DESIGNING SUPPLY CHAIN COLLABORATION FOR FOOD AND AGRIBUSINESS SECTOR

Dr. Jabir Ali Associate Professor Centre for Food & Agribusiness Management Indian Institute of Management, Lucknow 226 013

WHAT WE NEED TO DO?

MATCHING SUPPLY CHAIN WITH PRODUCTS

Before devising a supply chain, consider the nature of the demand for your products -Functional products require an efficient process; innovative products, a responsive process
By Marshall L. Fisher, Wharton Business School in Philadelphia

SUPPLY CHAIN MATRIX SUPPLY & DEMAND MATCHING

Functional Products Efficient Supply Chain Responsive Supply Chain Match

Innovative Products Mismatch

Mismatch

Match

A functional product should adopt efficient supply chain. A firm in this Quadrant would use information technology to increase its efficiency Minimization of costs raw material, production and distribution Eg. Inventory management continuous replenishment

An innovative product should adopt responsive supply chain. An innovative product would have higher margin. The product in this category would get obsolete rather quickly. Due to these characteristics, the firm should be responsive to avoid losing sales. Eg. Mass customization strategy

THE TRIPLE A SUPPLY CHAIN

The best chain are not just fast and cost effective. They are also agile and adaptable, and they ensure that all their companies interests stay aligned
By Hau L. Lee, Stanford Graduate School of Business, Stanford

ALIGNING INCENTIVES IN SUPPLY CHAIN

A supply chain works well only when its players equally share the risks, costs, and rewards of doing business together
By V.G. Narayanan and Ananth Raman, Harvard Business School in Boston Are all the stakeholders in agriculture supply chain getting their share? Farmers share in consumer price is very low? Number of middlemen in the chain take undue share without any value-addition? Why the contract farming in India is not succeeding?

HOW TO ALIGN INCENTIVES IN YOUR SUPPLY CHAIN?

A Step-by-Step Approach

Stakeholders face incentive problems in their supply chains because of

chain possess. badly designed incentives.

hidden actions by partner firms. hidden informationdata or knowledge that only some of the firms in the supply

They can tackle incentive problems by

acknowledging that such problems exist. diagnosing the causehidden actions, hidden information, or badly designed

incentives. creating or redesigning incentives that will induce partners to behave in ways that maximize the supply chains profits.

They can redesign incentives by

changing contracts to reward partners for acting in the supply chains best interests. gathering or sharing information that was previously hidden. using intermediaries or personal relationships to develop trust with supply chain
partners.

They can prevent incentive problems by

conducting incentive audits when they adopt new technologies, enter new markets,
or launch supply chain improvement programs. educating managers about processes and incentives at other companies in the supply chain. making discussions less personal by getting executives to examine problems at other companies or in other industries.

WERE IN THIS TOGETHER

If your latest supply chain partnership failed to live up
to expectations, as so many do, its probably because you never stated your expectations in the first place.
By Douglas M. Lambert and A. Michael Knemeyer

FUNDAMENTAL REQUIREMENTS FOR AN EFFICIENT AGRIBUSINESS SUPPLY CHAIN BETWEEN GROWERS AND CONSUMERS

Scale of operation - ability to produce sufficient volume of the

highest quality product throughout the season

Strategic alliances - concentrating expertise in growing a quality

product

Production flexibility-several processing contracts provide a

degree of flexibility on the supply side

Continuity of supply - Efficient crop planning Quality control - Product specifications, due diligence and
accurate record keeping are all important considerations for good Grimsdell, K.control 1996 quality

Communication efficient flow of information

PROCESS OF SUPPLY CHAIN COLLABORATION

Macro Factors Globalization/ Consolidation Consumers attitude Regulatory environment
Designing and Governance of SCM activities Supply Chain Collaboration

Micro Factors Industry structure Product features

Establishing and Maintaining of SCM relationships

Selecting information Data sharing and Informatio n system

Selecting partners

Managing trust

Collaboration width (activities)

Sharing rewards

Managing power

Sharing risks

Collaboration depth (level of collaboration)

Managing dependence

Source: Adopted from Matopoulos et al, 2007

DESIGNING A RELATIONSHIP WITH COOPERATION AND TRUST KEY STEPS Assessing the value of the relationship

Identifying operational roles and decision rights for each party

Creating effective contracts Designing effective conflict resolution mechanisms

MEASURING AGRIBUSINESS SUPPLY CHAIN PERFORMANCE

WHAT IS SCM PERFORMANCE MEASUREMENT?

Performance measurement is defined as the
process of quantifying the effectiveness and efficiency of actions across the supply chain. Effectiveness is the extent to which a customers
requirements are met and

Efficiency measures how economically a firms resources

are utilised when providing a pre-specified level of customer satisfaction

WHY TO MEASURE SUPPLY CHAIN PERFORMANCE?

To reduce operating costs

To drive revenue growth To enhance stakeholder value To enhance the customer satisfaction

A CYCLE VIEW OF PROCESSES

Processes interconnect entities (stages) in a supply chain
Customer Order Cycles exist on the boundary between
customers and retailers

Replenishment Cycles exist on the boundary between the

retailer and distributor

Manufacturing Cycles exist on the boundary between the

distributor and the manufacturer

Procurement Cycles exist on the boundary between the

supply and manufacturer

SUPPLY CHAIN PROCESSES A CYCLE VIEW

Procurement Cycle
Suppliers Manufacturers

Manufacturing Cycle

Replenishment Cycle Retailers

Customer Order Cycle

Wholesale Distributors

Customers

Information Flow

Goods Flow

Revenue Flow

CUSTOMER ORDER CYCLE

CUSTOMER & RETAILER

Customer arrival

Customer Order Receiving

Customer Order entry

Customer Order fulfillment

THE CUSTOMER ORDER CYCLE

Customer Arrival Physical entry, phone or web interface Goal - facilitate interactions by easy access to goods,
services or information with little delay to convert arrivals to orders

Metrics - delay time, queueing, congestion

Customer Order Entry Customer specifies products or services to be acquired Goal - ensure order entry is timely accurate and
communicated to all processes effecting it

CUSTOMER ORDER CYCLE (CTD.)

Order Fulfillment Order filled and sent to customer Objective - get the correct and complete order to the customer
at the promised date at the lowest cost and adjust internal stock records accordingly

metrics - on time deliveries, correct orders ,

Order Receiving Physical delivery of product or service to customer and cash

transferred to retailer

FRAMEWORK OF SCM PERFORMANCE MEASUREMENT

Van der Vorst (2000) (in logistics) makes a distinction between performance indicators on three main levels:

the supply chain level (e.g. product availability, quality, responsiveness, delivery
reliability and total supply chain costs);

the organization level (e.g. inventory level, throughput time, responsiveness,

delivery reliability and total organizational costs); and

the process level (e.g. responsiveness, throughput time, process yield and process
costs).

Li and OBrien (1999) (in manufacturing) proposed a model to improve supply chain efficiency and effectiveness based on four criteria:

profit; lead-time performance; delivery promptness; and waste elimination. responsiveness; reliability; costs; and assets.

Lai et al. (2002) identified four performance indicators:

MEASURING THE PERFORMANCE OF AGRI-FOOD SUPPLY CHAINS

Shelf life constraints for raw materials and perishability of products;

Long production throughput time;

Seasonality in production; Physical product features like sensory properties such as taste, odor, appearance, color, size and image; Requires conditioned transportation and storage; Product safety issues; and Natural conditions affect the quantity and the quality of farm products.

PERFORMANCE MEASUREMENT FRAMEWORK

Cost

Time

Waste

Quality

Framework
Flexibility

Responsive

Reliability

PERFORMANCE MEASUREMENT FRAMEWORK - AGRIBUSINESS

Efficiency Costs Production/distribution Transaction Profit Return on investment Inventory

Flexibility Volume flexibility Delivery flexibility Mixed flexibility

Performance

Responsiveness Fill rate Product lateness Customer response time Lead time Shipping errors Customer complaints

Quality Product Quality Sensory properties and shelf-life Product safety & health Product reliability and convenience Process quality Production system characteristics Environmental aspects Marketing

MEASURES AND METRICS AT FOUR BASIC LINKS IN A SUPPLY CHAIN: PLAN, SOURCE, MAKE/ASSEMBLE, AND DELIVER

Source: Gunasekaran et al, 2001

SCM RESOURCE PERFORMANCE MEASURES

Total cost: Total cost of resources used. Distribution costs: Total cost of distribution, including
transportation and handling costs.

Manufacturing cost: Total cost of manufacturing, including

labor, maintenance, and re-work costs.

Inventory: Costs associated with held inventory:

Inventory investment: Investment value of held inventory. Inventory obsolescence: Costs associated with obsolete inventory;
sometimes includes spoilage. Work-in-process: Costs associated with work-in-process inventories. Finished goods: Costs associated with held finished goods inventories.

Return on investment (ROI): Measures the profitability of an

organization. The return on investment is generally given by the ratio of net profit to total assets.

SCM OUTPUT PERFORMANCE MEASURES

Sales: Total revenue. Profit: Total revenue less expenses. Fill rate: Proportion of orders filled immediately:

Target fill rate achievement: To what extent a target fill rate has been achieved. Average item fill rate: Aggregate fill rate divided by the number of items.
On-time deliveries: Measures item, order, or product delivery performance:

Product lateness: Delivery date minus due date. Average lateness of orders: Aggregate lateness divided by the number of orders. Average earliness of orders: Aggregate earliness divided by the number of orders.

Percent on-time deliveries: Percent of orders delivered on or before the due date.

Backorder/stockout: Measures item, order, or product availability performance:

Number of backorders: Number of items backordered due to stockout. Number of stockouts: Number of requested items that are out of stock. Average backorder level: Number of items backordered divided by the number of
items.

Customer response time: Amount of time between an order and its corresponding delivery. Manufacturing lead time: Total amount of time required to produce a particular item or batch.

Shipping errors: Number of incorrect shipments made.

IDENTIFYING KEY PERFORMANCE INDICATORS (KPIs)

FACTORS AFFECTING SUPPLY CHAIN PERFORMANCE

Goal
Improving SCM performance

SCM Critical Success Factors

Reliability

Flexibility

Lead time

Costeffectiveness

Valueadded

Enablers

Management Systems

Process Integration

Information Systems

Organization

Technology

Relationships

SWOT

Potential Actions for Improvement

DESIGNING SUPPLY CHAIN PERFORMANCE INDICATORS

Input performance indicator Output performance indicator

Input

SCM process
Process performance indicator

Output

SCM PERFORMANCE INDICATORS AND BENCHMARKING

Input standards alternatives Output standards

Analysis of deviations

alternatives

Analysis of deviations

Input performance indicator

Input SCM process

Output performance indicator Output Process performance indicator Analysis of deviations

alternatives process standards

WEGMANS & WELCHS SUPPLY CHAIN PERFORMANCE: A CASE

Source: Mike Bargmann and Dee Biggs, 2006

KPI Reporting - Wegmans Food Markets and Welch Foods

Important KPIs
Days of supply On Time Delivery Order Cycle Time Invoice Accuracy Timely Payment Average Days Late Service level

This is a measure of the percentage of items fully synchronized between the two trading partners

Days Of Supply Reporting Back To Scorecard Entire Company Grocery Dairy

Frozen
KPI Notes: This KPI measures the days of supply of product Wegmans has on hand for Welch's. This is a weekly measurement, broken out by department.

DOS - COMPANY Days Of Supply

30
Entire Company

25

20

15

10

0 26 28 30 32 34 36 38 40 42 44 46 48 50 52 2 4

DOS Goal Trendline

10 6 8

---------------------------------- 2005 ---------------------------------||------------- 2006 ---

DOS - GROCERY

DOS - DAIRY

DOS - FROZEN

ON TIME DELIVERY PAGE

ORDER CYCLE TIME COMPANY

INVOICE ACCURACY

TIMELY PAYMENT

SERVICE WELCHS TO WEGMANS

SERVICE LEVEL DC TO STORE