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The Pep Company Supply Chain Management Case Study


Introduction

Since the innovation of this management technique in the early 1990s, supply chain management has been one of the most revolutionary innovations in the corporate world. Since its introduction, the topic has grown to propose many different models, which at times are not supplementary.

As a result, many a times, the manager has to choose among various models, concepts and principles that are applicable in the prevailing situation. Owing to this, the manager has to be aware of the best model to solve the specific problem at hand. This paper focuses on the Pep case with a view of discussing the best set of models, principles and concepts that fit given its problem with the supply chain.

Associated problems

The task of Barloworld Logistics was to address several problems the company was facing among others the uncertainty about the third party’s’ ability to offer the required distribution services and the long lead-time in the outbound leg of the supply chain leading to excessive working capital tied in that part of the supply chain.

Further, the company experienced high degree losses regarding the goods in transit thus increasing the insurance premiums and uncertainties of the availability of the product at the store level. In addition, there was breakage of communication thus; the distributor could not verify the presence of the products at the store level.

These problems among others necessitated the restructure of the supply chain to save the company and to ensure that it meets its goals and the demands of the ever-growing market. At this point, the paper focuses on the various models and principles that are applicable in solving the problems the company was facing.

SCM Decisions

Designing and implementing a specific supply chain model requires decision making at particular levels of the supply chain. Broadly categorized, these levels are strategic and operational levels. Strategic level decisions are long-term in nature and closely link with corporate level decisions and typically, they are policy and design oriented.

On the contrary, operational level decisions, as the name suggests narrow down to daily operational requirements of the organization and have a narrow scope (Cohen and. Lee, 1988). Some of the areas in which the management of Pep requires decision-making include the location, inventory transportation and production areas.

Location of production facilities, distribution stores and raw materials is one of the most basic decisions that the manager have make. In the case of Pep, the location network already exists and therefore the question is whether there is need to restructure (Cohen and. Lee, 1988).

This is necessary if the current structure does not fit the distribution needs of the company. The decisions at this level should reveal an optimized consideration of various cost factors including transport costs, taxes, distribution costs and tariffs.

Secondly, the management must take into consideration the inventory decisions. The primary idea behind the need for inventory management is to cushion the company against losses caused by uncertainties at any level of the supply chain. Pep Company has a problem in managing its finished goods inventory.

Owing to this, the company has been incurring high insurance premiums as result of the problem. The management therefore needs both a strategic and an operational decision on how to manage the inventory to reduce the associated costs.

Another consideration that the management needs to deliberate on is the transport decision. Apparently, the company has incurred losses, leave alone being unable to guarantee the availability of the product to the consumers owing to the current choice of transportation means. The company needs to reconsider the existing choice of transportation to curb the losses and further to guarantee delivery of the products to the customer base.

Modeling approaches

Choosing a modeling approach for supply chain management requires a clear distinction between the two levels discussed above namely strategic and operational levels (Ballou, 1992). Typically, strategic decision-making encompasses all the aspects of the supply chain and consequently requires a large volume of information available for decision-making.

Given their broad view, strategic models offer approximate solutions to problems unlike the operational models, which offer specific and articulate solutions to specific problems or issues at hand. This paper reviews the various possible models, which could offer the solution for Pep.

Inventory Management and Risk Pooling

From the above discussion, it is evident that one of the most important deliberations as concerning SCM is inventory management. Inventory in the supply chain comes in different forms, from raw materials and work in progress to finished goods in transit (Ballou, 1992). When making decisions concerning inventory, the decision maker must take into consideration the various interactions at every level of the inventory.

While other successful models discourage the holding inventory, it is very important that the management consider this carefully. This is because holding inventory, if well managed, is an important security measure for the organization. This is because holding inventories protects the producer from demand variations as uncertainties increase (Ballou, 1992).

Further, it also safeguards the company if the supplier is unreliable in terms of quality, lead-time or even quantities and prices. In addition to these, the company can enjoy economies of scale and take advantage of bonuses and cheap transport on large orders and supplies.

Developing inventory policy

Inventory management requires a lot of policing to ensure efficient management. Owing to this fact, managers have to develop policies at both strategic and operational levels. The whole concept behind inventory policing is when, how much and from where to order raw materials. From the other end of the supply chain, it is a question of when, where and how much to supply. One of the most important considerations the manager has to bring to attention is demand (Levi, Kaminsky and Simchi-Levi, 1996).

The decision maker must establish whether the demand is deterministic or random. If random, the manager must consider both the forecasting techniques and the variability of the demand (Lee and Billington, 1993). This is because many supply chain management problems arise from demand since there is a direct relationship between demand and ordering translating to the fact that failure in demand forecasting results to failure in both inventory ordering and supplies.

Further, the manager needs to consider the lead-time also. The fundamental question is, is the lead-time deterministic or random and if random, how is its distribution. Another important consideration is the warehouse space constrains or constrains of the product per year. This aspect helps the management helps in determining the planning horizon. Lastly, the manager must also consider cost variables. These include holding costs, ordering costs and setup costs.

Risk pooling

This concept is a very important when it comes to inventory management. This concept contends that aggregating demand reduces its variability significantly to the advantage of the company. This is so because aggregating demand across different locations, differences in demand off set each other and thus ultimately reducing the variability. As a result, the management through risk pooling is able to reduce on inventory held as safety stock and thus ultimately reducing the average inventory (Levi, Kaminsky and Simchi-Levi, 1996).

A good example is the central distribution system whereby one warehouse serves all customers. This may take various forms, which may include pooling across markets, across products and or across time. However, all these focus on one point; reducing the average inventory and its related costs. For the case of Pep, the company requires to improve on demand forecasting to improve its inventory management.

Network planning

With the changing view of SCM from the organizations view to a holistic view, more efficient network- wide planning is inevitable and thus the development of advanced planning systems (APS). Following this, there are two different types of networks under consideration (Ballou, 1992). These include intercompany networks and internal supply chains. The concept of APS is highly prevalent in network planning and this part pays special attention to it.

Advanced Planning Systems

The characterizing aspect of these systems is their hierarchical nature moving from strategic planning which is long-term in nature to supply networking to order fulfillment, which are mid-term and short-term in nature respectively.

At the strategic level, the most important of the decisions made at this level include among others the number of plants and DCs, various locations and their capabilities, the assignment of products to various plants, and determination of the transport links (Gunasekaran, Patel, and McGaughey, 2004). One of the most important notes is that at all these levels; demand forecasting is of paramount importance.

The lower level from this is supply networking in which case, the decision maker has to decide on several issues including the allocation of production quantities among plants, supply of finished goods from plant to DCs and from DCs to customers, smoothing of seasonal demand variations, and considerations of both hard and soft constraints. At this level, the manager sets up a network configuration, integrates suppliers and transporters, and assigns and modifies master data like for instance the product portfolio (Ballou, 1992).

The lowest level in APS focuses on operational details including production planning, external procurement, order fulfillment and transportation planning. At this level, the management focuses of execution procedures of the whole system and therefore this is in most cases the most important stage in the network designing process. In the case of Pep, this level requires a redesign to enable the company meet its supply chain requirements.

Supply Chain Integration

The concept of supply chain integration has yielded many positive results in those organizations that have adopted the technology. Supply chain integration is a concept based on the idea of establishing close relationships between the players in the supply chain, in most cases with technology as the enabler (Ballou, 1992). The main reason for supply chain integration is to enable the management to maximize value in the supply chain without basing success on cost reduction but also on generating new revenues and high profits (Cohen and. Lee, 1988).

The success of the supply chain integration is because of three major factors. One is the globalization of production whereby the local market is subject to global market standards. Secondly, the increasing needs to provide environmentally friendly products and lastly the increasing stress on the business and operational structures of the businesses.

However, the implementation of supply chain integration has not come without its challenges. In this view, the challenges associated with supply chain integration take three perspectives: technical perspective, managerial and relationships perspectives. To overcome these challenges, managers must adopt and practice various managerial techniques to enable the organization meet its objectives (Cooper and Ellram, 1993).

First, the manager must relate the supply chain with the strategic theory and concepts to ensure competitiveness in the long term. Further, the manager must cultivate other areas of management including customer order management, logistics management, operation management, and procurement management (Cohen and. Lee, 1988). This ultimately will bring the organization at a competitive level at which it can meet uncertainties, meet customer demands, create value and most importantly increase profitability.

Distribution strategies

Choosing a distribution channel is one of the most challenging yet important decisions in supply chain management. Majorly, the question is whether the company distributes its own products or it delegates this task to third parties. This is a very important question since there exists a form of trade off in this decision given that the cost of hiring a third party to distribute the products assumes lower costs compared to if the company distributes the products itself.

However, choosing an intermediary for distribution is not the end of work; the manger has to make several decisions since the responsibility of managing the supply chain solely lays within the company’s mandate. These decisions include the channel membership, channel motivation and the process of monitoring and managing the various players in the channel.

Given the above constraints and considerations, the manager has must strategically choose the mode, or the specific type of a distribution strategy. The choice is either intensive distribution, selective or exclusive distribution strategy. Under intensive distributing, the distributor or reseller (in this case the customer link) stocks the company’s product with other convenience goods.

Unlike the intensive distribution, the selective distribution employs a tactic whereby the mangers choose suitable distributors who stock the product but still can stock competitor’s products. The last option is the exclusive distribution strategy in which case only the distributor (in this case known as authorized dealers) has the permission to sell the product and he stocks the products for that manufacturer only.

After choosing the distributor, the company has to decide on the various ways of motivating the personnel to create the incentive for pushing the product further. Typically, the management may focus on the ownership of the distributor in which case, the company provides the incentive for the owner of the distributor who in turn pushes the personnel to sell the product.

Alternatively, the company may provide the incentive directly to the sellers and thus pushing the product in the market. The last task that the management has to carry out is to decide on the methods of monitoring and managing the channels.

Strategic alliances

Forming strategic alliances is one of the most prevalent practices in supply chain management. A strategic alliance is a collaboration of two or more with common proprietary orientations, or share the same investments (McDermott and Chan, 1996).

This collaboration aims at providing common and linked processes mainly with the aim of improving on the performance of both companies. An important note is that this kind of relationships is mutually beneficial since each of the companies derives some gain from the relationship.

However, forming a strategic alliance and having a successful supply chain are two completely different things. For a successful and beneficial strategic alliance, the management must consider the several variable of a successful strategic alliance. These include information. This is one of the most difficult decisions to make.

Communication with the collaborating partner is very crucial leave alone integrating intercompany processes (Arntzen, Brown, Harrison and Trafton, 1995). This not only improves on cooperation within the partners but also encourages the efficient use of resources for the better.

Forming strategic alliances is a strategic decision in which the management has to follow several steps before approving a company as a strategic partner. First, the company must develop a strategy. In this strategy, the management must assess the feasibility and the objectives of the alliance partnership with a view of rationalizing the partnership (McDermott and Chan, 1996). At this point, the management must focus on major issues and resource strategies.

Secondly, the management has to analyze the prospective partner to understand their weaknesses and formulate strategies for accommodating those strategies. At this step, the manager must study the management style of the partners and develop a strategy to accommodate those management styles leave alone understanding the motivation behind the partners willingness to join the alliance (Arntzen, Brown, Harrison and Trafton, 1995). Further, the management needs to adopt a specific criterion for choosing a partner and formulate a strategy on how to deal with the resource gaps between the alliance partners.

After assessing the partner, the next step is negotiating a contract. One of the most fundamental questions at this point is, are the objectives, goals and the aspirations of the strategic partner realistic? The contract must also feature the responsibilities and the contributions of each of the partners and the terms and conditions that apply to the information of each partner (Arntzen, Brown, Harrison and Trafton, 1995).

In addition to these, the contract must also include termination clauses, penalties for poor performance and the arbitration procedures. Each of these sections of the contract need must be clear, understandable, and not prone to misinterpretations.

In the case of Pep, one of the most important decisions that the management could choose is to collaborate with an alliance partner. From such a decision, the management can enjoy the various benefits that come with such collaboration. These include the fact that the company will only participate in the activities that it is best.

Secondly, the company gains the ability to develop competencies through the collaboration, which may prove useful in other parts of the organization. Lastly, the company acquires adequate suitability of the available resources including competencies and thus it improve the overall performance.

Conclusion

From this view, it is evident that though supply chain management is not an easy task, the benefits reaped from implementing the various models of SCM are many. This calls for managers to actively engage in these activities to create value within the organization and increase profits leave alone enhancing customer satisfaction.

In this endeavor, it is worthwhile remembering that specific models are best under specific situations and therefore, the process of choosing and implementing a model need to be well evaluated and monitored

References

Arntzen, B.C., Brown, G.G., Harrison, T.P. and Trafton, L., 1995. Global Supply Chain Management at Digital Equipment Corporation, Kluwer Academic Publishers, Boston.

Ballou, R.H., 1992. Business Logistics Management. 3rd ed. Englewood: Prentice Hall.

Cohen, M.A. and Lee, H.L., 1988. Strategic Analysis of Integrated Production Distribution Systems: Models and Methods. Operations Research, 36 (2), pp. 216-228.

Cooper, M.C. and Ellram, L.M., 1993. Characteristics of Supply Chain Management and the Implications for Purchasing and Logistics Strategy. The International Journal of Logistics Management, 4 (2), pp. 13-24.

Gunasekaran, A., Patel, C. and McGaughey, R., 2004. A framework for supply chain performance measurement. International Journal of Production Economics, 16 (6), pp. 333-347.

Lee, H.L. and Billington, C., 1993. Material Management in Decentralized Supply Chains. Operations Research, 41(5), pp. 835-847.

Levi, D.S., Kaminsky, P. and Simchi-Levi, E., 1996. Inventory Management and Risk Pooling”; “Designing & Managing the Supply Chain. 2nd ed. London: McGraw-Hill.

McDermott, M. and Chan, K., 1996. Flexible intelligent relationship management: the business success paradigm in a stakeholder society. The Learning Organization, 3 (3), pp.5-17.

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