Supply Chain Management in Tehindo Tea Manufacturing Company - Case Study Example

Introduction A supply chain is as system of organizations, projects, technology, people, information, and resources involved in facilitating the movement of a company’s products and services from their suppliers to their consumers. Therefore, supply chain management is the administration of a system of connected businesses involved in the final provision of product and services packages needed by consumers. Generally, it spans all movement and storage of raw materials, work-in-progress goods, finished goods from the production point to the consumption point. In this case, the paper will highlight the issues facing supply chain management in Tehindo Tea Manufacturing Company. According to the case study, the company has two types of products, ready to drink fruit tea and ready to drink jasmine tea. The paper will also explain the characteristics of products, the nature of demand, and the supply chain structures implemented by the company, to deliver successfully their products to their consumers. Additionally, the paper will also facilitate the discussions of the various supply chain concepts, for example, supply chain coordination, bullwhip effect, and vertical integration and outsourcing. Supply Chain Flow Diagram Physical Flow of Product Flow of Information Role of the key players and supply chain concepts The company has implemented a vertical integration model where a company within the Tehindo Corporate Organization supplies tea leaves, one of the main raw materials of producing their products especially the fruity tea. The company has big parts of land, which they grow tea thus supplying over eleven sale centers with various sales offices in Indonesia. Integrating the supplier’s actions on its own has become unachievable by several companies given the need for the company to minimize inventories and be able to deliver customers’ demands on time. This has been very helpful to the company since they have been able to concentrate more on the production and distribution sections of the company. The other responsibility of the manufacturers is ensuring that the products are safe at the design stage, where they can eliminate the hazards and any potential misuse in this stage. On the other hand, the manufacturer receives the raw materials from the suppliers and produces goods as per the market segment and those products that will satisfy the consumer needs. In addition, the manufacturers sometimes when they sell their goods direct to the consumers that they tend to control the prices of their products. The manufacturer also receives information from the distributors, wholesalers, and retailers about the products sales thus it becomes helpful in forecasting or making a decision of which product to invest more. The distributors, wholesalers, and the retailers act as the intermediaries for the company. Their main responsibility is making sure the company’s products are safely delivered and available to consumers. The flow of information is important in the supply chain especially to the manufacturing company. Every key player in the supply chain ought to provide potential information and correct statistics that the company can use to predict its production rates and the product to produce more depending on the demand rate in the market segment. Supply chain complexity in the company is evident it has over the years grown exponentially due to several factors such as several market segments, extended production chains, high product choice and configurations, and temporary demand cycles. For the company to be in a position of perfectly manage it supply chains, it is necessary to remove the complexity in order to get rid of the inefficiencies and the layers hidden costs. Comparative analysis of the two products/supply chain in terms of challenges The Tehindo tea company produces two major types of tea namely Goteh mainly called Jasmine tea and Fteh mostly referred to as Fruity tea. Goteh is mainly packed in glass bottles though a small number is packed in the tetra pack. The main advantage of the product is that it produces a majority of revenue to the company since it is consumed by all market segment. However, the product is also faced with challenges that make it difficult for the company to, successfully establish a stable supply chain that would enable swift flow of the product without cause’s shortages. The main challenge faced by the company is the fact that the product fits in all market segment. This makes the supply chain longer thus delaying the empty bottles to the company that they would use to pack the drinks back to the market. On the other hand, Fteh is a product that contains several variants and mostly it is packed with tetra packs. The product is mostly directed to the teenegers, and the type of supply of the products is through modern retail chains. A challenge of shortage of the products in the store is the main for the Fteh products. Issue of distribution and production of the various variants has become a challenge to the company. This kind of product require a minimized supply chain in the short run or either produce more on the the variant that teenagers are buying more. However, according to the operation manager, it is important to maintain an innovative product in the market since in the end; product will provide a strong market segment. Supply Chain configuration Supply chain configuration is an efficient method of dealing with product customization and differentiation throughout the supply chain network. Generally, it entails the setting up of a generic supply chain network to precise supply chain according to the diverse customer requirements. Therefore, the basis of supply chain configuration is founded in the co-ordination of the process, product, and the logistics decisions related to the variety of supplier and customer orders. In this case, Tehindo tea processing company has two related businesses, manufacturing and distribution businesses of tea products. Their vertical integration in the supplying the raw materials to the company has enabled the company get enough raw material to produce enough products to satisfy their market segments. In addition, the company has four different supply chain configurations. For example, the company supplies their products direct to their consumers, mainly when there is a larger order from an organization or an individual. The other supply chain includes the retailers such as supermarkets and shops who sell the products to consumers. The company also introduces wholesalers in their supply chain making it a two party’s supply chain. The wholesaler buys the products in bulk and later the retailers get the goods from them. Finally, the company also introduced the third party supply chain including the distributors, wholesalers, and retailers, where the distributor generally manages the distribution of the company’s products. Nevertheless, the company uses the distributors when selling the ready-to-drink jasmine tea since there is larger margin of the products selling in the modern retail outlets thus making it financially feasible to using the distributors as the third party. On the other hand, ready-to-drink fruity tea since it is a one-way product, a shorter supply chain will be convenience for consumers in the availability. For example, the use of retailers only will be a convenience to the business in faster delivery of the products. Challenges facing bottled jasmine tea and fruit tea According to the first meeting that was held on June 27, 2008, several issues were raised in concern with their distribution channels of ready to drink fruity tea products, into their various stores in Indonesia by the distribution manager causing a shortage of the products. According to their sales manager, the product is not doing well as expected previously, but in the end, it is said to have a strong market segment because of its variety of variants, which focuses mainly on the teenagers as the targeted population. However, the variety variants of the products has increased difficulties in distribution and production for the company thus explaining the reason why the product has been out of stock in the stores though, at some point, it has enabled the company to hold a strong market segment. On the other hand, though the bottled Jasmine tea is popular in Indonesia and generates biggest share of revenue for the company, it is also faced with some challenges in the distribution of the product to the intended market. One of the challenges that the company faced, is ensuring that there is a smooth flow of their products to the intended stores and consumers, as well as the movement of the empty bottles back to the production company for repackaging. The high inventory holds by their suppliers, for example, due to their poor forecasting, their results to shortages of the empty bottles in the production company for a period and as a result, there would be a shortage of the product in some stores. The other challenge the company is faced with is massive forward buying by their suppliers, which is caused by their habit of increasing their prices of the products prior by two weeks. However, they have implemented strategies such as exchange of empty bottles by full bottles to curb the challenge of shortage of empty bottles in the company. Temporary increase in demand/orders An increase in demand in the number of products the company is selling to the consumers, distributors, and retailers is affected by several factors. In this case, a temporary increase in demand may be because of the price changes by the company. For example, as mentioned in the case study, the company announces an increase of product prices prior to the actual increase by two weeks thus enabling the retailers and wholesalers to carry out forward buying. Within the two weeks prior to the actual price increase, there is an increase in demand for their products, but it is only temporary because, after the price increase, the orders tend to decline for some time after the increase. The other cases where the company anticipates a temporary market increase of their products is during certain events such as Christmas and New Year celebrations. Wholesalers and retailers tend to carry out a massive forward buying to satisfy the high demand of the final consumers, but after the events, the consumption declines affecting the demand of the products by the suppliers. Moreover, there are consequences that the company experiences due to the temporary increase in demand such as shortage of the empty bottles due to high holdings of the inventories by the suppliers. Additionally, temporary demand increase of products occurs when the modern retail outlets carry out promotional activities to attract more consumers. Therefore, at this particular time, the demand increase from the consumers will result to the suppliers increasing their orders from the company, but after the promotional activities, a likelihood is that the demand from the suppliers will decline. When there is an increase in supply of the product in the supplier’s stores, to maintain equilibrium, the supplier will tend to sell products at a lower price to reduce the high inventory in their stores thus reducing the chances of shortages. Recommendation in the second meeting In the second meeting that was held on August 15, 2008, there was discussion about the various types of products the company produced. In addition, whether there were any possibilities that the company would reduce on the number of products they produced to meet the needs of the business supply chain between the two types of products, ready-to-drink fruity tea, and ready-to-drink jasmine tea. First, the company should first analyze the areas the company is experiencing difficulties, for example, shortages of the products in the stores and implement strategies that will solve the problem. In this case, the ready-to-drink fruity tea product is the most affected due to its variety of variants in the market. The company has previously been experiencing shortages of the products in Indonesia stores caused by the variety of variants that the company produces. In my opinion, the company should carry out market research whose purpose will be determining which product is doing great in the market of the targeted market segment. This will help the company determine the product they will produce in large quantity thus solving the problem of the shortage of the most consumed variant. According to the marketing manager of the company, ready-to-drink fruity tea products are aimed to achieve a sound and high market segment in the long-run, however, to achieve that objective, the company has first to maintain the highly consumed variant in the market segment by producing and distributing more than the other variants thus avoiding cases of product collapse. On the other hand, sales data evidently shows that ready-to-drink jasmine tea is doing well in its market segment with high sales and low demand fluctuation. Therefore, I believe that, investing on the product will help the company generate more revenue that will help produce and distribute ready-to-drink fruity tea products more efficiently thus avoiding any shortages. There are also situations of shortages of products caused by longer supply chain. Therefore, the company should reduce the number of intermediaries in their supply chain to enable quick delivery and availability of their products to the consumers thus reducing the cases of product shortages. Information distortion and the bullwhip effect Supply chain subsists because it is hard for a company to supply all the things required from the raw materials to the final products and at the same moment get the products to consumers. Successful supply chain management needs a change from managing personal functions to the incorporating activities into the main supply chain; therefore, accurate and dependable information is essential. Information distortion is one of the major factors that can affect the effectiveness and efficiency of the supply chain process. On the other hand, demand forecasting and ordering policies are recognized as the main causes of bullwhip effect in the supply chain management. Therefore, the frequency of the changes that result due to temporary market expansion of the products may arise because of the variability in order that can translate into poor customer service. In several cases, this occurrence is due to the inaccurate information within the supply chain thus leading to a bullwhip effect (Sethi, Yan, Zhang 2005, p.6). Bullwhip effect is observable phenomena in the forecast-driven distribution channels also careful management of the effects, is essential to the managers of the supply chains. Because of the instability of customer demand for products thus the supply chain managers should forecast to, properly position their inventories. Since the forecasts are based on statistics, it is likely that there will be errors due to inaccuracy of the statistics resulting to information distortion, making it necessary for organizations to carry out an inventory buffer that takes the form of safety stock. The other method that the company can use to prevent information distortion is by using exponential smoothing technique. This procedure is proficient in cases where it is effectively modified and efficiently used. For example, in cases of seasonal patterns that causes temporary demand increase. Primarily, it will help the tea company curb the cases where there are problems of poor forecasts by their suppliers also enabling the company to execute a what if analyses leading to effective and better planning decisions (Sethi, Yan, Zhang 2005, p.6). Outsourcing and vertical integration Vertical integration and outsourcing are the most fundamental strategic decisions a company faces, where the company has to decide on the activities that should be outsourced and vertically integrated or which should be conducted in-house from either the supplier or the partners. In this case, the decisions of the company are ultimately based on whom the company consider their suppliers, customers, partners or competitors. Vertically integration generally involves a firm undertaking production, distribution and retailing function within the supply chain thus eliminating the intermediaries therefore, selling directly to retailers or to the consumers. In the case of the tea company, it is advisable for the company to undertake vertical integration to ensure there are no shortages of raw materials to produce their products resulting to regular availability of ready-to-drink fruity tea products in their retailer stores. In addition, it will also avoid the case where there is a shortage of empty bottles to refill the ready-to-drink jasmine products. Moreover, the company can also retain more control over the pricing and distribution of their products by selling to their customers and retailers (Wisner, Tan, & Leong 2009, p.53). On the other hand, outsourcing has been a significant method used by companies, to reduce cost of production and distribution. Outsourcing refers to cases where a company uses the efforts of a supplier, another company, or partners in ensuring that their products and services gets to the consumers. For example, the tea company can use another company’s more developed distribution channels to reduce the cost of distribution and efficiency. Consequently, the company will be in a position to focus on other business aspects such as focusing on the different variants of ready-to-drink fruity tea and the flexibility of the company (Wisner, Tan, & Leong 2009, p.53). References Sethi, S. P., Yan, H., & Zhang, H. (2005). Inventory and supply chain management with forecast updates. New York, Springer. Wisner, J. D., Tan, K.-C., & Leong, G. K. (2009). Principles of supply chain management: a balanced approach. Mason, OH, South-Western Cengage Learning. Read More