Operations and Logistics Business Problem - Kellogg Australia Pty Ltd - Case Study Example

Operations and Logistics Business Problem- Kellog Name Course Code Course Instructor Institution Abstract Kellog has been losing its market share to Nestle. The company has had a breakfast cereal market share of 40% in 2010, although this declined substantially to 27% in 2014. The problems in the company’s supply chain have been blamed for the company’s loss of market share to its competitors like Nestle. Kellog’s supply chain and logistics faces several challenges. It has failed to integrate the entire business activities associated with the logistic chain process. A range of other problems like prolonged order lead times, high inventory carrying costs, and challenges in responding rapidly to concurrent changes cut the company’s profits and weaken customer loyalty. It is recommended that Kellog should adopt an integrated supply chain management model, as it would enable the company to discover the cumulative effects of such individual processes. Elimination of such bottlenecks would improve the availability of the company’s products, as well as to accelerate the delivery to customers in order to boost the company’s sales and profits. The model combines production, purchase, as well as sale plans with logistics plans that use JIT. The model would reduce production and inventory costs, lower lead time, improve supplier transparency, lower legal, financial, quality, safety, risks, and support legacy and innovative products. Table of Contents Abstract 2 Table of Contents 3 1.0 Introduction 4 2.0 Analysis of Operations and Logistics Management Practices: 5 2.1 Background of Operations and Logistics Management Practices at Kellog 5 2.1 Problems at Kellog’s operations and logistics management 6 3.0 Discussion and Conclusions 8 4.0 Conclusion 13 References 14 1.0 Introduction Kellogg Australia Pty Ltd is leading manufacturer of breakfast cereals in Australia. The company was started in 1906 in the United States before spreading to Australia in 1938 (Kellog 2016). Since it was started, it has often based its business on the philosophy of ‘improved diet and improved health’. Being the global leader in the manufacture of cereals, the company serves its customers at both global and national level, and has managed to successfully create a global network of suppliers. The company produces nearly 40 brands of cereals and snacks, including Rice Krispies, Kellogg's Corn Flakes, Fruit n' Fibre, Nutri-Grain cereal bars, and Special K (Kellog 2016). This report comes about after Kellogg’s recently announced its plan to improve its supply chain as part of a plan to save nearly $475 million annually by 2018. Kellog’s presence in Australia has been dwindling during the recent years, which it solved when it added value to Kellogg’s Special K flake product (Decent 2015). The decline in sales due to growing competition and changing customer behaviours contributed to AUS$375 million loss during the first quarter of 2015. Kellog has been losing its market share to Nestle. The company has had a breakfast cereal market share of 40% in 2010, although this declined substantially to 27% in 2014 (EuroMonitor 2015). The problems in the company’s supply chain have been blamed for the company’s loss of market share to its competitors like Nestle. Kellog’s supply chain and logistics, however, faces several challenges. Kellog’s supply chains is fragmented and fails to integrate the entire business activities associated with the logistic chain process. A range of problems like prolonged order lead times, high inventory carrying costs, and challenges in responding rapidly to concurrent changes cut the company’s profits and weaken customer loyalty. 2.0 Analysis of Operations and Logistics Management Practices: 2.1 Background of Operations and Logistics Management Practices at Kellog Kellog’s supply chain comprises a range of activities, including product development to delivery to the end consumer. The company has always followed a socially responsible stand at its entire supply chain levels (Lu 2016). Essentially, the company’s supply chain is divided into three sectors: The primary sector refers to where the company acquires raw materials from across the globe, the secondary sector refers to where the company converts the raw materials supplies and then ships them to wholesalers, and lastly, the tertiary sector refers to a service sector that firms within the secondary sectors depend on to optimize business processes. Various business units and functions are coordinated across the supply chain system, such as purchasing, quality management, distribution, and sales (Lu 2016). Supply chain management is part of Kellog’s business strategy to consider how they would get raw material from the best available source and how that raw material would be used to manufacture a product. As Kellogg is involved in food items business, it falls under the category of secondary sector. It is important for the company to get the best available material and make sure that the product is of standard quality. Much more care is required in maintaining the supply chain for food items businesses and it is necessary that products are stored and transported effectively without incurring any loss in the quality of the product (Lu 2016). 2.1 Problems at Kellog’s operations and logistics management Supply chain management can be a tool that assists Kellog’s to carry out corporate strategic objectives, such as reduction of working capital, fastening cash-to-cash cycles, and ensuring increased inventory turns. However, Kellog’s supply chain and logistics faces several challenges. Kellog’s supply chains is fragmented and fails to integrate the entire business activities associated with the logistic chain process. A range of problems like prolonged order lead times, high inventory carrying costs, and challenges in responding rapidly to concurrent changes cut the company’s profits and weaken customer loyalty (Lu 2016). The fundamental objective of Kellog’s supply chain is to "add value.” This brings up an example of corn flakes, whose total cycle time is nearly one year. If the supply chain encompasses all activities from the first supplier to the end consumer, the cycle time may be reduced to 30 days, which would offer inventory turns, yet produce products that are fresh, a capacity to customise the products, as well as better customer responsiveness, all of which add value. However, the main cause of lengthy order-to-delivery cycle times is that the company has sustained an age-old "bad habit," which recurs as it has failed to adjust its internal processes to mirror shifts in the market. The problem of inefficient practices is further perpetuated by the existing separate and autonomous departments (Lu 2016). On the other hand, when Kellog orders for a machine part, an average order-to-delivery time would vary between six and eight weeks. Due to this, the company has always run the risk of losing competition to "replicators,” who may end up producing low-quality "knockoff" imitations in relatively less time. On analysis of Kellog’s entire supply chain, from the entry of orders and supply of raw-materials to ultimate delivery, it was established that problems existed at nearly all stages. For instance, the handwritten orders have to be constantly re-entered into the materials-planning system at the end of each week (Kampstra & Ashayeri 2013). This implies that certain orders run the risks of remaining unprocessed for a whole week. During Mondays in the morning hours, the production control is often faced with one-week's backlog of orders. It then takes a number of days to process the accumulated work before manufacturing orders can again be issued. After the orders are reduced, the engineering department would often demand for a week to come up with technical drawings. The engineering department would subsequently take a number of days to measure up drawings with the manufacturing orders, as well as any other associated documentation (Oakden & Leonaite 2011). Such information packets would later to be transmitted to the manufacturing line after which the scheduling system permitted the production department 3 weeks to process the orders. The orders then sit around for nearly 3 weeks before they are taken to production, despite the fact that the actual time needed to produce the corn flakes varied from a few hours to 24 hours. Unfortunately, Kellog’s still applies outdated processes to global supply chain operations, which are incapable of addressing current demands. When Kellog’s is forced to reroute an incoming container shipment, as it lacks complete visibility into the entire supply chain system, it is unable to make a simple decision of redirecting a shipment from one particular port to the other into a complication that affects the entire supply chain, and leads to higher costs and reduced efficiency. As the organization’s logistics expand, so must its ability to quickly see the cost and service implications of every decision (Muysinaliyev & Aktamov 2014). 3.0 Discussion and Conclusions The company should take the supply-chain management view, as it would enable the company to discover the cumulative effects of such individual processes. Elimination of such bottlenecks would improve the availability of the company’s products, as well as to accelerate the delivery to customers in order to boost the company’s sales and profits (Li 2014). As Kellog’s seeks to strengthen its growth and expansion into new markets, it needs to evaluate the capabilities of its current supply chains, and determine whether such capabilities can sufficiently support global competition. For a company like Kellog, brand recognition and pricing are not sufficient to distinguish it from competitors. Instead, differentiation in the global marketplace has more to do with the events that occur in the supply chain, as well as product innovation. As the market has dampened the pay off for higher prices, Kellog would have to address its profitability goals. It would ensure this by redesigning and improving supply chains, as well as improving operations to promote the delivery of value-added services. It is suggested that an optimized global supply chain would enable Kellog to address the problems identified in its supply chain. In order to address the challenge of the increased costs of supply chain at Kellog’s, an integrated supply chain management model that is motivated by market demand is suggested (Muysinaliyev & Aktamov 2014). The model combines production, purchase, as well as sale plans with logistics plans that used Just-in-time (JIT). It also takes consideration of both the internal management system, as well as Kellog’s external supply chain system. The globalization of business and the increasingly competitive pressures have driven many manufacturing firms to develop an effective supply chain planning to minimize the supply chain cost; supply chain planning is becoming the crucial element of company management. However, Kellog’s supply chain has failed to integrate the entire business activities associated with the logistic chain process. A range of problems like prolonged order lead times, high inventory carrying costs, and challenges in responding rapidly to concurrent changes cut the company’s profits and weaken customer loyalty. The problems can be resolved by integrating supply chain management systems for the company’s warehousing and transportation (Li 2014). As indicate in Figure 1, the proposed optimized supply chain planning system is made up of two sections: internal management system and external supply chain system. When it comes to the internal firm management system, business activities like production, sales, procurement, and logistics planning would be rooted in market information (Li 2014). On the other hand, market information like customer demand and location, would be collected from customers and would influence production plans and purchase plans. In the information flow process, logistics planning would be integrated with production, sales, and purchase planning. Conversely, in the external chain system, information flow would set off from customers to Kellog’s, as the manufacturer, and subsequently to the supplier. The flow of logistics would set off from suppliers to Kellog’s, as the manufacturer, and subsequently to the customer. The integration of the internal management system and external supply chain system would then be finished by purchasing information, market information, as well as logistics information (Muysinaliyev & Aktamov 2014). Therefore, an integrated supply chain becomes the ultimate stage in supply chain management. It ensures that integration of the Kellog’s business processes are not challenged by organizational boundaries, and covers both the suppliers and customers. The proposed supply chain model makes tradeoffs among several business processes in the supply chain. In addition, it solves the challenges of conflicting goals in the supply chain management process, such as the likely conflict between reducing costs and improved customers' service level. The model would enable the company to come up with a practicable way for integrating purchase, sales, production, as well as logistics into a supply chain planning (Li 2014). By technical description, the proposed supply chain model is made up of 5 key components: i) Market demand prediction component - The first component applies market data derived or collected from customers to estimate market demand, and present market demand information for planning sale-logistics. ii) Sale-logistics planning component Using the market demand information determined in the previous component, this component determines the sale plans, as well as the associated logistics plans concurrently. By integrating sale and logistics planning, customers' demands can be satisfied while at the same time reducing the costs of sale. iii) Production-logistics planning component. In theory, production plans are determine using sale plans and production capacity. Yet, work-in-process inventory may still influence the cost of production. Therefore, the carrying costs of material inventory has to be determined to decrease order lead time and production costs, and to make faster production decisions by taking logistics plans into consideration. In all, integrating production and logistics planning reduces the production costs (Li 2014). iv) Purchase logistics planning component. While making decisions on production, the related purchase plans have to be made at the same time. Yet, quantity of demand influences the costs of raw material inventory and transportation. However, the model integrates purchase and logistics, which in turn reduces costs of raw material inventory and transportation (Muysinaliyev & Aktamov 2014). v) Cost analysis component. The fifth component is used for evaluating the planning effects based on the comparison results of the total planning costs and estimated or projected costs. The managers determine the estimated costs beforehand rooted in their experiences and knowledge. When the comparison results show that the total planning cost is less than estimated or projected cost, the planning would be termed as being feasible. If not, then the planning would have to be adjusted to make it feasible (Li 2014). The optimized global supply chain would, therefore, assist Kellog’s to realise: 1. Reduced costs. Kellog’s would be able to access information on its suppliers and customers, as a result the company would be in a better position to make better procurement decisions. 2. Improved transparency. Being a global business, Kellog’s would be able to acquire supplier information from a single point. By having a global view of a transparent supplier base, it would be able to identify reliable suppliers from across the globe (Ibrahimov et al nd). 3. Lowered risks. The optimized supply chain would enable Kellog’s to quickly evaluate supplier’s capability to address legal, financial, quality, safety, as well as environmental regulations and expectations. By being flexible, it would be able to manage risks. 4. Supporting legacy and innovative products. As the modern-day global supply chain operators need a supplier settlement platform and billing partner who is capable of supporting a company’s existing products and adapting new products. The proposed model can achieve these objectives. It provides a platform for managing invoicing, taxation, as well as other important business operations. It is also capable of accommodating multiple business models to allow Kellog’s to reach international markets (Ibrahimov et al nd). 4.0 Conclusion Kellog’s supply chain and logistics faces several challenges. It has failed to integrate the entire business activities associated with the logistic chain process. A range of problems like prolonged order lead times, high inventory carrying costs, and challenges in responding rapidly to concurrent changes cut the company’s profits and weaken customer loyalty. Due to these, the company has always run the risk of losing competition to "replicators,” who may end up producing low-quality "knockoff" imitations in relatively less time. On analysis of Kellog’s entire supply chain, from the entry of orders and supply of raw-materials to ultimate delivery, it was established that problems existed at nearly all stages. It is recommended that Kellog should adopt an integrated supply chain management model, as it would enable the company to discover the cumulative effects of such individual processes. The model combines production, purchase, as well as sale plans with logistics plans that use JIT. It also takes consideration of both the internal management system as well as Kellog’s external supply chain system. It would ensure this by redesigning and improving supply chains, as well as improving operations to promote the delivery of value-added services. The model would reduce production and inventory costs, lower lead time, improve supplier transparency, lower legal, financial, quality, safety, risks, and support legacy and innovative products. References Decent, T 2015, "Breakfast and snack habits: Australians are eating healthier," SMH, 16 Aug 2016, EuroMonitor 2015, Breakfast Cereals in Australia, viewed 15 Aug 2016, Guo, R & Tang, Q 2008, "An Optimized Supply Chain Planning Model for Manufacture Company Based on JIT," International Journal of Business Management, vol 3 no 11, pp.129-133 Ibrahimov, M, Mohais, A & Michelewicz, Z nd, Global Optimization in Supply Chain Operations, viewed 15 Aug 2016, Kampstra, R & Ashayeri, J 2013, "The International Journal of Logistics Management Realities of supply chain collaboration," The International Journal of Logistics Management, p.1-10 Kellog 2016, A historical overview, viewed 16 Aug 2016, Li, X 2014, "Operations Management of Logistics and Supply Chain: Issues and Directions," Discrete Dynamics in Nature and Society, volume 201, 1-7 Lu, C 2016, Supply chain management from factory to supermarket shelves: how does Kellogg’s do it?, viewed 16 Aug 2016, Muysinaliyev, A & Aktamov, S 2014, "Supply chain management concepts: literature review," Journal of Business and Management, vol 15 iss 6, pp.60-66 Oakden, R & Leonaite, K 2011, Supply Chains: Logistics Operations in the Asia- Pacific Region, McGraw-Hill Aust. 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