supply chain management - shahi foods

SUPPLY CHAIN MANAGEMENT SHAHI FOODS

Shahi Deluxe

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1.0 INTRODUCTION

Shahi Foods is a manufacturer and distributor of snack food products. The brand is most

associated with their silver bullet brand that launched their enterprise, Supari. Shahi and Supari

are almost synonymous with end consumers, yet the Shahi product portfolio goes beyond just

Shahi Supari. Their diversified portfolio includes ethnic mouth-fresheners, sugar and toffee

candies, and most recently added, potato crisps.

Shahi began operations in the late seventies, and has since built up its reputation as a

major contender in the snacks and ethnic mouth-freshener industry. A few years ago the

company received its certification from HAACP, (hazard analysis and critical control point)

which certifies companies related to food products for quality and safety. This certification

added to their previous attainment from ISO, and goes in tandem with Shahi’s vision, which is:

“To provide the utmost quality products at affordable rates to customers.”

In our report we will focus on one of Shahi’s bestselling products, namely Shahi Deluxe,

an ethnic mouth-freshener. We will be analyzing the entire spectrum of Shahi’s supply chain for

this product, as well as the issues facing Shahi in managing their supply chain. Finally we will

be developing recommendations for a world class supply chain system based on the SCOR

model that would no doubt see the company reap successes in the future.


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Partial Organizational structure of Shahi’s Factory

Factory Operations Manager

Production Manager

Store Keeper

Finished Goods Manager

Admin. Security manager

Maintenance Manager

Packaging manager

(thekedar)

Floor managers

Department Supervisors

Laborers

Assistant

Laborers

Electricians Mechanics Technical staff

Operators Security Guards Chawkidar Peon Cleaning staff

Packaging labor

employed by the

thekedar

Assistant

Laborers


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SHAHI DELUXE

PART 1: ‘A TASTE OF THINGS TO COME’


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1.1 SUPPLY CHAIN DRIVERS

Production

The raw material ingredients required for the production of Shahi Deluxe include ‘sonf’,

betel nuts, and dried dates. These ingredients are procured from different suppliers of both local

and international repute.

Shahi follows a FIFO method of production scheduling; namely, the first materials that

are supplied are the first to be used in the production processes. Shahi does not like to overstock

finished goods, thus they aim to optimize the production process so as to minimize the stocking

of finished goods. Production is carried out on a daily basis, and the levels of production are

determined from past sales information that the sales and marketing department supplies to the

production floor managers.

The delivery period for raw materials falls between two and five days. During the on-

season, raw materials are delivered through local supply channels and thus take less time to be

delivered. Yet during the off-season, because raw materials are sourced from foreign suppliers,

the time for importing increases the delivery period.

Raw materials are converted daily during the production process, thus the work-in-

process inventory does not extend to more than one day.

Before the production processes take place, all raw materials are assured by Shahi’s

quality assurance inspector.

Inventory

Shahi does not employ specific inventory management techniques in the stocking of its

raw materials or finished goods. The reason for there being no specified levels of inventory is

because supply is sporadic, depending on availability and seasonal factors. Thus Shahi follows a

Seasonal Inventory policy by stocking materials when it is in season or when a supplier has

exceptional quality ingredients on hand.

Shahi follows a policy of maintaining one day of finished goods stock in their inventory.

This along with their raw materials inventory are the only inventories that contribute to the total

inventory pool, as the work-in-process inventory is converted on a daily basis.


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Location

Shahi employs different distributors for every region in Pakistan. In most regions the

company does not own and operate storage warehouses, and thus supplies the product straight to

distributors. In Karachi however, Shahi owns and operates its own company warehouse which

stocks finished goods before being distributed to its front line channel members at specified

times.

Shahi employs regional sales managers who are responsible for the management and

efficient supervision of all its distributors. Market segmentation is carried out in-house and then

relayed on to distributors by the sales managers with specific instructions on distribution and

handling aspects.

Transportation

Logistic concerns are handled mostly directly by Shahi as it utilizes its own vans for the

transport of its product from the factory (behind University Road) to its distributors. Most of its

distributors operate in close proximity to Shahi’s factory, thus saving the company time and

money in transportation.

The export of Shahi Deluxe is handled by distributors themselves, and the cost is borne

directly by them.

Information

The effective procurement and utilization of information is outsourced by Shahi to

research firms. There is one sales representative who is responsible for garnering information on

past performance, and the perceptions of wholesalers and distributors. He does this by

conducting surveys and studying historical data. This information along with the data provided

by research firms, allows Shahi to take informed strategic business decisions.

All the daily reports of inputs and outputs are fed into an inventory management software

that manages the efficiency and effectiveness of Shahi’s inventory and stock keeping processes.

Meetings are conducted regularly to utilize information in an effective fashion, and

discussions on the Bullwhip effect that Shahi is currently facing allow the management to better

gauge their performance and improve.


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SUPPLY CHAIN DRIVERS

The right combination of responsiveness and efficiency in each of these drivers would

allow Shahi’s supply chain to increase throughput while simultaneously reducing inventory and

operating expenses. Essentially a trade-off, Shahi can gauge their position on the supply chain as

relative to these five drivers, and manage them to the optimum level.

Shahi maintains that it seeks to align its supply chain so as to find the best payoff

between responsiveness and efficiency. It chooses its suppliers on either price basis or on quality

basis, yet more so on price basis because there is little or no standardization of the raw materials

for their consideration in Pakistan. Thus, seasonal bulk purchases allow Shahi to gain economies

of scale, which they align with their business strategies.

1. Production

What, how and when to produce

4. Transportation

How and when to move product

3. Location

Where best to do what activity

2. Inventory

How much to make and how much to store

5. Information

The basis for making these decisions


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1.2 CHANNEL MEMBERS

Supply Chain Participants

The channel members in Shahi’s supply chain include their suppliers, their suppliers’

suppliers, local intermediaries, distributors, wholesalers, and retailers.

Shahi’s channel members for the raw material ingredients needed in the production of

Shahi Deluxe are, growers and farmers, village intermediaries, cleaners, stockists, processors,

distributors, wholesalers, retailers, and in the off season, brokers, importers, and international

suppliers. Furthermore, for the sourcing of raw materials needed for the production of the

wrappers for Shahi Deluxe, film manufacturers and printers are also used.

A more detailed view of all the participants in Shahi’s supply chain network regarding

Shahi Deluxe can be appreciated in the later part of the report dealing with the sourcing section

under Supply Chain Operations.

SUPPLY CHAIN STRUCTURE

Growers/Farmers

SHAHI

Local Intermediaries (Villages)

Cleaner

International Seller

Importer

Stockist

Broker

Processor

Distributor

Wholesaler

Mobiler

Retailer

Consumer


Shahi Deluxe

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SHAHI DELUXE

PART 2: ‘ETHNIC MOUTH-FRESHNER’


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2.1 SUPPLY CHAIN OPERATIONS

There are four categories of supply chain operations; planning, sourcing, making and

delivering. These four categories organize the supply chain operations and were developed by

the supply chain council for use in conjunction with the SCOR model.

Planning refers to all the operations that are necessary in order to actively facilitate the

sourcing, making and delivering of a company’s product. Planning is essentially the backbone of

the entire process, without accurate planning, the entire supply chain network will suffer. It

provides a base from which all other decisions can be made. By covering the several operations

that fall under this category, such as demand forecasting, product pricing and inventory

management, companies can take informed decisions in regards to successfully managing their

supply chains.

Sourcing essentially refers to the processes and activities required by a company to

facilitate the acquisition of materials and other inputs in order to further its business. This

includes all procurements from suppliers and other channel members.

Making basically covers all the operations needed to successfully create a product out of

all the given inputs. The three subsets of this category are; product design, production

scheduling, and facility management.

Delivering sees that all operations involved with the effective allocation of the finished

product to distributor channel members take place without hitch. Order management, and

delivery scheduling are crucial factors involved in delivering operations, and allow the company

to optimize its delivery channels so as to maximize profits.

The following sections will analyze Shahi’s position relative to these supply chain

operations.


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Planning

Demand Forecasting

Shahi does not face very irregular demand for its products. In spite of this, they do

witness general changes in demand trends over long periods of time.

Product pricing

The management of Shahi only contemplates to bring about changes in its product prices

when faced with severe shortages of its raw materials, and are hence forced to bear the added

cost. If, however these circumstances do not occur, Shahi would only change its prices over long

periods of time due to inflation and other long term economic determinants. Therefore, it is fair

to say that even though they face seasonal price differences in their sourcing of raw materials,

they do not pass this on to their final consumers, unless extreme circumstances arise.

Inventory management

Inventory management has two major standpoints, one would be the inventory of finished

goods and the other would be that of raw materials. Shahi does not maintain any work-in-process

inventory. It dispatches its daily production at the end of everyday. Only under extreme

circumstances is Shahi ever forced to stock work-in-process inventories.

The inventory management aspect of planning plays a very intricate role for Shahi. One

has to keep in mind that the purchasing of Shahi is done in batch bases. Even for a single type of

raw material, throughout the year Shahi will deal with different suppliers. It will deal with local

suppliers when a raw material is in season and will deal with foreign suppliers during the off

season. It is the role of the purchasing manager to procure good quality raw materials for the best

prices.

The amount of inventory level that is maintained as the buffer stock is one month’s

supply. The reason that Shahi has to maintain this buffer stock is because of the inconsistent

nature of supply sources that Shahi has to face. The inconsistent supply of raw material is not

due the any management irresponsibility but rather to the nature of the industry they are in.


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Sourcing

Since Shahi Deluxe is comprised of many different constituents, Shahi deals with a

number of suppliers, each providing one particular product. Moreover, the products that Shahi

acquires from these suppliers are agricultural based. Shahi tends to not focus on building long

term relationships with certain suppliers due to the uncertain nature of their industry. Key

suppliers face inconsistent product quality, shortages, and severe price sensitivities, and thus are

not reliable enough for Shahi to seek a long term relationship with.

Furthermore, Shahi enlists several different suppliers in order not to fall prey to supplier

pressures such as unwarranted price hikes by a monopolized player in the industry. Thus by

having several suppliers for each different raw material, they optimize their costs as well as

reduce their risks.

Shahi Deluxe is comprised of three main ingredients; sonf, betel nuts, and dry dates.

These three raw materials, along with the material needed for producing the wrapper for the final

product, are procured from different suppliers. Thus the channel members involved in Shahi’s

supply chain revolve around the procurement modes of these materials.

Sonf

ON SEASON

Growers/Farmers

Growers/Farmers

Growers/Farmers

SHAHI


Cleaner/Stockist


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OFF SEASON

• Local shortage situation of sonf usually occurs in the off season, and requires the

sourcing of sonf from international suppliers.

• Currently sonf is in its off season and Shahi is sourcing it from international sellers.

• Local sonf is a seasonal product sourced mainly from Sindh. It is harvested during

February to April.

• Shahi usually purchases six months stock of sonf, which is stored in its own godarns.

• Inbound logistics needs served by informal local transporters.

• The quality of each sample is assessed by checking the supply against the sample

provided.

• Prices vary based on quality.

• During the off-season, the stockists and importers are responsible for the sourcing of

the needed supply.

There are certain issues with the procurement of sonf:

1. There is no standardization or grading of the product.

2. Procurement has to be done on lot by lot basis.

3. Proves difficult for medium or long term planning.

4. Agricultural production of local suppliers varies greatly.

5. Currently sonf is in short supply, and necessitates its import from India.

Stockist

Grower


Broker

SHAHI

International Seller

Importer


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Betel Nuts

BETEL NUTS

• Betel nuts are primarily imported from Indonesia and Thailand.

• Prices fluctuate on a daily basis due to demand and supply conditions.

• Importers may import specifically for a manufacturer or may import without having a

secure order in hand.

• Since betel nuts are a commodity, market players engage in daily price determination

wars.

• Overall, the market is quite efficient due to the excess of players and information.

• This leads to speculative buying or selling stock as well.

• It is a controversial commodity and the government has tried implementing standards

and policies for import.

• Selective application of law creates large-scale corruption and importing through

efficient methods.

• Shahi does not enter into direct import contracts due to clearance hassles and due to

abundant availability.

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Stockist

International Sellers

Importer

Broker

SHAHI


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Dry Dates

DRY DATES

• Dry dates are a commodity product.

• Their production is on a seasonal basis (August harvest).

• Generally there is less price fluctuation in this category.

• In 2004, the harvested crop was infected, which led to a severe shortage and doubled

prices.

Shahi uses cut dry dates. They enter into a contract with a processor who provides them

with cut dry dates at a specified price. The quality must abide to certain standards, although this

is difficult to implement, especially in periods of short supply. Furthermore, the understanding

with their processor is that large price fluctuations in the price of dry dates will be passed on

upwards or downwards. Finally, the contract is not exclusive, as quality concerns still exist.

Village Intermediary

Grower/Farmer

Grower/Farmer

Processor

SHAHI

Mandi in Sukkur and Khairpur


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Wrapper

WRAPPER

• Price rates and quality specifications are established with suppliers on long term

contracts.

• Unusual increase or decrease in price will be passed on upwards and downwards.

• Quantity ordered is based on demand.

• General level of quantity supplied on a regular basis.

• There is a long lead time in sourcing wrappers thus making it very difficult to

streamline the process.

• Shahi orders on a blanket purchase order basis: quantity is intimated over period if

rush order is required or quantity needs to be changed.

Film Manufacturer

Printer

SHAHI


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Making

Product Design

Shahi Supari, being an edible supari, has a traditional design that is comprised of

ingredients such as sonf and betel nuts. With Shahi Supari serving as Shahi’s leading brand, the

company wanted to enhance its brand image further by creating a more exotic mouth freshener.

With the market trends in the supari and freshener market changing, the company added some

ingredients such as dry dates to their original formulation and kept the original packing to keep

the traditional look and thus resulted in Shahi Deluxe. The product has preservatives, sweeteners,

and the highest quality ingredients; sonf, betel nuts, and dry dates.

The formulation and introduction of Shahi Deluxe was done after the great success of the

traditional Shahi Supari with digestible dry dates added in the ingredient. This move made Shahi

Deluxe the leader in its market.

Production Scheduling

Production scheduling is conducted on a daily basis through demand forecasts based on

the previous day’s sales figures. For example, if today’s sales were 2,500 boxes, and the last

year’s average for the month of December was 2,000 boxes, then the factory will make 2,500

boxes.

The sales staff goes to the distributors to study market trends, changes and to take orders

for the following day. They then report this to the sales manager who calculates the averages and

relays the figures to the factory personnel. The facility is run on eight hour shifts everyday and

the production manager is responsible for the uninterrupted flow in production, whereas the

storekeeper takes care of maintaining adequate levels of inventory. When he foresees some kind

of shortage of any material, he informs the head office who procures the said ingredient; either

through local channels or imported though dealers.

1st floor Raw material movement Cleaning and sorting Cutting

2nd Floor Roasting Mixing

1st Floor Packaging

Finished goods

Chute


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Facility Management

Shahi has one factory which runs on a daily basis except on Sundays. Due to this, and

because they convert all inputs on a daily basis, they have no work in process inventory, and low

levels of total inventory. Thus utilization of space is very effective. The production manager,

along with an HR manager, handles all the labor management of the facility. An inventory

storekeeper is in place to handle the raw material and finished goods inventory stocking and

delivery.

The process followed for production every day is that the sales manager sends the next

day’s sales forecast figures to the factory manager. The production manager and with the store

keeper then assess how much raw material would be required for the said quantities of finished

product. The raw material is then taken out of the stores and put into production.

After the finished goods have been packed, it is the store keeper’s duty to load the stocks

onto company delivery trucks and have them delivered to which ever distributor they need to go

to. There is always sales staff accompanying the delivery people to collect sales information

from distribution centers.


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Delivering

Order Management

The daily production and delivery of finished goods is carried out from the company’s

own factory. Shahi has adopted an in-house system of order management according to which

they follow the subsequent processes.

One man, the sales manager collects all the information and assesses how much

production will be done the following day. After his assessments, the order is sent to the

factory’s production manager.

Order routing is done on a manual basis as there is no system in place yet for the said

purpose. There are a set number of distribution houses which are Shahi’s customers, thus making

it relatively easy for the company to manage countrywide deliveries. It is the duty of the

distributors to handle fluctuations in supply through their own inventories.

As previously discussed, there is a very seasonal supply of raw materials in this industry,

thus all raw materials are procured on an ad-hoc seasonal basis. For example, when the price of

sonf is relatively low they buy large quantities of sonf to avail economies of scale. Or when they

are getting very good quality dates, they buy in bulk and stock up on dry dates. There is no set

rule for order management because in the industry it is not possible to have uninterrupted supply.

This also makes it very difficult to plan in high demand seasons as prices also vary accordingly.

Delivery Scheduling

Deliveries are made everyday except on Sundays to the distributors who then forward the

product on to wholesalers and other channel members. Orders for deliveries are placed at least a

day in advance and days with very high and very low demand are smoothed off by the use of

distribution centers which generally carry their own stocks of inventory. There are company

trucks that are used to deliver the finished goods from the factory to each main distributor. On

the trucks that carry the stocks of finished goods are also Shahi sales personnel who are in charge

of collecting all the information they can from the distribution centers. This is a main tool used

by the company for planning, as all the market information regarding sales quantities, future

orders, client handling, changes in trends and preferences are all collected through this primary

collection system.


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SHAHI DELUXE

PART 3: ‘DELICIOUSLY APPETIZING’


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3.1 AGGREGATE PLANNING

Aggregate planning is an operational activity which conducts an aggregate plan for the

production process, in advance of 2 to 18 months, to give an idea to management as to what

quantities of raw materials and other resources are to be procured and when, so that the total cost

of operations of the organization is kept to the minimum, over that period.

The quantity of outsourcing, subcontracting of items, overtime of labor, employees to be

hired and fired in each period, and the amount of inventory to be held in stock and to be

backlogged for each period are decided. All of these activities are done within the framework of

the company’s policies and long term commitments.

Aggregate planning has certain pre-required inputs which are inevitable; information

about the resources and the facilities available; demand forecasts for the period for which the

planning has to be done; the cost of various alternatives and resources which includes the cost of

holding inventory, ordering cost, and the cost of production alternatives like subcontracting,

backordering and overtime.

Aggregate planning attempts to match the supply and demand of a product or service by

determining the appropriate quantities and timing of inputs, transformation, and outputs.

Decisions are made on production, staffing, inventory and backorder levels.

The main objectives of a good aggregate plan is to maximize customer service and the

utilization of plant and equipment, and to minimize inventory investment, changes in the

workforce levels, and changes in production rates.

However one should keep in mind that these objectives are relative with respect to every

firm in an industry. The significance given to each of these objectives differs from case to case

based on specifics dealing to each organization.

Chase Approach

Capacities of workforce levels, production schedules, and output rates are

adjusted to match demand requirements over the planning horizon.

The advantages to this approach are:

• Anticipation inventory is not required, and investment in inventory is low.

• Labor utilization is kept high.


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The disadvantages to this approach are:

• High expense of adjusting output rates and/or workforce levels.

• Possible alienation of workforce.

Level Approach

Capacities of workforce levels, production schedules, and output rates are kept

constant over the planning horizon.

The advantages are:

• Stable output rates and workforce levels.

The disadvantages are:

• Greater inventory investment is required

• Increased overtime and idle time

• Resource utilizations vary over time

Leverage Approach

Varying total levels of production capacity in order to match demand is the lever

approach. This approach can only be used if there is excess production capacity available.

The main advantages are:

• A considerable amount of the workforce can be maintained at a steady rate.

• Low levels of inventory.

• Lower average levels of capacity utilization.

The disadvantages are:

• Changes in capacity have to be made fast.

• More easily prone to bullwhip effect.


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Shahi’s Aggregate Strategy

Shahi uses the leverage approach to fulfill the fluctuations in its demand. The reason for

this is that Shahi does not face a great deal of variation in its demand. Hence, Shahi management

finds it best to fix the production level of its factory to a certain level. They change the leverage

of their productivity by working their capital and other resources overtime to meet and rise in

demand. This way they can keep their inventory levels of finished products to a minimum. They

need to do so since they have a limited number of godarns and one warehouse in which they

store their raw materials and finished goods respectively.

However, from the perspective of their raw materials, Shahi maintains a level approach in

the sense that Shahi’s most important supply chain policy is that they should always have enough

stock of raw materials to meet fluctuations in demand. They use the leverage approach in the

manufacturing stage where they overwork their capital and other resources to meet demand with

their finished products.

Since their purchasing of raw materials is done in batches, periods which consist of

spikes in the demand do not affect their purchasing of raw materials. The general level of

quantity is supplied on a regular basis. However, in case of a rise in demand, they let their

suppliers know as soon as they realize the rise in demand. Problems do arise however for the

sourcing of wrappers because they have longer lead times and hence make it difficult to

streamline the process.

Shahi does however evaluate the demand of their products annually to forecast any

general rising or falling trends in their demands. Based on these annual forecasts they base their

total annual purchasing quantities. Further plans are made and the break up of pre-quantified

batches is passed on to the purchasing managers. Purchasing of raw materials is based on these

forecasts as well as on previous year performances.

In spite these forecasts, the purchasing manager of Shahi is permitted and is delegated the

authority to divert from these forecasts if there is an opportunity to purchase a high quality batch

of raw materials. Under these circumstances and given the norm of the industry, the purchasing

manager is usually faced with an option of buying a particular batch of raw material of a fixed

quantity. If the quality is to the mark, then has to negotiate the price and coordinate with the

warehouse in Karachi and communicate with them the quantity and the date of arrival of the

stock so that the warehouse can accommodate the purchase.


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3.2 OUTSOURCING

Outsourcing is the management or day-to-day execution of an entire business function by

a third party service provider. Outsourcing can be provided on or off premises, in the same

country or in a separate country. A long-term, results-oriented relationship with an external

service provider for activities traditionally performed within the company is what comprises a

decision to outsource. Outsourcing usually applies to a complete business process. It implies a

degree of managerial control and risk on the part of the provider.

Outsourcing is often referred to as a ‘make versus buy’ decision on the part of the

manufacturer. The question is, “Is it in the organization’s best interests to continue to (or start to)

perform the activity itself using its own people, process expertise, and technology or to ‘buy’ the

activity from the service provider marketplace?”

While outsourcing may seem new, it really is just a new focus on the classic make or buy

procurement decision. One needs to ensure that such decisions are made intelligently and not just

based on the outsourcing trend.

The decision to outsource can be analyzed through a mathematical formula. This formula

would allow a company to compare the cost of producing the process or part in-house compared

to outsourcing its production to an external agency. Yet although the lower costing option would

seem the most feasible, it is important to consider other aspects of outsourcing that particular

process or part before making the decision. Several questions need to be addressed before

making a decision. These questions include but are not limited to;

1. Is this process or part our organization’s core competency? Is it strategic?

2. Could we be harmed by disclosing proprietary information?

3. What will be the impact on quality? On delivery?

4. What additional risks would we be facing?

5. How irreversible is the decision?

After answering these questions if it is in the company’s interests to outsource, and

the option is less costly, then the company should seek out a reliable external agency with

which they could build a long term relationship. This agency should fit into the company’s

strategic vision and should form an active part in its supply chain network.


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After answering the afore mentioned questions, Shahi has reached a decision to

outsource the following processes, as it sees it in its long term interest to do so.

• Research and information compiling is outsourced to research companies. This is

done to collect market research about market trend changes, likes and dislikes,

and any other changes that are usually seen in the market place.

• Packaging staff in the packaging department is employed and handled by a

thekedar, although the equipment and facility used is Shahi’s. The main problem

faced here is with the production manager, who is not able to delegate authority to

laborers. Any mal practices are to be discussed by the thekedar, and managers are

not allowed to directly tell the laborers what to do and what not to do.

• Delivering is made the responsibility of distribution centers, who keep their own

stock of inventory and distribute to whole sellers, retailers and the like.

• Cleaning is often times outsourced, as Shahi’s in-house capacity is at times not

sufficient enough for the purpose.

• Stocking is sometimes made the responsibility of the seller who enters into a

contract to sell large quantities during the season, and then supplies as per agreed

schedule, thus reducing the burden on Shahi in two ways, by deferring the

liability for payment, and countering space constraints.


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SHAHI DELUXE

PART 4: ‘MOUTHWATERING DELIGHT’


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4.1 THE BULLWHIP EFFECT

The basic concept behind supply chain management is simple: Shahi orders products

from local vendors and importers when needed, while keeping track of what the speculated sales

of the next season will be. Then the production manager orders enough raw materials from local

producers, importers or stockists. Then the stockists look up for products on his end and arranges

the order for Shahi based on the figures provided by the production manager.

In other words, when there are multiple levels to a supply chain - supplier, manufacturer,

distributor, OEM customer and user - the further up the chain, the less predictable are the order

quantities.

The problem turns out to be one of coordination. Suppliers, manufacturers, sales people,

and customers have their own, often incomplete, understanding of what real demand is and

especially in an industry like Shahi’s it is very difficult to order for the future as there are no data

trends as such based on which planned purchase for the future can be made. Each group has

control over only a part of the supply chain, but each group can influence the entire chain by

ordering too much or too little. Furthermore, each group is influenced by decisions that others

are making and so is in the case with Shahi, as certain ingredients are also imported, a little

mistake in ordering can cause major shortages or pile ups of the dates, sonf or beetle nuts.

This lack of coordination coupled with the ability to influence while being influenced by

others leads to what refers to as the Bullwhip Effect. Decisions made by groups along the supply

actually worsen shortages and overstocks.


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Causes of Bullwhip Effect

Demand Forecast Updation

Forecast variance at each level of the supply chain gets amplified if forecasts are based

on the downstream partners’ forecasts (instead of actual end user demand) and if forecasting

policies (like lead time) methodologies and assumptions differ.

Order Batching

Orders placed by Shahi to its upstream partners may be batched and this leads to

increased order variance. Order batching may be due to;

• Transportation economies

• Seasonal consumer demand

• Order processing and handling costs

Forward Buying

Products may be bought in advance of actual demand to take advantage of price

promotions. This often happens as there are few tools for forecasting demands and whenever

there is a price reduction, Shahi stocks raw materials and has to bear the risk of product expiry as

well.

Shortage Gaming

When demand exceeds supply, the production manager at Shahi exaggerates the demand

to ensure 'allocation'. When demand is fulfilled, such 'buffer' orders are cancelled.

Reduction of the Bullwhip Effect

One way Shahi can reduce the bullwhip effect is through better information, either in the

form of improved communications along the supply chain or through presumably better

forecasts. Because managers realize that end-user demand is more predictable than the demand

experienced by factories, they attempt to ignore signals being sent through the supply chain and

instead focus on the end-user demand. This approach ignores day-to-day fluctuations in favor of

the running levels.


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Another solution is to reduce or eliminate the delays along the supply chain. In both real

supply chains and simulations of supply chains, cutting order-to-delivery time by half can cut

supply chain fluctuations by 80%. In addition to savings from reduced inventory carry costs,

operating costs also decline because less capacity is needed to handle extreme demand

fluctuations.

Following are certain recommendations on how Shahi can reduce their bullwhip effect:

1. Focus on end-user demand through point-of-sale (POS) data collection, electronic

data interchange (EDI), and vendor-managed inventories (VMI) to reduce

distortions in downstream communication.

2. Start production and go into horizontal integration.

3. Allocate demand among customers based on the trends basis or monthly reviews.

Causes Information Sharing

Channel Alignment Operational Efficiency

Demand Forecast Updation

* Visibility of End User demand data across the supply chain

* Vendor Managed Inventory (VMI) * Consumer Direct

* Lead-time reduction * Echelon-based inventory control

Order Batching * Visibility of End User demand data across the supply chain * Order processing costs reduction (e.g. through Computer/ Internet based Order Management Systems)

* Logistics outsourcing * Discounts for truck-load assortments (of different products) * Delivery Consolidation

* Order processing costs reduction (e.g. through Computer/ Internet based Order Management Systems)

Forward Buying * Visibility of End User demand data across the supply chain

* Continuous Replenishment Program (CRP) * Stabilize prices through Every Day Low Price (EDLP: selling price) and Every Day Low Cost (EDLC: buying price)

* Activity Based Costing (ABC) to clearly analyze inventory costs, handling costs, transportation costs etc. and compare them with product price promotion benefit

Shortage Gaming * Share sales, capacity and inventory data

* Define cancellation policies


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4.2 SUPPLY CHAIN COORDINATION

Demand Forecasting

Clearly, one way to counteract this distortion in demand by forecasts by Shahi is for all

partners in the supply chain to share a common set of demand data from which to do their

forecasting. The most accurate source of this demand data is the supply chain member closest to

the end use customer, if not the end user customers themselves. Sharing point-of-sales (POS)

data among all the companies in a supply chain goes a long way toward taming the bullwhip

effect because it lets everyone respond to actual market demands instead of supply chain

distortions. The retailers should be questioned and a trend analysis should be made because

collecting information from thousands of retailers will create an issue. So the solution is to ask

the final distributor to forecast the demand based his rationale.

Order Batching

Order batching occurs because Shahi places orders periodically for amounts of product

that will minimize their order processing and transportation costs. It also occurs when ordering in

lot sizes determined by the forecast made by the sales manager. Furthermore, it is also based

upon the raw material that is purchased in bulk when it is available on low rates.

The way to address demand distortion caused by order batching is to find ways to reduce

the cost of order processing and transportation. The result will be a smoother flow of orders that

distributors and manufacturers will be able to handle more efficiently. Ordering costs can be

reduced by using electronic ordering technology. Transportation costs can be reduced by using

third party logistics suppliers (3PLs) to cost effectively pick up many small shipments from

suppliers and deliver small orders to many customers.

Product Rationing

This is the response that manufacturers take when they are faced with more demand than

they can meet. One common rationing approach is for a manufacturer to allocate the available

supply of product based on the number of orders received. Thus, if the available supply equals 70

percent of the orders received, the manufacturer will fill 70 percent of the amount of each order

and back order the rest. This leads distributors and retailers in the supply chain to raise their


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order quantities artificially in order to increase the amount of product that gets rationed to them.

This behavior greatly overstates product demand and is called “shortage gaming.” There can be

several ways to respond to this. The best would be if Shahi can base their rationing decisions on

the historical ordering patterns of a given distributor or retailer and not on their present order

sizes. This eliminates much of the motivation for the shortage gaming that otherwise occurs.

Product Pricing

Product pricing causes product prices to fluctuate, but in the case of Shahi, the end price

is established so that the firm cannot change and over charge its price to the consumers on a daily

or even monthly basis, as the industry is too competitive and there are many mushroom brands.

Given that nothing much can be done with the end price charged to the consumer, Shahi should

minimize the cost of importing or reduce the cost of getting it from the farmers, or integrate

vertically and start producing the raw materials themselves.


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4.3 COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)

All the initiatives mentioned in the last section are aimed at coupling the supply chain

more tightly by allowing for better forecasting and planning through information sharing, leading

to synchronized channels. In other words, if suppliers have a better visibility into the retailers’

sales forecasts, then they can plan their operations better. And if they have better visibility into

the retailers’ order forecast, then they can plan their replenishment better.

CPFR is an idea that helps extend supply chains that are become more demand-driven.

Today, it is termed as an acceptable business practice that has begun to deliver significant

business benefits to enterprises in the supply chains that have adopted it.

CPFR is a revolutionary business process wherein trading partners use technology and a

standard set of business processes for Internet-based collaboration on forecasts and plans for

replenishing product.

But in the case of Shahi, CPFR can be defined as those collaborative business practices

that enabled trading partners to have visibility into one another’s critical demand, order forecasts

and promotional forecasts through a systematic process of shared brand and category plans,

exception identification and resolution. The objective of CPFR is to improve efficiencies across

the extended supply chain, to reduce inventories, to improve service levels and to increase sales.

CPFR helps trading partners generate the most accurate forecasts possible and set highly

effective replenishment plans. Practitioners report major benefits in higher service levels,

decreased inventories, and increased sales.

One of the main differences between CPFR and other collaborative arrangements is that

under CPFR, all parties included are informed of exceptions, which generate the collaborative

activities aimed at resolving these exceptions. A second difference is the reliance on the

exception engine to be able to point out discrepancies, when operating at scale - in other words

with a large number of stores and many stock keeping units.

CPFR Process Steps

Step 1: Front-end agreement

Step 2: Joint business plan

Steps 3-5: Sales forecast collaboration


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Steps 6-8: Order forecast collaboration

Step 9: Order generation/delivery execution

Step 1: Create Front-End Agreement

Shahi, its suppliers and distributor companies identify executive sponsors, agree to

confidentiality and dispute resolution processes, develop a scorecard to track key supply chain

metrics relative to success criteria, and establish any financial incentives or penalties.

Step 2: Create Joint Business Plan

The project teams develop plans for promotions, inventory policy changes, store

openings/closings, and product changes for each product category.

Steps 3-5: Sales Forecasting Collaboration

Trading partners share consumer demand forecasts, and identify exceptions that occur

when partners’ plans do not match, or change dramatically. They resolve exceptions by

determining causal factors, and adjusting plans where necessary.


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Steps 6-8: Order Forecasting Collaboration

Trading partners share replenishment plans, by identifying and resolving exceptions.

Step 9: Order Generation

Result data (POS, orders, shipments, on-hand inventory) is shared, and forecast accuracy

problems, over/under stock conditions, and execution issues are identified and resolved.


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Value of CPFR

AMR Research in 2001 published their findings on the range of results actually achieved

by many early adopters of CPFR, and is summarized below in tabular form.

Retailer Benefits Typical Improvement

Better Store Shelf Stock Rates 2% - 8%

Lower Inventory Levels 10% - 40%

Higher Sales 5% - 20%

Lower Logistics Costs 3% - 4%

Manufacturing Benefits Typical Improvement

Lower Inventory Levels 10% - 40%

Faster Replenishment Cycles 12% - 30%

Higher Sales 2% - 10%

Better Customer Service 5% - 10%


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Benefits to Shahi

1. Enhanced Relationship

a. Implicitly, CPFR strengthens an existing relationship and substantially

accelerates the growth of a new one.

b. Buyers and sellers work hand-in-hand from inception through fruition on

business plan, base, and promotional forecasts.

c. Continual CPFR meetings strengthen this relationship.

2. Greater Sales

a. The close collaboration needed for CPFR implementation drives the planning

for an improved business plan between buyer and seller.

b. The strategic business advantage directly translates to increased category

sales.

3. Category Management

a. Before beginning CPFR, both parties inspect shelf positioning and exposure

for targeted packs and SKUs to ensure adequate days of supply, and proper

exposure to the consumer.

b. This scrutiny will result in improved shelf positioning and facings through

sound category management.

4. Improved Product Offering

a. Before CPFR implementation, the buyer and seller collaborate on a mutual

product scheme that includes SKU evaluation and additional product

opportunities.

5. Improved Order Forecast Accuracy

a. CPFR enables a time-phased order forecast that provides additional

information, greater lead-time for production planning, and improved forecast

accuracy vs. either stand-alone VMI/CRP or other industry tools.

6. Inventory Reductions

a. CPFR helps reduce forecast uncertainty and process inefficiencies.

b. How much inventory does your company hold to "cover up" for forecasting

errors or a trading partner's inability to have the product available in a timely

manner?


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c. With CPFR, a product can be produced to an actual order instead of storing

inventory based on forecasts. This would completely eradicate and lead times.

7. Improved Technology ROI

a. Through the CPFR process, technology investments for internal integration

can be enabled with higher quality forecast information.

b. The company will benefit by driving internal processes with common, high-

quality data.

8. Improved Overall ROI

a. As other processes improve, the return on investment from CPFR can be

substantial.

9. Increased Customer Satisfaction

a. With fewer out-of-stocks resulting from better planning information, higher

store service levels will prevail, offering greater consumer satisfaction.


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4.4 ENTERPRISE RESOURCE PLANNING (ERP)

Enterprise applications, commonly known as ERPs, are the backbone of a company’s

information systems. They can standardize and integrate all of Shahi business processes, as well

as facilitate collaboration between all its channel members.

Enterprise Resource Planning, as a term, derives from material resource planning. ERP

systems are management information systems that integrate and automate many of the business

practices associated with the operations or production aspects of a company. These typically

include manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting.

ERP software can aid in the control of many business activities, like sales, delivery, billing,

production, inventory management, and Human Resource Management Systems.

ERPs are cross-functional and enterprise wide. All functional departments that are

involved in operations or production are integrated in one system. In addition to manufacturing,

warehousing, and shipping, this would include accounting, human resources, marketing, and

strategic management.

Implementation

Enterprise resource planning systems are often closely tied to supply chain management

systems. Supply chain management software can extend the ERP system to include links with

suppliers.

To implement ERP systems, Shahi can seek the help of an ERP vendor or of third-party

consulting company. Consulting in ERP involves two levels, namely business consulting and

technical consulting. A business consultant studies an organization’s current business processes

and matches them to the corresponding processes in the ERP system, thus ‘configuring’ the ERP

system to the organization’s needs. Technical consulting often involves programming. Most ERP

vendors allow changing their software to suit the business needs of their customer.

Risks

Some risks to watch out for by Shahi in implementing an ERP system include:

• User Resistance/Revolt - Users who fear being downsized may sabotage the

system.


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• Mismatch between ERP system and Organizational Culture - If a system attempts

to implement best practices inappropriate to the organization, the system may

suffer from "culture clash" consequences.

• Inability to control technology.

• Illogical processing.

• Inability to stop processing quickly.

• Cascading errors.

• Repetition of Errors.

• Concentration of data.

• Inability to sustain processing.

• Concentration of responsibility.

Advantages

The benefits from enterprise resource planning are thought to include:

• Lower inventory carrying costs.

• Lower ordering costs.

• Lower production costs.

• Lower accounting and record keeping costs.

• Lower transportation costs.

• Lower investment in equipment.

• Lower investment in plant.

• Lower investment in land.

• Reduced assembly-line down-times.

• More flexible production processes.

• More efficient lot sizes and scheduling.

• Reduced errors due to better coordination.

• The cost and efficiency improvements (mentioned above) could increase

profitability or increase market share (at a lower price).

• Reduced number of stock-outs.

• Reduced fulfillment times.

• Increase process transparency for the customer.


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• Allow greater product customization and thereby better match the exact needs of

the customer.

• The customer satisfaction improvements mentioned above could increase sales

volumes, increase sales revenues due to a higher effective price, increase market

share, and increase profitability.

Disadvantages

The limitations and pitfalls of the enterprise resource planning are claimed to be:

• The systems can be very expensive to install and maintain.

• Some systems can be difficult to use.

• The system is no better than the weakest link in the chain - a problem in one

department or at one of the partners will affect all the other participants.

• The system is vulnerable to a strike or labor problem at any one link in the chain.

• There can be transportation inefficiencies if small lots of the product are

transported several times before reaching the consumer.

• Once a system is established, switching costs are very high for any one of the

partners (reduced flexibility and strategic control at the corporate level).

• The blurring of company boundaries can cause problems in accountability, lines of

responsibility, and employee morale.

• There is a resistance to sharing sensitive internal information, information that may

be essential to the process.

• There are compatibility problems with the various legacy systems of all the

partners.


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4.5 ELECTRONIC DATA INTERFACE

EDI documents contain the same data that would normally be found in a paper document

used for the same organizational function. For example an EDI 940 ship-from-warehouse order

is used by a manufacturer to tell a warehouse to ship the product to a retailer. It typically has a

ship to address, bill to address, a list of product numbers (usually a UPC code) and quantities. It

may have other information if the parties agree to include it. However, EDI is not confined to

just business data related to trade but encompasses all fields such as medicine (patient records,

laboratory results), transport (container and modal information), engineering and construction,

and many other fields.

The standard outlines which pieces of information are mandatory for a particular

document and which pieces are optional and then gives the rules for the structure of the

document.

An electronic data interface system will help Shahi in being more systemized and

organized. As Shahi has faced this issue of missing information forms, the specifications are real

world descriptions of how the data should be interpreted. This is particularly important when

specifying quantity. For example, suppose a packet is packaged in a large box that contains 5

display boxes and each display box contains 24 boxes of Shahi packaged for the consumer. If an

EDI 940 document says to ship 10 boxes of Shahi it may not be clear whether to ship 10

consumer packaged boxes, 240 consumer packaged boxes or 1,200 consumer packaged boxes. It

is not enough for two parties to agree to use a particular qualifier indicating case, pack, box or

each; they must also agree on what that particular qualifier means.

EDI Translation Software interfaces between the internal system and the global

standards. For an "inbound" document it typically takes the variable length fields of the EDI

document, translates the individual pieces of data and then creates a file of fixed length fields.

For an "outbound" document the translation software queries the internal system, as in the case

of an SQL database, or it translates a fixed width file exported by the internal software.

Translation software may also utilize other methods or file formats. The mechanism of

translation is not part of the standard.

Although one could argue that Shahi’s industry is not ready to accept electronic data

systems, on the flip side, it would serve to benefit not only Shahi, but its entire industry.


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SHAHI DELUXE

PART 5: ‘A TOAST TO THE FUTURE’


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5.1 SCOR MODEL

‘The Supply-Chain Operations Reference-model (SCOR) is a process reference model

that has been developed and endorsed by the Supply-Chain Council as the cross-industry

standard diagnostic tool for supply-chain management. SCOR enables users to address, improve,

and communicate supply-chain management practices within and between all interested parties.

SCOR is a management tool. It is a process reference model for supply-chain

management, spanning from the supplier's supplier to the customer's customer. The SCOR-

model has been developed to describe the business activities associated with all phases of

satisfying a customer's demand. By describing supply chains using process building blocks, the

Model can be used to describe supply chains that are very simple or very complex using a

common set of definitions. As a result, disparate industries can be linked to describe the depth

and breadth of virtually any supply chain.’


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5.2 WORLD CLASS SUPPLY CHAIN

In order to fashion itself a world class supply chain system, Shahi needs to incorporate

several functions and business strategies that they at present do not follow. Thus our

recommendations to Shahi’s upper management are as follows:

1. Invest in an electronic resource planning system, which would allow you to

track deliveries, maintain inventories, cut back on unneeded expenses, and

optimally manage your entire supply chain.

2. Stop outsourcing information gathering, because in today’s markets,

knowledge is a powerful weapon which any company wields. Create a

position where an employee or team of employees gather and analyze market

information and research.

3. Develop long term relationships with your key suppliers for main materials

like sonf. This way, you would not face a crisis situation in the off season and

be forced to pay higher prices for imported sonf.

4. Develop the industry by inviting new players and competitors. The best way

to create stability in an unreliable supplier market is to enhance the category

you exist in. This way, new suppliers also enter into the fray, which creates

more competition for business which would eventually lead to a more stable

market situation that the current one.

5. Use a particular broker for raw materials, so even if supplies face shortages in

off seasons, the broker will be responsible for the sourcing of the materials.

6. Implement a formal system of management, specifically for the management

of their supply chain.

7. Publish annual financial reports, which would ideally include financial ratios

so as to assess the performance of different aspects of the company.

8. Help build an industry grading system for raw material ingredients which

would circulate among all partners in their supply chain.

supply chain management - shahi foods

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