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KFC: an important MBA case study

The KFC with no chicken story has been great fun for media and great for social media gossip – all those calls for a nationalisation of chicken distribution to ensure we’re never deprived of our fix of the nation’s favorite meat.

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We enjoy a high-profile failure and enjoy picking over the bones of who’s to blame.

But media discussion has tended to point a finger at the logistics provider DHL, and in the reliance on a single distribution center. And on both counts that’s wrong.

The most important thing about the story is that it’s broken the spell for consumers around how supply chains actually work. There’s no “magic” that gets just the right amount of fresh chicken from farms to outlets just when it’s needed, no fleet of KFC trucks and KFC drivers receiving orders from KFC stores. Modern supply chains are hugely complex, and critically, will involve a number of different organisations to make any system work all contributing different expertise and resources.

Using a single distribution centre in the ‘Golden Rectangle’ between Milton Keynes and Rugby on the M1/M6 is a well-established and proven means of getting products to a network of outlets anywhere in the UK. We know that a lorry that’s loaded up by 7pm in the evening will be able to deliver the needed supplies to anywhere in the morning, the Highlands of Scotland, to Northern Ireland. It works. Big name supermarkets have been working this way from warehouses in Daventry for many years.

The reason chicken didn’t get to KFC outlets was because there was a whole new system, involving a group of new partners, being put into place. Experience has shown that plugging together new software and technologies lead to teething problems, no matter how much more advanced and sophisticated the technology might be.

The automated baggage problems at Heathrow’s Terminal 5 is a classic example. It’s like any complex machine, like a car or airplane. You test the engine, that works fine, test the air conditioning, the wings, the navigation system – all okay. Bring them all together and suddenly one element isn’t working properly with another element and the whole machine stops working.

There are four key components of a supply chain strategy: the processes, the infrastructure in terms of warehousing and transport, the information systems that run it, and the people involved. KFC could see that, for the future, it could provide fresher, better quality product to its customers with a different approach to its supply chain – maybe by reducing inventory levels within stores (less old chicken), and relying on more regular ‘just-in-time’ meat.

Under the new KFC approach, DHL has taken on the infrastructure side. The other party is QSL, which supplied the software for the information systems. The supply chain came together for the first time by all reports on Tuesday (13th February) last week and somehow it failed.

The situation has proven what people have been saying about the reality of modern business: that we’re at a stage where it’s not a matter of competition between individual businesses anymore but between whole supply chains. KFC, like so many other major brands, is dependent on others, on the quality of its collaborations. So this wasn’t a blip, a human error, but part of the risk involved with modern supply chains. Could it have been avoided?

There would have been extensive testing since the contract was awarded in October 2017, and a great deal of confidence before the ‘go’ button was pressed. But perhaps there could have been more of a phased approach, for example, just using the new infrastructure to deliver to one region before a roll-out. It’s all part of the risk management assessment, where the supply chain industry knows, from the evidence, that 10% of supply chains are severely disrupted each year.

The KFC supply breakdown has had a serious impact on many people: the franchisees, the employees as well as the brand as a whole. Immediately lost revenues, huge amounts of management time, damaged shareholder value and hordes of regular customers who tried a different fast food outlet. So lessons need to be learned.

KFC will be a really important case study in terms of scrutinising how the tendering process and procurement took place, how the collaboration was established and run (given that we now have ISO standards for managing collaborative relationships), how the handover was carried out with the previous partner involved. There’s a need to look at the different risk profiles to see how the inevitable risks can at least be reduced – maybe there’s a need to look at having more distributed networks so that supply chains are not so reliant on one software system or facility.

KFC’s communications with its customers, being open about the issues early and keeping them informed, appeared to be good. But, for example, an initial communication from DHL, reported in the local south-west of England media, suggested there had been “an administrative error” as if someone had forgotten to fill out a form to order chickens in the first place.

What’s next, pubs with no beer? It’s quite possible. We have come to expect high quality, convenience, and good value wherever we are, but that comes at the price of great supply chain complexity. A complexity we need to understand and manage better.

posted by Richard Wilding
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Strategic Supply Chain and Procurement Best Practices in Oil and Gas. There has been a paradigm shift in the way oil and gas companies have embraced e-procurement

Oil and gas companies operate in dynamic and complex environments where they face constant challenges, especially in terms of supply and demand. Now, with oil prices at historic lows, it is time to evaluate the supply chain, and procurement techniques and costs. Oil and gas companies need to focus not only on their product supply chains but also on the non-hydrocarbon supply chains that handle the parts, materials, and services required to run the business. The non-hydrocarbon supply chain is critical to delivering the equipment and services required to find, extract, refine, and finally market the oil and gas. Procurement and supply chain strategies are set to be at the forefront of critical issues plaguing oil and gas companies, especially with the current downward spiral of oil prices.
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We have found that oil and gas supply chain practices (in certain geographies) clearly lag behind those of some other industries that use advanced techniques, such as optimized inventory management, collaborative supplier relationship management and so on. In this article, we provide a brief insight about the opportunities and areas in which supply chain practices can be improved amongst international and national oil companies (IOCs/NOCs), including improving service to internal customers and reducing costs, and highlight other industries from which companies in the oil and gas space can learn.

According to the Harvard Business Review[1], purchased products and services account for more than 50 percent of the average oil and gas company’s total costs. Thus, even a 5 percent reduction in purchase costs can result in a significant increase in the profit margin for oil and gas companies. To achieve this, oil and gas companies should look at the following opportunities in order to deliver better supply chain value:

  • Supply chain market intelligence.
  • Materials/supplier relationship management.
  • Supply chain talent and technology.

Supply chain market intelligence is the process of acquiring and analyzing information in order to understand the present and future market; support current and future sourcing and market sector strategy execution; enable the business to better anticipate changes in the external marketplace and react before others do. Supply chain market intelligence is key to any industry, and more so for the dynamic oil and gas industry. Effective supply chain market intelligence helps oil and gas companies deal with strategic supply chain challenges, such as constrained capacity, infrastructure, and volatile markets. It also helps companies make the right decisions about which markets to buy from, how to determine the right price to pay, and what benchmarks and targets provide the right competitive edge.

The oil and gas industry is heavily dependent on suppliers to provide complex services and critical equipment to support ongoing projects and operations. More than often, contract management and supplier relationship management are not up to the mark, and as a consequence, the oil and gas companies take on supplier risks. To improve supplier relationship management, companies should adopt a method of supplier benchmarking. Oil and gas companies need to measure the robustness and performance of different contractors for various spend categories and constantly seek dialog with them so that the suppliers are in unison with the necessary obligations in terms of safety, training, equipment and staffing requirements.

Another method that can help the oil and gas company in pricing negotiations is the use of the should-cost model, as well as the total-cost-of-ownership (TCO) model. In the former, the total acquisition cost for a particular piece of equipment or service is arrived at by taking into account the design cost, supplier operating cost, supplier margin, and transaction and acquisition costs. The should-cost model for different spend categories can empower oil and gas companies to effectively negotiate contract terms and conditions with suppliers. In the case of the TCO approach (more suitable for long lead times and critical capital-intensive equipment), the different costs, including the acquisition costs, and operation and maintenance costs, are arrived at before choosing the right supplier at the competitive price.

Some IOCs have adopted measures such as the should-cost and TCO models, but these are yet to be adopted by other regional and local players in the oil and gas industry. We realize that this area of supplier relationship management needs a deeper analysis and smart approach is given that local content plays a part in determining the right contracting and procurement strategy.

Even though technology is helping oil and gas companies to find and extract more oil, there is a need to seriously consider supply chain and procurement systems that provide additional real value. Needless to say, modern enterprise resource planning (ERP) systems are really helpful to address the above-mentioned concerns. These ERP systems should cater to inventory management, demand forecasting, contractor management, master data management and e-procurement. Demand forecasting/planning coupled with inventory management and e-procurement form the crux of the oil and gas supply chain strategy. Oil and gas-focused ERP systems have completely revolutionized the way enterprise resource planning is being carried out in different industries. There has been a paradigm shift in the way oil and gas companies have embraced e-procurement or shown interest in e-procurement systems.

Even with best-in-class supply chain processes and systems, we strongly believe that, without the right people, the best-in-class supply chain practice cannot be sustained, nor can the full benefits of supply chain really be enjoyed. As with any other industry, the oil and gas industry also has to grapple with the shortage of supply chain and procurement talent due to an aging workforce and growing skill shortages. Some of the measures that can be effectively adopted are training and grooming of talent in critical supply chain functions, the establishment of a supply chain center of excellence and industry/academia collaboration to nurture supply chain talent.

To improve and deploy best-in-class supply chain practices, IOCs/NOCs can adapt and/or implement some of the practical measures listed below:

  • Understand the total value of major spend categories. This requires thoroughly identifying costs and options across the supply chain for each category and determining appropriate interventions (e.g., seeking the new supplier, changing specifications, altering contract terms).
  • Build custom-fit procurement processes that provide better clarity and engage suppliers early in the process. Moreover, follow through to execution and into operations.
  • Manage risks across the entire spending portfolio—not just within individual projects or commodities, or splitting capital from operations spend.
  • Proactively manage the supply base, select relevant suppliers, focus on alignment and sustainability (i.e., dynamic relationships), and ensure company ownership and accountability is clear to suppliers.
  • Institutionalize the capabilities required for supporting procurement and supply chain activities. Today, these scarce skills are at a premium. In the next few years, it is going to be just as important to cultivate the right talent here as it is in the most critical technical and operational areas.

Going forward, we realize that, even though some of the supply chain best practices have trickled through the oil and gas industry, there is always scope for further improvement. Better demand planning and optimized inventory management can help oil and gas companies maintain oil and gas equipment uptime, and hence benefit from improved productivity. Improved spend category management and collaborative supplier relationship management, coupled with increased automation of transaction processing, leads to sourcing savings and identification of secondary saving opportunities.

We believe that the deployment of supply chain best practices, coupled with the implementation of a strong software solution, is the way forward for oil and gas companies to reduce costs, and focus on oil and gas production and exploration in the most optimized way. It is going to be really interesting to see how oil and gas companies can effectively manage local content sourcing combined with the adoption of best-in-class supply chain practices in 2016.

VINODKUMAR RAGHOTHAMARAO
 MARCH 11, 2016

Vinodkumar Raghothamarao works in professional services for the Middle East, Africa and India(MEAI) at Epicor Software Corporation.

[1] https://hbr.org/1983/09/purchasing-must-become-supply-management

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3 tips for internal negotiation

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How to get the best deal for everyone

Dealing with external negotiations is bread and butter for most procurement professionals. But when it comes to negotiating with internal stakeholders, they can stumble, according to Giuseppe Conti, operations director at pharmaceutical company Merck. Speaking at ProcureCon Europe in Berlin, Conti offered three top tips for procurement professionals looking to influence internally.

1. Understand the challenges of internal negotiation

“When we have an internal meeting, we often don’t consider it a negotiation,” said Conti. “But we have different priorities.” Part of the challenge, he said, is the ‘image’ your department has inside the company and the preconceived idea you might have about others. Remember that in an internal negotiation, you will have to continue to work together afterward, he advised procurement professionals. “Internal conversations have an impact and you have to manage them carefully,” he said.

2. Prepare
“Don’t just talk and expect them to agree,” Conti said. You wouldn’t in an external meeting, so why should this be any different? Preparation is key: engage in stakeholder mapping and analysis, he said. “Understand the interests of all the different stakeholders. Ask them what they think and analyse their point of view.”

3. Know how to deal with conflicting interests

Different departments are going to be pushing for different areas, and procurement needs to understand how to balance that. “Pushback is a good thing because it helps you understand what matters to the other party,” said Conti. The ultimate solution may depend on company culture, he said. While an informal coffee meeting is enough in some businesses, in others it may require orders from senior management to resolve conflicting issues

posted by Katie Jacobs
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Tesco and Morrisons fastest-growing supermarkets of UK big four

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Tesco and Morrisons were neck and neck as the fastest growing of the big four – both clocking in sales growth of 2.7%. Tesco continues to perform well – more positive news following approval of its Booker acquisition last week. Despite a slight fall in market share of 0.1 percentage points, Tesco experienced particularly strong growth from its Extra superstores. The varied selection of groceries on offer at these larger stores has encouraged customers to return to fuller trolley shops, with average baskets worth £31.09 – currently, the highest value in the bricks and mortar market.

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Holding market share steady year on year at 10.6%, Morrisons has continued its run of form, entering its 16th consecutive period of growth. Its premium own-label line The Best proved particularly successful, with sales rising by 20% year on year, as cooked meats, vegetables and cakes and pastries tickled shoppers’ fancy.

Meanwhile, there are no signs of a let-up in the shift away from discounted products for Sainsbury’s: only 34.5% of sales at Sainsbury’s were on promotion during the past 12 weeks, in stark comparison to 41.9% for the rest of the big four. Overall sales growth now stands at 1.1%.

Over the past 12 weeks, Asda attracted an additional 309,000 shoppers through its doors, helping the grocer achieve its highest sales growth since June 2014, now 2.3%. At odds with its traditionally brand-focused approach, Asda has also encouraged shoppers to choose own-label alternatives, which are up by 6.4% year on year. Less than a year since its launch, the retailers’ Farm Stores range is bought by 30% of all British households – with sales surpassing £50 million – while its premium Extra Special line increased sales by 19%.

Aldi and Lidl once again battled to be crowned the UK’s fastest-growing supermarket. Aldi pipped Lidl to the post this month as sales grew by 13.9% and 13.3% respectively. With both discounters working hard to expand their store portfolio, Aldi and Lidl also benefited from increased shopper numbers as well as growth in basket size.

Co-op returned to growth for the first time since July 2017 with sales up 0.4%, after a period of decline following the retailer’s sale of nearly 300 stores to McColl’s. Iceland held share steady at 2.2% compared to this time last year, increasing sales by 1.3%.

There were no signs of a slowdown in Waitrose, which saw sales growth of 2.3%. The supermarket has now experienced uninterrupted sales growth since March 2009. Meanwhile, Internet-only grocer Ocado increased market share by 0.1 percentage points to 1.2%.

FRASER MCKEVITT

Head of Retail and Consumer Insight

SHOPPERS 06.03.2018 / 08:01