Business Operations Management for Aldi Supermarket - Case Study Example

Business Operations Management for Aldi Supermarket (Aldi) Part Almost 30 years ago, Checkland (1981) proposed the concept of Soft Systems Methodology (SSM) in order to show how real world situation can be improved through continuous learning integration. In business context, real world situation is being defined as operational problems being faced by companies (Bergvall-Kareborn, 2001). In case of Aldi Supermarket (Aldi), real world situation can be defined as parcel delivery or logistics or inventory management problems might face by the company while introducing home delivery facilities for online ordered merchandises. According to Bomford (2012), online retailers face it difficulties in delivering parcel to the actual customers due to verity of reasons such as absence of incentives on right parcel delivery, lack of control over drivers who deliver parcels, lack of integration of parcel or customer tracking technology and absence logistic coordination between partners. As a result, in UK, more than 11% of parcel deliveries fail in first time attempt and significant amount of cost being incurred in re-deliveries (Bomford, 2012). Existing parcel conundrum might create problem for Aldi Supermarket (Aldi) to deliver online ordered merchandises to customers. From operation strategy priorities perspectives, the probable parcel delivery problem for Aldi can be divided into sub systems. For example, issues regarding centralization of inventory, delivery chain, cost implications and customer operations can be considered as sub parts in the system. Problems regarding online retailing and parcel delivery of Aldi can be analyzed through Soft Systems Methodology (SSM). In order to develop functional back ground of the study, business operations management for Aldi Supermarket (Aldi) in the UK will be discussed in the next section. Aldi Supermarket (Aldi) is renowned discount super market chain and the company is headquartered at Essen, Germany (Business Case Studies LLP, 2014). The German discount store chain was established in the year 1913 (Business Case Studies LLP, 2014). In UK, Aldi mainly focuses on increasing market share grocery segment. Aldi has established partnership with merchandise suppliers and the company sell supplied merchandises under its own brand name. It has been found by Aldi that more than 80% of customers of the company spend money on buying merchandises from other supermarkets and these customers show high tendency of brand switching (Business Case Studies LLP, 2014). In order to increase brand loyalty and frequency of purchasing among customers in UK, Aldi has deployed different marketing initiatives such as adjustment of marketing mixes, change in value proposition and introduction of parcel delivery for online orders (Business Case Studies LLP, 2014). Aldi Supermarket (Aldi) mainly operates through brick and mortar retail stores and they have little experience in selling merchandises through online retailing. According to Cheng and Choi (2010), delivering goods to customers is being done by integration different supply chain and operation management activities. In similar context, Aldi will need to integrate principles of operation management in order to increase efficiency of parcel delivery system. Accuracy of delivering merchandises that are being ordered through online medium is being decided by three factors, 1- delivering ordered merchandises to customers in first attempt, 2- decreasing cost of delivery and 3- decreasing lead time between parcel delivery and order processing (Cheng and Choi, 2010). Aldi needs to work on these three factors while deciding operational background for online retailing and parcel delivery model. As part of Soft Systems Methodology (SSM), strategic decision dilemma of Aldi can be described in two phases such as “AS IS” and “TO BE”. Existing operational condition for online retailing and home delivery of ordered merchandises for Aldi can be classified as ‘As Is’ and achieving desired level of accuracy in parcel delivery system for Aldi in future years can be termed as ‘To Be’. “To be” state can be achieved through business process plan and integration of state of art technology. While defining SSM, Checkland (1981) used mnemonic term CATWOE for specifying key strategic elements in the operational process. Customers [C] - end receiver of system output, actor [A] - individuals who actually carry out system activities, transformation [T] - process conversion of input into output, weltanschauung [W] - meaningfulness of the transformation process from world view, owners [O] - individuals who have the power to transform the system and environmental constraints [E] - financial, legal, ethical and resource constraints that may limit outcome of transformation process. In case of Aldi, dilemma regarding introduction of online retailing and home delivery of purchased merchandises can be identified as problematic situation. CATWOE analysis can be used in order to understand importance of different actors in the system transformation process of Aldi. CATWOE analysis for the mentioned problem will be discussed in the later part of the study. In order to develop solution to problematic situation of Aldi Supermarket (Aldi), the study will compare and contrast different models that are being used by other online retailers to address issues regarding centralization of inventory, delivery chain, cost implications and customer operations. Inventory management- according to Palzkill (2011), online retailers tend to use gross margin return on investment (GMROI) in order to measure profitability in terms of stock keeping unit or SKU holding. GMROI is being calculated by dividing aggregate gross margin on stock keeping unit by average inventory cost. Most of small level online retailers and online grocery stores tend to use decentralized inventory management system (Palzkill, 2011). In decentralized inventory system, inventory management responsibility is being outsourced to local personnel or local institutions. These local members are not direct part of online retailers. However, excessive dependency on local partners decreases control of e-retailers over logistics activities. Due to dependency on decentralized inventory model, online retailers lack the opportunity to control and improve material delivery through supply chain (Agarwal, Shankar and Tiwari, 2006). On the other hand, problems regarding parcel delivery are also being caused by lack of control over logistics activities. While adopting centralized inventory system, online retailers get the opportunity to manage optimal SKU level in real time manner. Direct access to inventory data helps e-retailers to control GMROI in better manner Palzkill (2011). Therefore, it is being suggested that Aldi Supermarket needs to adopt centralized inventory management for its online retailing division. Adopting centralized inventory functions will help Aldi to control pertinent aspects of logistics activities such as demand forecasting, establishing lean supply chain, establishing equilibrium in decoupling point and decreasing cost of operation (Agarwal, Shankar and Tiwari, 2006). Delivery and customer value chain- Nakhata (2008) pointed out that companies need to decrease complexities and steps in logistics activities in order to decrease lead time and cost of operation. In UK, Most of the online retailers take help of local postal service and private courier service providers in order to deliver ordered merchandises to customers. Postal service driven home delivery system is being plagued by factors like, 1- lack of customer and parcel deliverer coordination, 2- no financial incentives for successful parcel delivery, 3- no parcel tracking services, 4- lack of control over intention of parcel deliverer and many others (Bomford, 2012). In order to avoid these problems, Aldi needs to implement multi level delivery channels in order to decrease probability of committing error in ordered merchandises delivery. For example, small level parcel storing warehouses will be established in different locations of UK. On the other hand, locker facilities will be introduced in local railway satiations, bus stops and local community centres. Parcel will be stored in the lockers on the basis of their name and pin code. GPS location stamping technique will help drivers to communicate with customers about locations and whereabouts of delivered parcels. By doing these activities, Aldi will reduce decrease lead time of parcel delivery and increase accuracy in terms of delivering parcels to right address. Customers will get benefits like lack of waiting time for parcel delivery, lack of harassment in finding locations of delivered parcels and decrease in harassment in tracking parcel location throughout the supply chain. Cost implication- according to Stratton and Warburton (2003), integration of lean supply chain management can decrease overall cost of operation for companies. It is being recommended that Aldi needs to adopt centralized inventory systems and multi level supply chain activities as part of lean management system. It is expected that adopting centralized and consolidated supply chain model will help Aldi to decrease cost of redelivery of merchandises by 50%. On the other hand, decreasing frequency of visits of driver will also decrease fuel usage for vehicle and delivery trucks. As a result, cost incurred due to fuel consumption will be saved for Aldi (Bomford (2012). Environmental sustainability- according to Bomford (2012), due to failed parcel delivery, customers might need to travel by fuel fed vehicles for searching delivered merchandises. The entire process of searching missing parcels by fuel fed vehicles emits CO2 that negatively affect environmental sustainability. Adopting recommended multi level and technology integrated supply chain solution will decrease frequency of vehicle movement during parcel delivery for Aldi. As a result, carbon emission in parcel delivery operation will be reduced and environmental sustainability will be maintained. Aldi can further increase environmental sustainability of operation process by reducing use of papers for packaging of parcelled merchandises. Organic substitutes of papers or recycled papers can be used for packaging of merchandises (Bomford, 2012). Part 2 Checkland (1999, p. 164) defined root definition in Soft Systems Methodology (SSM) as “carefully phrased explicit statement of the nature of some systems which will subsequently be seen to be relevant to improving the problem situation”. In simple words, root definitions illustrate core purpose of different activities in system (Checkland and Poulter, 2006). CATWOE and root definition for proposed business process plan for Aldi will be illustrated in the next section. CATWOE Customers (C) Individuals in UK who do not have time to purchase grocery by visiting stores physically will be target customer for Aldi. These sets of individuals prefer to order grocery item and other merchandises from online shops of Aldi. In UK, more than 10 million people (including both active and registered users) use internets for online shopping (Bomford (2012). Actors (A) Employees of Aldi and staff of logistics partners will help business system to manage operational activities (Business Case Studies LLP, 2014). Efficiency of parcel delivery can be increased by integrating activities of employees in community centres, railway stations and lockers. Transformation Process (T) Aldi needs to establish partnership with community centres, railway stations and GPS service providers in order to increase efficiency of the system. While adopting lean management principles in logistics activities, Aldi needs to take help of IT partners and supply chain consultants in order increase efficiency of parcel delivery. Weltanschauung (W) Adopting recommended multi level and technology integrated supply chain solution can HELP Aldi to reduce carbon emission in parcel delivery process significantly. In the recommended parcel delivery model, frequency of vehicle movement from both seller and buyer will be reduced. Lowering fuel fed vehicle movement will decrease carbon emission significantly. Owners (O) Private owners, board members and financial investors will be owners of the business system. Environmental Constraints (E) Existing business system of Aldi complies with legal and corporate governance norms in UK. The company has sufficient financial and non financial (human resource, technical expertise and market reputation) resources for executing mentioned recommendations. However, the business system of the company needs to comply with IT security issues regarding online customer data processing, environmental norm, employment norms and government taxation rules in order to avoid penalties. Root Definition X: Aldi needs to establish partnership with community centres, railway stations and GPS service providers in order to increase internal process efficiency. Partnership will also increase accuracy of parcel delivery process. Y: IT partner will provide GPS location stamping technique, radio frequency identification, e-fulfilment solutions and enterprise resource planning (ERP) solution to increase responsiveness in parcel delivery for Aldi. Configuration of supply chain centres will be done through predictive analysis of decoupling point for supply-demand equilibrium. Z: as part of long term objectives, the business system will focus on decreasing cost of operation, increasing process efficiency, decrease carbon footprint in operation, increasing accuracy of parcel delivery and achieving competitive advantage. Based on CATWOE and Root Definition analysis, rich picture can be depicted through hand drawing. AS IS: Aldi copies existing parcel delivery system of other online retailers and decentralized inventory management technique is being used by the company. Parcel delivery is being done through local postal services and IT integration in the business system is pretty low. Gross margin return on investment (GMROI) is being used for calculating profitability. First time delivery rate is pretty low for Aldi and the company does not use Smartphone application based customer tracking technology in order to increase efficiency of parcel delivery. TO BE: Aldi will establish lean parcel delivery system backed centralized inventory management, partner consolidation and reduction of wastes. Parcel delivery will be one by commissioned drivers and lockers located in local community centres and railway stations. Degree of IT integration will be high in the business system. Return on investment (ROI) will be used as financial performance predictor. First time delivery rate is will be high for Aldi and the company will use Smartphone application based customer tracking technology for decreasing lead time and responsiveness of parcel delivery. Part C Managerial Qualities & Resource Audit In the business process plan, the study has proposed logistics solution that can help Aldi to address parcel delivery problems. In order to implement business process plan, top down project implementation approach needs to be adopted. Top level managers need to supervise the project implementation activities. In order to ensure successful implementation of proposed parcel delivery system, managers need to have following qualities. Managers need to be able to identify process loopholes and encourage stakeholders to identify problems in existing business system. Managers should have transformational leadership skills in order to encourage internal stakeholders to participate in the project. As part of transformational leadership, managers need to maintain transparent communication with employees participated in the change process. Managers need to have capability to negotiate with external stakeholders and project consultant for decreasing cost and time for completion of the project. From resource perspectives, Aldi will need three types of resources such as financial capital, technology & infrastructure and human capital. Financial resource: debt and equity capital will be used to establish new warehouses and purchase technical equipments. Technological resources: IT (information technology), engineering, automation and supply chain integration technology will be used. Human capital: commissioned drivers, employees of Aldi, staff of parcel delivery partners and temporary employees will be used as human capital. Business Performance Measurement Kaplan and Norton (1996) proposed concept of Balance Scorecard (BSC) that can help companies to measure performance in comprehensive manner. Components of BSC can be depicted in the following manner. Figure 1: Balance Scorecard (Source: Kaplan and Norton, 1996) Post implementation of recommended system for Aldi, performance of the system can be measured through Business Process Perspective, Financial Perspective, Learning & Growth Perspective and Customer Perspective. Customers: In order to measure accuracy of parcel delivery; proposed BSC will measure performances in terms of success rate in first delivery attempt, customer retention rate, increase in average revenue per customer (ARPU) and decrease in customer churn rate. Based on concept of Bayesian probability, increase in customer life time value can also be included in BSC as long term performance indicator. Financial Perspective: As part of financial performance management; return on investment, decreasing cost of operation, decreasing inventory holding cost, sales revenue fluctuation, transaction cost and profit margin can be used by Aldi. Internal Business Process As part of internal business process measurement; new technology integration, motivation of employees, efficiency of after sales service, training of drivers and decrease in process lead time will be used. Learning and Growth From learning and growth perspective, components like carbon footprint reduction in the value chain activities and leadership development will be used by Aldi. It is evident from the above discussion that integration of latest technology can help Aldi to increase accuracy of parcel delivery. Business problem for Aldi has been analyzed through Soft Systems Methodology (SSM). Changing existing business system will help Aldi to increase profitability from its operation. The proposed parcel delivery system will help the German discount chain to reduce carbon emission from its value chain activities and increase environmental sustainability. Customers are being identified as primary stakeholders in the proposed business system. Therefore, proposed business system has been designed such a manner so that it can deliver value to customers. Reference List Agarwal, A., Shankar, R. and Tiwari, M. K., 2006. 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Berlin; London: Springer. Kaplan, R. S. and Norton, D. P., 1996. The balanced scorecard: Translating strategy into action. Harvard: Harvard Business Press. Nakhata, C., 2008. Market-Driven Supply Chain Management: A Sustainable Competitive Strategy in the Fashion Apparel Industry. Executive Journal, July-September, pp. 39-44. Palzkill, J., 2011. Inventory Management Best Practices for Online Retailers. [online] Available at: [Accessed 2 April 2014]. Stratton, R. and Warburton, R. D. H., 2003. The strategic integration of agile and lean supply. International Journal of Production Economics, 85, pp. 183-98. Read More