2.0 Terms of reference:
On the 7th November 2002 Dr. Dave Coates requested that I, James Jeremy, complete a report of approximately 2,500 words, based on a case study published in the Harvard Business Review that investigates the supply chain of a company called Exceso. The completed report should be submitted by the 11th December 2002.
3.0 Executive Summary:
In this report, I have investigated the supply chain of a company called Exceso, a hypothetical company taken from a Harvard Business Review case study.
In the first section I summarised the situation at Exceso, where it is clear the company is experiencing trouble. Over-ambitious sales targets have been set which are having adverse affects on the supply chain process. To meet these objectives Exceso are heavily discounting their products in order to increase their costumer base but at the same time many of their distributors shelves lay bare. The likelihood is they will meet this target but will probably find themselves short of orders for the next period as they have introduced a textbook situation of forward buying.
Even though four experts offered advice on the situation, which undoubtedly resulted in a discussion of good ideas, there was no clear objective of how these could be achieved.
In the final section, I have taken into account their recommendations and incorporated these with my own ideas. In my opinion the solution seems clear ie, that Exceso must change their output obsessed outlook and adhere to their customers demands.
I propose that this should be achieved by the adoption of a collaborative, planning, forecasting, replenishment (CPFR) system. This would involve Exceso building strong ties with their distributors and working in partnership to produce a shared interest business plan. Sales forecasts would be a mixture of the two parties predictions incorporating various data sources such as point of sale (POS) information through an electronic data interchange (EDI). This will hopefully keep disparities between over and underproduction to a minimum.
Replenishment would be a collaborative affair, utilising the basis of Vender Managed Inventory (VMI) where the two companies would generate orders considering all possible factors that could affect demand, hopefully resolving the present problem Exceso is experiencing of choosing to push their heavily discounted goods onto any customers they can find at the risk of not fully stocking their existing distributors.
4.1 Summary of the situation at Exceso:
The Exceso Corporation is a market leader with a flagship product, the attractive ‘ClickZipPlus’ that is sold mainly in supermarkets in packs of 4 and 8.
At the time of this exercise the plant is running at full capacity and the elderly equipment is exhibiting signs of distress. Despite this, R. Foley Vinton, the CEO is trying to maximise production and turnover in order to report a 9% sales growth by the final quarter of the year: this is something of a virility symbol which he has given as a promise to firms of financial analysts, who have created expectations amongst shareholders.
However, the growth target is exerting extreme pressure on Martin Wu’s sales department and it is providing some bizarre results. The 9% projection set by Martin was estimated with the use of ‘raw data containing anomalies’ and was based on a more favourable economic outlook. Martin now predicts a 3% sales growth, but in order to achieve this the ‘ClickZipPlus’ is being offered to Exceso retailers at heavily discounted rates.
A buyer, Alice Dias, whilst negotiating for a retail outlet (Flemings ValuMart), realises she can use the firms HQ bulk discount of 6% to ‘forward buy’ a large excess of the product. After taking her own quota, she can pass an amount onto another branch of ValuMart that is being offered only 4% discount. She also makes a deal with a small firm that will take her unwanted residue at the higher discount, but with a buyback premium within 60 days should sales proceed well.
It would seem that Exceso have over looked the problems that could occur from offering goods so cheaply; it is likely that this will have adverse effects, not only on profits, but also the supply chain and the business as a whole. However the objective in Martin Wu’s team, with only weeks to go, is to achieve heavily discounted selling in bulk quantity, to any taker: this is amply demonstrated when, at a sales meeting, a key account manager announces an order for 40,000 new cases of the product.
The client has been offered 9% discount and is, supposedly, an overseas trading company. People at the meeting are very sceptical of the stories that this firm has markets in Eastern Europe or Jiangsu province, China, but they are aware of the immediate threat to their jobs if the sales objective is not met.
Even before these events, there is evidence that someone at Exceso has taken their eye off the ball, when Andrea Valdini – an analyst for a firm of investment brokers notes that the stock of ‘ClickZipPlus’ in a ValuMart store near her office have all but been replaced by a rivals cheaper product. It leads her to wonder what is going on. This scarcity is a serious problem for Exceso as they are literally opening the door to their rivals who seem to have a good selection on the shelves and even the manager of the ValuMart has been recommending the substitute product.
Shortly after these events Alice Dias is contacted with an incredibly good offer of ‘ClickZipPlus’ from an overseas trading company.
There seems now to be a danger that Exceso could loose control of the marketing of their product as people like Alice Dias set up their own warehouses, taking advantage of the small size and storage space required. They could then wait for scarcity in the retail markets to prompt an increase in their prices.
4.2 Appraisals of advice given:
Four experts have offered advice and recommended solutions to improve the situation at Exceso; I will now discuss each of their suggestions below:
4.2.1 Hau Lee
Mr Lee’s main emphasis has been on the ‘bullwhip effect’ where supply and demand oscillations create distortions that grow ever more exaggerated as orders travel up or down the chain.
He has rightly identified that there are huge disparities between what Exceso’s consumers need and what the company is making. Owing to a lack of relevant information-sharing between the manufacturer and retailer it is impossible to provide an uninterrupted and timely flow of goods to customers, Exceso would have no idea of unplanned demand fluctuations, promotions, stock outs, etc and this must impact into margins and profits. ‘Sales targets and quotas often cause distortion’ (Donovan, 2000). Therefore to achieve a smooth flowing supply chain the bullwhip effect must be reduced – or better, eliminated.
Of the four commentators, Mr Lee is the most concerned with the practical difficulties of implementing change in this firm; he feels, that since the problem is long standing and originates with the CEO, big changes at board room level must inevitably ensue.
That could be one end result, but there is also the possibility that a senior executive such as Martin Wu, (although compromised by having agreed the sales target with Foley), could over a period of time, persuade the latter to abandon his ‘loading’ policy. A halfway house solution, which would still keep shareholders happy and smooth out the large ordering lumps, would be to introduce shorter sales measurement periods to try and avoid the ‘mad scramble’ to produce and push the goods at the end of the quarter.
It would undoubtedly benefit the company to drop its Wall Street mentality. Dashes for sales growth by any means, including outright fraud, and massive rewards to CEO’s have recently blighted the stock market and investors have seen through tricks like manipulating sales figures. As Mr Lee points out, firms that undertake information sharing and then focus on actual consumer demand with the intention to reduce the bullwhip effect, achieve a smooth flow of goods without the need for big discounts, and thus make higher than average profits.
4.2.2 Kusum Ailawadi
Kusum has also focused on the fact that Exceso are encouraging a system of forward buying. She has looked at possible solutions and although not to keen on the idea of an everyday low pricing scheme (EDLP) that rejects the use of promotions (which are normally manipulated by retailers), she has recommended the implementation of pay-for-performance trade deals that take into account the EDLP thesis.
This system involves rewarding retailers that set a price which maximises total channel profit; this should promote equality between the manufacturer and retailers price margins. The discount from the manufacturer is tied not to what the retailer buys or sells, but to the price charged to consumers. As a result there is less room for forward buying and its associated problems. Store promotions can still be undertaken but it would be a collaborative affair from which both parties benefit.
But is this system the Holy Grail that it appears to be? There can be no question that it offers some very good ideas, but close links between parties is imperative to its success and there is no suggestion here as to how Exceso could be steered to this position. Also, would retailers who guard their ability to determine selling prices agree to this, especially for goods that have low price elasticity?
This system does not really consider the competitor’s reaction to pricing policy, and ultimately Exceso and its retailers must be wary in case the bullwhip effect is induced as a counterweight.
4.2.3 Mike Bargmann
Mike has focused on a ‘lack of supply chain visibility’ where no one really knows how much is being sold, at what price, and where, due to the non-existent collaboration between parties.
He discussed the effects this has on the consumers and recommends that supplier and retailers start by collaborating on a business plan for the ClickZipPlus which would outline shared goals and, in essence, would be the basis of a collaborative planning, forecasting and replenishment process (CPFR). He goes on to promote the additional adoption of vendor managed inventory (VMI).
Mike has not made it clear if he is suggesting the use of a VMI system under the CPFR thesis. It has been found that VMI has its limitations, in that communication is a one-way process where suppliers are responsible for maintaining appropriate inventory levels at a retailer’s warehouse or stores. On the other hand little account is taken of unanticipated problems of production such as materials price increases, strikes, machinery malfunction, etc. Although the manufacturers are pulling information from retailers, they are not really working together and as the supply of goods is left to the manufacturers discretion this system often fails to consider last minute retailer changes driven by promotions, competitors, demographics, seasons, etc, which could still result in the problems of stock-outs and dissatisfied consumers. This goes against the CPFR ethos where it is a total collaboration based on a shared business plan between retailer and supplier.
The adoption of CPFR is undoubtedly a great idea for Exceso that would call for shared action and responsibility between retailer and supplier, but Mike has not recommended how these systems could be implemented. I will discuss this further in section 4.3.
4.2.4 Jeanie Daniel Duck
Jeanie takes it for granted that the solution to Exceso’s problems is some kind of collaborative venture with its retailers and gives due consideration as to how any proposal for change can be pushed through the top management.
She has identified four different levels of awareness that have to be acknowledged by the company before the problem can be remedied. Firstly the people within Exceso must acknowledge there is a problem, secondly they must agree it is significant, thirdly they must believe that it is in their power to fix it and finally they must believe that there are things they each can do to bring about the change.
Although there is a realisation at the top of the company that forward buying is leading to difficulties it is unpalatable for them to consider this too deeply. The firm is on the verge of some type of crisis and, if it were not to be too severe, this could be the catalyst for the type of truthful analysis seen from the customer / retailer point of view that Jeanie feels is necessary to transform the situation. Foley must change his organisation and, in order to do that, he must see both a reason to do so and a vision of a more efficient method.
Whilst arguing strongly for a fundamental change, Jeanie has little to offer as a means of achieving this, other than waiting for the crisis to develop, for Martin Wu to make a move, the board to stage a palace revolution, or for Foley to become bored with the present tactics.
All I can suggest is that four senior executives in the firm individually acquaint Foley with their views mentioned in this paper and I for good measure would also recommend to him my solutions discussed in the next section.
4.3 Recent solutions to this situation:
The last section analysed some useful advice from the four experts. Any of their suggestions, extracted from their individual experiences, would be of measurable benefit to Exceso. Many of their recommendations are compatible, one with another and I therefore favour a mixture of these methods. In this section I will try to bring their ideas together as well as investigate other theories and developments that I feel would improve the company’s situation.
From this case study it is difficult not to conclude that Exceso are stuck in the recent past where manufacturers made products and retailers distributed them with very little communication between the parties. A study of the US food industry estimated that poor co-ordination among supply chain partners was wasting $30 billion annually. Thus some industries were suffering from an excess of products together with a shortage of others, mainly due to their inability to predict demand. (Fisher, 1997). All four experts have agreed that Exceso’s problem is that their orders have nothing to do with real consumer needs – they are not receiving any demand signals from retailers point of sales data when many of their more perceptive competitors will be gaining the benefits from a sharing of information (and knowledge).
Firstly, I therefore recommend (along with Mike Bargmann) that Exceso needs to work towards an efficient consumer response (ECR) system.
Methods and practices to achieve this have developed immensely over the past decade. Out of the original ECR concept of continuous replenishment processes (CRP) such as VMI (which was discussed earlier) has emerged Collaborative Planning, Forecasting and Replenishment (CPFR), which combines a proactive approach for managing future activities with efficiently planned promotions and demand-based product mix planning.
Hau Lees recommendation that making changes must be made at, or from, the top, and Jeanie Ducks argument that people within the company must recognise there is a problem makes a good stating point for the introduction of CPFR which can be defined as the use of available technology to achieve a well defined business philosophy.’ (Who ever 2002).
Once the company has acknowledged that CPFR will be of benefit to them, the process would then continue by creating a front-end agreement with ValuMart and Exceso’s other distributors. It should be noted here that Ralph Drayer from Procter and Gamble stated, in an article, that CPFR ‘requires developing a deeper working relationship than we have experienced before’. Thus at this stage both parties would need to determine how they could work together, focusing on mutual goals and objectives, information sharing needs and how success would be measured, or in negotiating terms ‘talks about talks’. At this stage they could also consider the use of Kusum Ailawadi’s suggestion of pay-for-performance trade deals. Once they have come to an agreement they should draw up a joint business plan.
Whereas in the past Exceso would have produced their own forecasts (which, as we have seen, were in any case inherently inaccurate), the next stage in the CPFR process would be to amalgamate, where possible, both parties forecasts. Finally both sides would negotiate one shared, agreed-upon forecast. The joint forecast would be created through the sharing of point-of sale (POS) information, existing inventory, stock out information, promotions and supplier production constraints.
This should generate more accurate forecasts, benefiting both parties hugely if implemented correctly. The manufacturer (Exceso) would hopefully be able to match supply with demand and that would drastically reduce the problem of over and underproduction. This must, in turn, help reduce costs as it would enable minimal inventories to be held with maximum production efficiency. The retailer would benefit by having improved shelf availability that would improve customer satisfaction and profits. It would be in the manufacturers interest, now, to introduce a system of regular reviews to measure output against forecast and, by applying a system such as Critical Path Analysis to adjust out any anticipated production problems by advance ordering of materials, speeding up certain processes, outsourcing, etc.
There are, of course, many different routes to producing and meeting forecasts, and if the parties work together, improved accuracies will be realised and hopefully Exceso can be steered away from their present one track method of executive attempts to meet an inflexible, predefined unsustainable target that has resulted in the problems we have seen.
Exceso would then be in a position to consider Mikes earlier suggestion of VMI, but however, utilising it under the CPFR ideology. I have noted that VMI schemes have their limitations, as they generally use one-way communication. Vital to the success of CPFR for Exceso would be the huge acceleration of data sharing between the parties, this alone would allow for an effective VMI system but as communication will be a two way process they can use this to their benefit. Whereas with traditional VMI it would be the manufacturers job to literally pull information from the retailer, (normally from their electronic data interchange – EDI) I propose that Exceso could adopt a method of replenishment where, as well as utilising the data from the retail company they would also have regular meetings and heavily share information so they would have a clear view of any up coming promotions, of not only their product but competitors as well. This would reduce the problem of stock outs due to unforeseen factors as they will be well informed of anything that could affect sales and then incorporate this into their agreed upon forecasts, greatly reducing the chances of the bullwhip effect occurring.
Hopefully this has given a clearer view of the processes that would be involved for Exceso adopting a CPFR ideology. I have touched only briefly on the major factors with the limited information of a simulated exercise. A lot deeper analysis would need to take place to realise the full potential of CPFR but I feel that I have given good ground for Exceso to start investigating changes that will be of major benefit to the company. Exceso is undoubtedly in trouble and although CPFR is still in its early days this practise could revolutionise the company and reassert its products as market leaders. Hopefully increased sales would be achieved due to increased availability and the shareholders would be very impressed with the increase in profits from the reduced costs gained throughout the system. Ultimately the company must not fall back into their present trap of taking virtually no external outlook on markets that are constantly evolving and demanding that companies do as well.