain of Tehindo Company. This is because wholesalers and retailers temporarily increases order and later allows them to drop to a point below average for a short period time after the price increase. Due to this effect, the retailers and wholesalers develop a tendency of holding the larger inventories on temporary basis. However, during New Year celebrations and other significant events, a normal and real increase in demand is experienced from the consumers. Therefore, it is relevant to point out that information sharing and demand forecast are the key factors contributing to information distortion and bullwhip effect to happen within the supply of chain of Tehindo tea manufacturing company. Ertek and Eryılmaz (2008) noted that the most common problems that companies face include excessive inventory, insufficient transportation, shortage of products and information distortion. Generally, bullwhip effect is perceived to be one the main reasons of such problems (Reddy 2001). In order to reduce information distortion and bullwhip effect, the management of Tehindo Company should find better ways of ensuring more communication and sharing demand information. Since information distortion negatively affects the sales and operations performance of supply chain of Tehindo Company in terms of the influence it has on the inventory levels, it would be vital for the company to focus more on building sound collaboration and communication in the chain (Wadhwa et.al.2008). By ensuring that full information is shared across the supply chain, the company will be able to keep track all the way from the customer to the upstream partners within the chain and back (Gattorna 2006). Question 6: Outsourcing and vertical integration The fundamental question regarding what kind of functions to perform in-house by the company and those functions to contract out is relatively considered when making the vertical integration decisions particularly in manufacturing and distribution industry. Vertical integration is defined as the practice of joining of a company with another which either sells output or from which to buy input. Generally, vertical integration can be appropriately adopted in manufacturing and distribution industry where the output of one company is used as input to another firm along the same supply chain. On the other hand, outsourcing is considered as an alternative to vertical integration where it is used as an approach of contracting with third-parties to complete certain aspects of a product-service bundle (Hanna & Newman 2001). The benefits of outsourcing include; creating opportunity for a company to pay more attention on its core competences, it also gives the company a great chance to add capacity without necessarily incurring overhead and fixed costs. Additionally, outsourcing promotes market agility and corporate growth, enabling a company to grow without involving in large capital investments as well as enhancing flexibility in times of economic downturns (Chima 2007, p.30-31). It is apparent that a vertical integration model is commonly practiced within the Tehindo Company where the tea leaves are supplied internally by a company in the Tehindo corporate organization. Downstream, various products are distributed via 11 regional sales centers within Bali, Java, Kalimantan, Sumatera and Sulawesi. Basically, each of the regional sales centres has several other sales offices and warehouses. The main advantage of vertical integration is that supply and demand are guarantee. In the case of Tehindo, it can be noted that tea plantation cannot supply tea leaves to others unless the manufacturing entities used in the chain fails to absorb the supply. Vertical integration and outsourcing are some of the efficient operation structures adopted to enhance the competitive edge or profile of businesses. Whereas vertical integration promotes the availability and influence of the business, outsourcing means contracting certain business operations to the outside service providers of the company. However, it is important to understand that the suitability of both vertical integration and outsourcing often depend on the nature of a company’s activities as well as the industry it specializes in (Cole-Ingait 2014). In general, Indonesia has 150 sales offices, out of which 17 sales offices are located in East Java, the leading market areas for Tehindo. Outsourcing is also experienced where the Tehindo Company is seen to have recently worked in collaboration with a third-party distributor purposely to manage the distribution of its tea products. However, the disadvantage of this outsourcing practice is that it is only applicable for OWP products that can be delivered via traditional and not the modern retail chains. Therefore, it is quite surprising to see that the company cannot rely on a third-party distributor to manage the distribution of its OWP products to be received by the modern retail chains. Since the margin is a bit tiny for OWP products sold under the modern retail outlets which in most cases use different marketing schemes specifically, promotions and discounts. This limits the third-party distributors with the opportunity to handle customized deals. List of References Chima, M.C., 2007, ‘Supply-Chain Management issues within the Oil and Gas Industry’, Journal of Business and Economic Research, Vol.5, No.6, pp.27-37. Cole-Ingait, P., 2014, “A Vertical Integration vs. Outsourcing Industry”, Retrieved November 17, 2014 from, Ertek, G & Eryılmaz, E., 2008, “The bullwhip effect in supply chain: Reflections after a decade”, CELS 2008, Jönköping, Sweeden. Gattorna, J, 2006, Living supply chains: how to mobilize the enterprise around delivering what your customers want, Financial Times Press, Pearson Education Australia, Sydney. Heikkilä. 2002, “From supply to demand chain management: efficiency and customer satisfaction”, Journal of operations management, Vol. 20: 747 –767. Hendriks, L, 2010, Information Distortion influencing the supply chain, Tilburg University. Hanna, M. O. & Newman, W. R., 2001, Integrated Operations Management-Adding Value for Customers, Prentice Hall. Lee, L.H, Padmanabhan,V & Whang, S., 1997, ‘The Bullwhip Effect In Supply Chains, Sloan Management Review’, Vol.38, No.3, pp. 93-102. Nepal, B, Monplaisir, L & Famuyiwa, F., 2010, Supply Chain Configuration Model for developing new product, POMS 21th Annual Conference, Vancouver. Ocicka, B., 2009, “Customer driven supply chain reconfiguration: best practice case of Basell Orlen Polyolefins”, ELAbestLog. Retrieved July 16, from Pujawan, I.N & Mahendrawathi, E., 2009, ‘Managing Supply Chain Complexity in a Tea Manufacturing Company’, Operations and Supply Chain Management, Vol.2, No.3, pp.167-171. Retrieved November 17, 2013 from, Reddy, R., 2001, ‘Taming the Bullwhip Effect’, Intelligent Enterprise, 4(9), 58-60. The Economist Intelligence Unit, 2009, The demand-driven supply chain: a holistic approach, The Economist Intelligence Unit, London. Wadhwa, S, Mishra, M., Chan, F.T & Ducq, Y., 2008, ‘Effects of information transparency and cooperation on supply chain performance: a simulation study’, International journal of production research, Vol. 48, No.1, pp.145-166. Read More