UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) ALIGNMENT OF THE SUPPLY AND DEMAND WITHIN A SUPPLY CHAIN: A QUALITATIVE STUDY by THEO VAN DER MERWE Submitted in fulfilment of the requirements for the degree of Magister Commercii in Business Management in the Facility of Economic and Management Sciences UNIVERSITY OF PRETORIA STUDY LEADER: PROF. G.H. NIEMAN October 2005 UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) ii CONFIDENTIALITY STATEMENT This report is confidential and to be used by the shareholders of Kraft Foods. It is intended for use by the persons to whom it is transmitted. Any reproduction or divulgence of any of its contents, without the prior written consent of the company, is prohibited. DECLARATION It is hereby declared by Theo van der Merwe that this dissertation has been linguistically groomed by Kjell Ruth, Managing Director of Kraft Foods South Africa. UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) iii ACKNOWLEDGEMENTS There are many people who contributed directly to this endeavour and have been a source of constant support. These are: • Kjell Ruth, Managing Director of Kraft Foods South Africa who approved the dissertation research project. • Abrie de Swardt, Supply Chain Director of Kraft Foods South Africa who supported the project and research proposals. • Professor G.H Nieman for his guidance and support. • Willem Cilliers who inspired me to devote my career to the challenging world of supply chain management during my final years at university. • My family and friends, especially my wife Riëtte and daughter Shanelle for their support and understanding during this project. I dedicate this dissertation to my wife, Riëtte van der Merwe, who is a constant source of inspiration and who supports me in my passion for constant business improvement. “Live as if you were to die tomorrow. Learn as if you were to live forever.” ~ Metszche UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) iv ABSTRACT The dissertation "Alignment of supply and demand within a supply chain: a qualitative study” determines the causes of the misalignment between the supply and demand within a supply chain, with specific focus on Kraft Foods South Africa. The costs of a mismatch between supply and demand are growing in many industries. Companies have tried various approaches, however these approaches, while useful, have failed to address a number of the drivers of supply-demand mismatch. The literature study starts with an overview of supply chain management. The study covers the various concepts of supply chain management, the importance of supply chain performance, the challenges of managing supply chains, demand management, supply management, as well as the relationship between supply and demand. The literature study continues to cover the various concepts related to the alignment of supply and demand within a supply chain. The study covers the effects of the misalignment between supply and demand within a supply chain, traditional approaches to align supply and demand and the transformation to a more responsive organisation. The various approaches to decrease the supply and demand lead time gap are also discussed. The literature study concludes with an overview of the supply chain of Kraft Foods South Africa, as well as the global Kraft Foods organisation. The review covers the challenges, the sustainable growth plan, the organisational set-up, sources and product range, geographical layout, people, functions and technology involved in Kraft’s supply chain. The review concludes with an overview of the current alignment between supply and demand within Kraft Foods South Africa’s supply chain. Chapter five discusses the details of the research design and methodology that was followed in conducting the research. Chapter six indicates the findings of the structured interviews with the key players in Kraft Foods South Africa’s supply chain. Chapter seven makes certain recommendations for the supply chain of Kraft Foods South Africa that will assist in improving the alignment between supply and demand. UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) v TABLE OF CONTENTS CONFIDENTIALITY STATEMENT ………………………………………………………...ii DECLARATION ……………………………………………………………………………...ii ACKNOWLEDGEMENTS ………………………………………………………………….iii ABSTRACT ………………………………………………………………………………….iv TABLE OF CONTENTS ……………………………………………………………………..v CHAPTER 1: OBJECTIVES AND SCOPE OF THE STUDY........................................1 1.1 BACKGROUND TO THE STUDY.......................................................................1 1.1.1. Supply and demand alignment.................................................................1 1.1.2. Kraft Foods South Africa...........................................................................2 1.1.3. Kraft Foods South Africa’s supply chain department................................3 1.1.4. Kraft Foods South Africa’s supply chain alignment..................................3 1.2 RESEARCH PROBLEM......................................................................................4 1.3 RESEARCH OBJECTIVES.................................................................................4 1.4 RESEARCH METHODOLOGY...........................................................................5 1.4.1 Literature review...........................................................................................5 1.4.2 Structured in-depth interviews......................................................................5 1.5 BENEFITS OF THE STUDY................................................................................6 1.6 OUTLINE OF THE DISSERTATION...................................................................7 1.7 GENERAL............................................................................................................8 CHAPTER 2: SUPPLY CHAIN MANAGEMENT...........................................................9 2.1 INTRODUCTION .................................................................................................9 2.2 UNDERSTANDING, PREDICTION AND CONTROL.........................................9 2.3 NEW NATURE OF COMPETITION..................................................................11 2.4 FOCUS OF SUPPLY CHAIN MANAGEMENT.................................................12 2.5 IMPORTANCE OF SUPPLY CHAIN PERFORMANCE...................................13 2.6 MEASURING PERFORMANCE .......................................................................15 2.6.1 Measuring time...........................................................................................15 2.6.2 Measuring cost...........................................................................................17 2.6.3 Measuring efficiency...................................................................................18 2.6.4 Measuring effectiveness.............................................................................19 2.6.5 Difference between efficiency and effectiveness.......................................20 2.7 CHALLENGES OF MANAGING SUPPLY CHAINS........................................21 2.7.1 Managing complexity in supply chains.......................................................21 2.7.2 Managing variability in supply chains.........................................................23 2.8 INTERRELATIONSHIP BETWEEN PEOPLE, PROCESSES AND TOOLS...26 2.9 MANAGING INVENTORY.................................................................................27 UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) vi 2.9.1 Importance of inventory management........................................................27 2.9.2 Classifications of inventory.........................................................................27 2.9.3 Inventory management of perishable items...............................................28 2.9.4 Managing excess inventories.....................................................................29 2.10 MANAGING SUPPLY CHAIN STRATEGIES WITH PARETO........................30 2.11 PULL VERSUS PUSH SUPPLY CHAINS........................................................35 2.12 MASTERING DEMAND ....................................................................................39 2.12.1 Knowing the customer............................................................................39 2.12.2 Analyzing the product.............................................................................42 2.12.2.1 Implications of product attributes on the supply chain....................42 2.12.2.2 Implications of product demand variability on the supply chain......43 2.12.2.3 Pareto product groups.....................................................................45 2.12.2.4. Implications of product life cycle on the supply chain.....................46 2.12.2.5 Implications of product life cycles on forecast error........................47 2.12.3 Shaping demand.....................................................................................49 2.12.4 Stabilizing demand..................................................................................52 2.13 DEMAND MANAGEMENT................................................................................56 2.13.1 Components of demand .........................................................................56 2.13.2 Purpose and rules of forecasting............................................................57 2.13.3 Understanding forecasting error.............................................................58 2.13.4 Forecast collaboration.............................................................................62 2.13.5 Forecast process performance management.........................................64 2.13.6 Relationship between forecast error and response lead time................66 2.13.7 Types of forecasting................................................................................67 2.13.8 Constrained versus unconstrained forecast...........................................68 2.13.9 Forecast models versus forecast judgment............................................69 2.13.10 Forecasting software versus forecasting processes...............................71 2.13.11 One-plan mentality..................................................................................71 2.13.12 Evangelical forecasting...........................................................................72 2.13.13 Legal aspects of forecasting...................................................................73 2.13.14 Demand planning versus demand management....................................74 2.14 SUPPLY MANAGEMENT.................................................................................76 2.14.1 Streamlining replenishment....................................................................76 2.14.2 Replenishment process..........................................................................77 2.14.3 Determining replenishment order quantity..............................................77 2.14.4 Correlation between customer service level and inventory levels..........79 2.14.5 Limitations of material requirements planning........................................80 2.14.6 Master production schedule- to freeze or not to freeze..........................82 2.15 SUPPLY CHAIN EXCEPTIONS........................................................................84 2.16 RELATIONSHIP BETWEEN SUPPLY AND DEMAND...................................86 2.17 CONCLUSION...................................................................................................86 CHAPTER 3: SUPPLY AND DEMAND ALIGNMENT................................................90 3.1 INTRODUCTION ...............................................................................................90 3.2 MISALIGNMENT BETWEEN SUPPLY AND DEMAND..................................91 UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) vii 3.2.1 The effects of the misalignment between supply and demand in a supply chain ....................................................................................................................91 3.2.1.1 Supply chain volatility increases cost..................................................91 3.2.1.2 Supply chain volatility creates complexity...........................................92 3.2.2 Traditional approaches to resolve mismatches between supply and demand..................................................................................................................93 3.3 TRANSFORMING TO A RESPONSIVE ORGANIZATION..............................96 3.3.1 Changing from functions to processes.......................................................97 3.3.1.1 Organizational structure......................................................................97 3.3.1.2 Conflicting objectives.........................................................................100 3.3.1.3 Aligning objectives.............................................................................103 3.3.1.4 Misaligned incentives........................................................................103 3.3.1.5 Aligning incentives.............................................................................103 3.3.2 Change from profit to performance ..........................................................106 3.3.3 Changing from products to customers.....................................................107 3.3.3.1 Making the customer part of the supply chain..................................107 3.3.3.2 Flexible manufacturing and logistics.................................................108 3.3.4 Changing from inventory to information...................................................108 3.3.5 Changing from transactions to relationships............................................109 3.3.6 Changing from Economies of Scale to Economies of Scope...................110 3.3.6.1 Supplier integration..............................................................................111 3.4 LEAD TIME GAP.............................................................................................111 3.5 RATIONALE FOR SUPPLY CHAIN TIME COMPRESSION.........................113 3.5.1 Strategic lead time reduction....................................................................114 3.5.2 Supply chain time compression approaches............................................115 3.5.2.1 Taking a holistic view........................................................................115 3.5.2.2.1 Supply chain integration...............................................................116 3.5.2.2.2 Supplier programmes...................................................................116 3.5.2.1.3 Just-in-time supply programmes..................................................117 3.5.2.1.4 Retail customer replenishment programmes...............................118 3.5.2.1.5 The problem with supply chain programmes...............................120 3.5.2.2 Use of technologies...........................................................................122 3.5.2.3 Cut out unnecessary steps................................................................123 3.5.2.3.1 Elimination of waste.....................................................................123 3.5.2.3.2 Reduce waste by pooling risk.....................................................125 3.5.2.3.3 Increasing velocity........................................................................127 3.5.2.4 Source with service in mind, as well as cost.....................................128 3.5.2.4.1 Winning through collaboration.....................................................129 3.5.2.4.2 Design products with the supply chain in mind............................130 3.5.2.4.3 Designing for supply ....................................................................130 3.5.2.4.4 Customization..............................................................................132 3.5.2.5 Reduce forecast time and increase accuracy...................................133 3.5.2.6 Redesign production processes........................................................133 3.5.2.7 Theory of constraints.........................................................................134 3.5.2.8 Unbalanced capacity.........................................................................136 3.5.2.9 Supply chain throughput efficiency...................................................137 3.5.2.10 Process throughput reduction .......................................................137 3.5.2.11 Postponement ...............................................................................138 UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) viii 3.5.2.12 Rethink distribution options...........................................................142 3.6 IMPROVING VISIBILITY OF DEMAND..........................................................143 3.6.1 Causes of induced demand volatility........................................................144 3.6.1.1 Terms of trade...................................................................................144 3.6.1.2 Promotions and pricing .....................................................................145 3.6.1.3 Specific company policies.................................................................145 3.6.1.4 Distribution channel structure............................................................146 3.6.2 Importance of supply chain communication.............................................147 3.6.3 Increasing pipeline visibility......................................................................148 3.6.4 Managing the different demand streams..................................................150 3.6.4.1 Customer-supplied forecasts............................................................153 3.6.4.2 Point –of-sale data streams..............................................................153 3.6.4.3 Customer warehouse movement data..............................................154 3.6.4.4 Customer order data.........................................................................155 3.6.4.5 Factory shipment data.......................................................................156 3.7 CONCLUSION.................................................................................................157 CHAPTER 4: THE SUPPLY CHAIN OF KRAFT FOODS SOUTH AFRICA............161 4.1 INTRODUCTION .............................................................................................161 4.2 FOCUS OF KRAFT FOODS INC....................................................................166 4.3 THE CHALLENGES OF KRAFT.....................................................................166 4.4 THE SUSTAINABLE GROWTH PLAN OF KRAFT.......................................167 4.5 KRAFT FOODS SOUTH AFRICA’S SUPPLY CHAIN ORGANIZATION......170 4.6 ROLE PLAYERS IN KRAFT FOODS SOUTH AFRICA’S SUPPLY CHAIN.170 4.7 SOURCES AND PRODUCT RANGE IN KRAFT’S SUPPLY CHAIN............172 4.8 GEOGRAPHICAL LAYOUT OF KRAFT’S SUPPLY CHAIN ........................173 4.9 PEOPLE IN KRAFT FOODS SOUTH AFRICA’S SUPPLY CHAIN..............175 4.10 FUNCTIONAL INVOLVEMENT IN THE PLANNING PROCESSES..............179 4.11 TECHNOLOGY INVOLVED IN KRAFT’S SUPPLY CHAIN..........................180 4.12 SUPPLY AND DEMAND ALIGNMENT IN KRAFT’S SUPPLY CHAIN ........181 CHAPTER 5: RESEARCH DESIGN AND METHODOLOGY...................................183 5.1 INTRODUCTION .............................................................................................183 5.2 THE PURPOSE IF STUDYING RESEARCH METHODS..............................183 5.3 RESEARCH DESIGN......................................................................................185 5.3.1 Degree of research question crystallization.............................................186 5.3.2 Method of data collection..........................................................................186 5.3.3 Researcher control of variables................................................................187 5.3.4 The purpose of the study..........................................................................187 5.3.5 The time dimension..................................................................................188 5.3.6 The topical scope......................................................................................188 5.3.7 The research environment........................................................................189 5.3.8 Participants’ perceptions...........................................................................189 UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) ix 5.4 RESEARCH DESIGN AND METHODOLOGY...............................................190 5.5 SECONDARY VERSUS PRIMARY RESEARCH DATA................................191 5.5.1 Purpose.....................................................................................................194 5.5.2 Scope........................................................................................................194 5.5.3 Authority....................................................................................................194 5.5.4 Audience...................................................................................................195 5.5.5 Format.......................................................................................................195 5.6 CRITERIA FOR A GOOD LITERATURE REVIEW........................................195 5.7 EXPERIENCE SURVEY..................................................................................196 5.8 ACTIONS THAT GUARANTEE GOOD RESEARCH....................................197 5.8.1 Purpose clearly defined............................................................................197 5.8.2 Research process detailed.......................................................................198 5.8.3 Research design thoroughly planned.......................................................198 5.8.4 High ethical standards applied.................................................................198 5.8.5 Limitations frankly revealed......................................................................198 5.8.6 Adequate analysis for decision- maker’s needs.......................................199 5.8.7 Findings presented clearly........................................................................199 5.8.8 Conclusions justified.................................................................................200 5.8.9 Researcher’s experience reflected...........................................................200 5.9 INVESTIGATIVE QUESTIONS.......................................................................201 5.10 DEDUCTION VERSUS INDUCTION..............................................................202 5.11 SURVEYS........................................................................................................202 5.11.1 Personal interviewing............................................................................202 5.11.1.1 Gathering personal interview data.................................................203 5.11.1.2 Recording personal interviews......................................................204 5.12 FINDINGS, SUMMARY, CONCLUSIONS AND RECOMMENDATIONS......204 5.13 REDUCING INTERVIEW SUBJECTIVITY......................................................205 5.13.1 Relativity................................................................................................205 5.13.2 Point of view..........................................................................................206 5.13.3 Context..................................................................................................206 5.14 CREDIBILITY OF QUALITATIVE RESEARCH..............................................206 5.15 LIMITATIONS OF THE RESEARCH..............................................................207 5.16 CONCLUSION.................................................................................................208 CHAPTER 6: RESEARCH FINDINGS.......................................................................211 6.1 INTRODUCTION .............................................................................................211 6.2 OUTCOME OF STRUCTURED INTERVIEWS...............................................214 6.2.1 Demand management..............................................................................215 6.2.1.1 Focus of demand forecast.................................................................215 6.2.1.2 Supply chain trigger: order versus forecast......................................217 6.2.1.3 Involvement of customer and suppliers in planning..........................218 6.2.1.4 Causes of demand variability............................................................220 6.2.1.5 Demand forecasting versus demand management..........................223 UUnniivveerrssiittyy ooff PPrreettoorriiaa eettdd –– VVaann ddeerr MMeerrwwee,, TT ((22000066)) x 6.2.1.6 Information that increases forecast accuracy...................................226 6.2.1.7 Costs and implications of misalignment between supply and demand 228 6.2.1.8 Alignment of departmental objectives and incentives.......................230 6.2.1.9 Frozen forecast.................................................................................233 6.2.1.10 Supply chain complexity................................................................234 6.2.1.11 Differentiation of service levels between products and customers237 6.2.1.12 Different forecast targets...............................................................239 6.2.1.13 Reduction of the demand lead-time gap.......................................239 6.2.1.14 Demand and supply alignment within a supply chain...................241 6.2.1 Supply management.................................................................................243 6.2.2.1 Differentiation of service levels between products and customers...243 6.2.2.2 Supply chain trigger: order versus forecast......................................243 6.2.2.3 Reduction of supply lead time...........................................................243 6.2.2.4 Frozen production lead time..............................................................245 6.2.2.5 Alignment of departmental objectives and incentives.......................246 6.2.2.6 Supply chain complexity....................................................................248 6.2.2.7 Streamlining customer and product portfolio....................................249 6.2.2.8 Supply chain bottlenecks..................................................................250 6.2.2.9 Reaction of supply to demand changes............................................252 6.2.2.10 Opportunities to pool risk...............................................................253 6.2.2.11 Product or production design changes..........................................255 6.2.2.12 Demand and supply alignment within a supply chain...................259 6.3 CONCLUSION.................................................................................................259 CHAPTER 7: SUMMARY, CONCLUSION AND RECOMMENDATIONS................264 7.1 INTRODUCTION .............................................................................................264 7.2 LITERATURE RESEARCH REVIEW AND RESEARCH DESIGN................264 7.3 RESEARCH OBJECTIVES REVISITED.........................................................270 7.4 RECOMMENDATIONS...................................................................................272 7.4.1 Decrease complexity in the supply chain.................................................272 7.4.2 Decrease variability in the supply chain...................................................273 7.4.3 Move from demand planning to demand management...........................273 7.4.4 Changing the supply chain trigger from forecasts to actual consumer demand................................................................................................................274 7.4.5 Unfrozen forecast horizon ........................................................................274 7.4.6 Aligning objectives and incentives of all participants in the supply chain.274 7.4.7 Create one plan........................................................................................275 7.4.8 Reduce the supply chain lead time gap...................................................275 7.5 LIMITATIONS OF THE RESEARCH..............................................................276 7.6 BENEFITS OF THE STUDY AND FUTURE RESEARCH.............................277 BIBLIOGRAPHY.........................................................................................................278 ANNEXURE A..........................................................................................................290 LIST OF TABLES …………………………………………………………………………...xi LIST OF FIGURES …………………………………………………………………………xii