Gate Gourmet Supply Chain Management - Assignment Example

Gate Gourmet Supply Chain Management 1. Supply chain challenges Gate Gourmet faces because of demand fluctuations from airlines: The challenges Gate Gourmet faces because of demand fluctuations from the airlines it serves can be summed up with one word: “variability”. As the case study pointed out, there is a limit to how much can be planned ahead of demand; extra passengers or last-minute changes (such as meals for special diets) can add complications when time available to completely service customers is already extremely limited. Frei (2006, pp. 3-4) lists five different types of customer variability, of which two – arrival variability and request variability – apply to Gate Gourmet. Frei also points out that service businesses have two choices in dealing with variability – either to accommodate it or to reduce it (ibid., p. 5). For Gate Gourmet, however, it does not have the luxury of managing customer demand variabilities, so it must accommodate them, which means that, apart from its own processes, Gate Gourmet must focus on its supply chain to find ways to keep up with its customers. The customer variability issue is important, even though it deals with the part of the supply chain between Gate Gourmet and its customers, because it creates many of the potential challenges farther up the supply chain. Because Gate Gourmet relies on quick delivery for many of its supplies, its supply chain is at risk from environmental conditions such as traffic or bad weather that makes delivery times uncertain, and high demand for certain time slots that may make receiving and processing supplies more difficult (Minguela-Rata & De Leeuw, 2013). A delay in a flight could also have a serious impact as well. The processes for preparing and packaging meals and other supplies for loading on the aircraft relies on careful timing and an efficient process; if one is delayed, that could create a space constraint, puts the loading of that particular aircraft when it finally is ready out of sequence, which could delay the servicing of other aircraft, and if the delay is long enough, could even result in some of the meals and supplies having to be re-prepared because of limited shelf life. Gate Gourmet could plan to respond to “unexpected” challenges, such as through speeding up production processes to gain time, or forecasting a certain amount of supplies over actual demand to cover unanticipated additions or changes to orders. If the company does that, however, it risks creating a “bullwhip effect,” which can have other negative consequences. 2. The “Bullwhip Effect” in the supply chain and how it would affect Gate Gourmet: The definition of the “bullwhip effect” as it is given in research literature is an ‘effect that occurs when demand order variability increases as one moves up (i.e., away from customer demand) the supply chain’ (Lee, Padmanabhan & Whang, 1997 (1), pp. 1-2; Chen, Ryan & Simchi-Levi, 2000, p. 270). To explain it in simple terms, we can use Gate Gourmet as an example: The customer is the airline, which has a demand for a certain number of meals for a particular flight; for example purposes, let’s say the flight has 200 passengers. Because Gate Gourmet operates according to a “just-in-time” model, it orders the necessary amount of food ingredients from its supplier to arrive at its preparation centre no later than the time at which Gate Gourmet needs to begin its preparations; for example, two hours before the flight’s departure time. Gate Gourmet relies on the information provided to it by its customer (the airline) in order to schedule receipt of its order from the supplier, and that supplier in turn relies on that order information provided by Gate Gourmet in order to order from its supplier, and so on, for each of the levels in the supply chain. Instead of 200 passengers, however, there are three late arrivals, so in order to smoothly provide 203 meals instead of the 200 the airline’s order information led Gate Gourmet to anticipate, Gate Gourmet has to have some resources available to produce the three extra meals. Gate Gourmet knows that there is a good chance this sort of thing will happen, but until it does the caterer does not know how much ‘emergency’ supply it will need, so perhaps it estimates it will need enough for five extra meals, and makes arrangements to either have those supplies delivered ahead of time, or be made ready for rapid delivery at the last possible moment. Gate Gourmet’s supplier in turn knows its customer will likely need ‘emergency’ supplies on top of its regular order, so it estimates an amount a little larger than Gate Gourmet’s own estimate and orders this larger amount from its own supplier. Each step back in the supply chain from the end customer, then, has a progressively larger variance between actual and anticipated demand; if these variances are visualised on a graph, the resulting drawing would be a wave-form with increasing amplitude from right-to-left – resembling what a bull-whip looks like when it is cracked, hence the term by which the phenomenon is known. The effect on Gate Gourmet from a bullwhip effect could be excess costs. These would come from excessive inventory – much of which would be wasted in Gate Gourmet’s case, since it would involve fresh food ingredients with a limited useful time – excessive costs from handling and perhaps even production of meals that are not needed (Lee, H.L., Padmanabhan, V., and Whang, S., 1997 (2), p. 547). Gate Gourmet’s costs could also increase if the bullwhip effect farther up the supply chain causes its suppliers to raise prices in order to cover excess costs. 3. Supply chain management concepts, methods, tools and techniques Gate Gourmet has at its disposal to ensure customer service and resource utilization: While the case study does not provide details as to whether Gate Gourmet is already employing any of following concepts, there are a number of ways the company can streamline its processes to ensure and possibly even improve efficient high-quality service. To minimize the variation that Gate Gourmet needs to consider in its own production process, it could outsource some requirements such as special diet meals, or even less-complicated meals for budget and economy-class passengers; this is something that is already being done by some airlines and catering providers (Jones, 2007, p. 54). Fisher (1997, pp. 109-111) describes this in terms of matching supply chain strategy with the general type of product: functional products require an efficient supply chain, while innovative products – i.e., products that change frequently or offer a high degree of customisation – require a responsive supply chain. Accordingly, companies can combine the two approaches in the same supply chain, making some products functional in order to standardise and streamline part of the supply chain, which allows more attention to be paid to the more complex and variable supply chain that applies to other products. Another technique, which could be integrated into Gate Gourmet’s existing Scala system, is Adaptive Planning, which is based on a concept called Open Demand and Resource Network (ODRN) (Andreev, et al., 2007, pp. 216-217). ODRN basically breaks down every part of a supply chain into its smallest individual parts – for example, a delivery of fresh fish to a Gate Gourmet kitchen could be divided into two components, the order itself and a mode of transportation. The various components are then considered ‘nodes’, which can be put together and connected to others on an as-needed basis. When a change occurs, for example, a change in a passenger’s meal choice, it is easier to determine the impact of the change, and if necessary assign the ‘object’ (the changed meal) to another grouping of resources (Ibid., p. 219). 4. Why lead-time reductions in the supply chain are attractive to companies like Gate Gourmet: Lead-time reductions can occur at several points in the supply chain, and have measurable benefits. In general, the end result of lead-time reductions and other forms of time compression is an increase in competitive advantage. According to Beesley (2010, p. 83), “time-compressed suppliers appear to grow at three to four times the rate of their competitors and three times faster than overall demand with twice the level of profitability.” In other words, the company is able to attract more customers who are in turn willing to pay more. There are several reasons for this. First, the customer is required to maintain less of a buffer, which reduces the customer’s costs; for Gate Gourmet’s airline customers, that means they can eliminate uncertainty in their ordering, and not order extra meals and supplies (or at least reduce the amount of extra orders) to cover contingencies like extra passengers. Second, it reduces various risks by allowing the customer to order closer to the time the products are actually needed; for example, if an airline is forced to cancel or modify a scheduled flight, a very short lead time reduces the likelihood of a canceled or changed order. And third, reduced lead times “increase the velocity of cash flow” (Ibid.), or in other words, reduce the amount of time between an order placement and the receipt of payment for the completed order. That allows Gate Gourmet greater financial resource flexibility, while competitors on the other hand will have to spend more in order to “catch up”, and will have to offer even better service in order to take a part of Gate Gourmet’s established market share. Reducing lead times are also important for reducing the risk of the bullwhip effect. Chen, Ryan and Simchi-Levi (2010, pp. 275-285) found that increasing the lead time by one period (which could be a day, week, month, etc.) doubled the variability of the forecast demand. For example, if an order from an airline to Gate Gourmet for 200 meals made 24 hours in advance can be expected to vary by four meals on average, cutting the lead time for the order to 12 hours should also cut the expected variance in half. Another factor improved by reducing lead times is that it allows for more order and demand information to be gathered in the same length of time. Chen, et al. (2010, p. 285) also found that “forecast smoothing” – that is, increasing the number of order and demand records used to forecast future demand and orders – reduced the likelihood and severity of the bullwhip effect. For longer lead times, more information would have to be gathered, but if the period was long enough, some of the data used for the forecast might no longer be relevant or accurate; the case study mentions the changes caused by the September 11 terrorist attacks, and this is a good example – data gathered before and after September 11 almost certainly reflected two different customer demand environments, which means an average derived from all the data would probably still be inaccurate. In summation, reducing lead times on either side of the supply chain would help Gate Gourmet; if it was able to reduce lead times between itself and the customers, it would be able to reduce them between itself and suppliers, and vice versa. References Andreev, M., Rzevski, G., Skobelev, P., Shveykin, P., Tsarev, A., and Tugashev, A., 2007, in Marek, V., Vyatkin, V., and Colombo, A.W. (eds.), HoloMAS 2007, LNAI 4659, pp. 215–224. Berlin: Springer-Verlag. Beesley, A., 2010, ‘Time compression in the supply chain’, in Waters, D. (ed.) Global Logistics, 6th ed., pp. 69-91. London: Kogan Page. Chen, F., Ryan, J.K., and Simchi-Levi, D., 2000, ‘The impact of exponential smoothing forecasts on the bullwhip effect’, Naval Research Logistics, Vol. 47, pp. 269-286. Frei, F.X., 2006, ‘Breaking the trade-off between efficiency and service’, Harvard Business Review, November 2006. Available from http://hbr.org/search/R0611E&legacy=true? name=itemdetail&referral=4320&id=R0611E. Jones, P., 2007, ‘Flight-Catering’, in Becker, H. and Grothues, U. (eds.), Catering-Management Portrait einer Wachstumsbranche in Theorie und Praxis, pp. 39-55. Hamburg, Germany: Behr’sVerlag. Lee, H.L., Padmanabhan, V., and Whang, S., 1997 (1), ‘The bullwhip effect in supply chains’, Sloan Management Review, Vol. 38, No. 3, pp. 93-102. Lee, H.L., Padmanabhan, V., and Whang, S., 1997 (2), ‘Information distortion in a supply chain: The bullwhip effect’, Management Science, Vol. 43, No. 4, pp. 546-558. Minguela-Rata, B., and De Leeuw, S., 2013, ‘Managing the last mile of the supply chain for spare parts’, Universia Business Review, 3rd trimester, pp. 104-117. Read More