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Identifying the determinants of value in the U.K. red meat industry: A value chain analysis approach

Identifying the determinants of value in the U.K. red meat industry:

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A value chain analysis approach David Simons1, Mark Francis1, Michael Bourlakis2 and Andrew Fearne3 1Food Process Innovation Research Unit, Cardiff Business School, Aberconway Building, Colum Drive, Cardiff, CF10 3EU, United Kingdom, [email protected]; [email protected] 2School of Agriculture, Food and Rural Development, Agriculture Building, University of Newcastle upon Tyne, Newcastle upon Tyne, NE1 7RU, United Kingdom. [email protected] 3Centre for Food Chain Research, Department of Agricultural Sciences, Imperial College, Wye, Ashford, Kent, TN25 5AH, United Kingdom, [email protected]

Abstract Value Chain Analysis (VCA) is a tool for analysing the nature and source of value within a supply chain and the potential for reducing waste therein, with the focus explicitly on the determinants of value within a manufacturing process rather than the simple measurement of process outputs. The tool has been successfully applied in recent years within the motor and information technology industries, to assist forward thinking businesses to survive in an increasingly competitive environment. VCA within the food industry faces the challenge where transactional relationships between trading partners remain the norm. This paper reports the results from the first of a series of Government sponsored VCA projects in the U.K. red meat industry. The paper explains the rational for VCA, describes the methodology and reports the findings from a case study involving a food multiple retailer, a meat processor and a livestock producer. Insights are presented into the potential for the use of VCA in the U.K. food industry and the specific issues that researchers need to be mindful of when embarking on a VCA project. The paper concludes by identifying key areas in which further research is required to develop the methodology to suit the unique characteristics of the food industry. Keywords: Value chain analysis, red meat industry, U.K.

1. Introduction The U.K. red meat industry is in crisis. Common Agriculture Policy (CAP) reform, Bovine Spongiform Encephalopathy (BSE), Foot and Mouth Disease, the long-term decline in consumer demand for red meat and the concentration of market power in the hands of food retailers has contributed to an unprecedented structural change. Unavoidably, U.K. red meat processors and livestock producers struggle to survive. Previous research (Fearne, 1998, 2000; Hornibrook and Fearne, 2001, 2002; Katz and Boland, 2000; Palmer, 1996) has highlighted the importance of greater vertical coordination within red meat supply chains in order to reduce risk and uncertainty and foster an environment of innovation and value creation. However, the industry is dogged by adversarial trading relationships and a commodity culture that make it hard for stakeholders within the industry, particularly upstream, to reach a position of sustainable profitability. This paper explores the first of eight Value Chain Analysis (VCA) projects within the U.K. red meat industry. Given

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the considerable challenges facing that industry in general and the red meat industry in particular, this paper is timely as it presents a generic framework for measuring the determinants of value and the opportunities for eliminating waste within a vertically co-ordinated supply chain. In the following sections, we describe the context of the study, examine the theoretical and methodological issues associated with the VCA approach and present the project findings. The paper concludes with a summary of the lessons learned and key areas for further research.

2. The red meat industry forum’s value chain analysis project in context The Policy Commission on the Future of Farming and Food reported its findings in January 2002 and one of its key recommendations was the creation of a Food Chain Centre (FCC) to “... bring together people from each part of the food chain”. The FCC was duly created in the summer of 2002 (see http://www.foodchaincentre.com). At the same time that the Policy Commission was conducting its enquiry into the future of U.K. farming and

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David Simons, Mark Francis, Michael Bourlakis and Andrew Fearne

food, the Red Meat Industry Forum (RMIF) was created to respond to the problems confronting the red meat industry (for further information about the RMIF, see http://www.mlc.org.uk/forum/phasetwo/). The RMIF comprises representatives from all stakeholders within the U.K. red meat supply chain. It has within its remit the task of identifying priority areas for research to assist the industry in making the necessary changes to achieve higher levels of performance and sustainable levels of profitability for all stakeholders, from farm to retail. Following a twelvemonth consultation period, the RMIF presented a ten-point action plan (Table 1). The RMIF started to implement its agenda by commissioning three projects from the original ten-point plan. These projects were funded by the Department for Trade and Industry (DTI) Industry Forum Adaptation Scheme (see http://www.industryforum.co.uk/). One of these projects was the VCA project, which the FCC was invited to manage. The VCA project calls for eight complete value chains to be studied and mapped in detail, with the primary objective being the identification of cost savings opportunities through the elimination of wasteful (non value-adding) activities at the intra- and inter-firm level. Each of these chains will

involve one or more producer, abattoir, processor, and supermarket or food service outlet. The research design framework calls for the selected value chains to encompass the maximum diversity. The selection criteria includes coverage of the three product species (beef, lamb and pork), fore and hind quarter cuts, regionality (England, Wales and Scotland) and different retail routes to market (supermarket, food service and local butcher). Finally, it should be noted that the VCA project is covered by a commercial confidentiality agreement as is the norm for applied research of this type in a highly competitive industry. The terms of this agreement have resulted in some of the data presented in this paper being anonymised.

3. Theory and methods VCA is an established technique for analysing and subsequently improving resource utilisation and product flow within manufacturing processes. It has been widely applied in the fields of operations management, process engineering and supply chain management (Womack et al., 1990; Womack and Jones, 1996).

Table 1. RMIF ten point action plan. No.

Project description

1.

Develop an effective benchmarking scheme for beef, sheep and pigmeat to allow farmers to establish where improvements can be made in their own businesses by comparing their cost and yield data against similar farms. Promote benchmarking programs for red meat businesses through the use of the diagnostic tool to identify weaknesses and reduce their costs. Improve the understanding of deadweight price procurement for cattle and sheep by making it more transparent thereby helping to maximise returns. Attract and retain experienced and well-qualified people into the red meat industry by setting up attractive career development paths, with senior business management courses for high calibre new young blood. Explore the feasibility of establishing a Center of Red Meat Excellence that would be able to tap into the skills of an array of bodies to raise the profile of the red meat industry. Develop a program of Master classes for abattoirs and processors, using outside experts to help them identify and adopt best practice methods that could improve their operations from other industries. Disseminate Supply Chain Best Practice by looking at how other countries and industries have improved and then bringing those techniques to the U.K. and sharing the information in the best way - be it via newsletters, miniconferences, or demonstration farms. Encourage VCA to help the various red meat businesses in the supply chain to identify and then eliminate, or reduce, the unnecessary, non-value adding links. Use Efficient Consumer Response techniques to develop more effective collaboration arrangements for retailers, food service operators and their suppliers so that they can work together to meet the demands of their customers. Provide better communication of consumer research so that more people benefit from the valuable data this work provides.

2. 3. 4. 5. 6. 7.

8. 9. 10.

Source: http://www.mlc.org.uk/forum/about

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Identifying the determinants of value in the U.K. red meat industry: A value chain analysis approach

The technique involves assembling a cross-functional team of people from all the key firms involved in the value chain of a specific product. This team is then trained in the use of a number of different process and supply chain mapping tools before collectively conducting a series of structured data collection events designed to identify and prioritise wasteful activities for subsequent elimination. This technique consistently reveals significant waste elimination opportunities (Francis, 2000; Hines and Rich, 2000; Jones and Simons, 2000). A typical VCA project involves five stages. The first two stages involve introducing the project and participating firms and team members, before conducting a workshop to explain the mapping tools. Stage three involves another workshop to produce a high level Big Picture Map (Rother and Shook, 1998) of ‘skeleton’ of the current state of the whole value chain under consideration. This involves establishing the main physical and information flows, as well as the key performance measures applied by each of the firms in the chain. After this description has been established, the interfirm problems and issues are identified and annotated onto the map. These issues are then analysed to identify inter-firm waste elimination opportunities, which are allocated for removal. Stage four involves fieldwork at each of the participant value chain firms in turn. The activities of each firm are mapped in detail to identify intra-firm waste elimination opportunities. Further inter-firm opportunities might also be identified during the course of this exercise. Finally, the team convenes to review the waste elimination

progress and to construct a collective vision of a future state. This is usually some desirable vision of what the value chain could look like in 12-36 months time if certain actions were undertaken to eliminate or change existing constraints. These projects are then scheduled by the team, which by now has formed the nucleus of a permanent cross-value chain continuous improvement team. In accordance with this standard VCA methodology, Table 2 summarises the fieldwork events that would typically be scheduled for a VCA project involving three firms within a red meat supply chain. The theoretical justification for VCA is based on two complementary approaches to sustainable manufacturing and operations management. These are the Lean paradigm and Integrated Supply Chain Management. The origins of the Lean paradigm within the automotive sector are well documented (Ohno, 1988; Womack et al., 1990), where the development of Lean characteristics is proposed to be the fundamental reason for Toyota’s growth into a dominant global producer. Toyota’s transition began in 1945, but only became apparent in the West in the 1970s when Toyota and other Japanese automobile manufacturers gained large share in export markets. Womack et al. (1990) characterised this Lean paradigm and subsequently established five teleological principles for becoming a Lean competitor. These five principles are: 1. Value: Specify what does and does not create value from the customer’s perspective, not from the perspective of individual firms, functions or departments.

Table 2. Scheduled events for a standard VCA project in the red meat industry. Event name / Description

• • • •

•

• • •

Introductory meeting Tools and techniques workshop Current state cross value chain workshop Specific mapping days for a supermarket or a food service company: – Store – Depot – Central functions/ administration Specific mapping days for a meat processor: – Abattoir (kill) – Meat plant (cut and pack) Specific mapping days for a livestock producer Future state cross value chain workshop Formal presentation of the subsequent value chain summary report at the end of the project (as a workshop and/or on a percompany basis)

Source: the authors

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David Simons, Mark Francis, Michael Bourlakis and Andrew Fearne

2. Value Stream: Identify all the activities necessary to design, order and produce the product or service across the whole value stream to highlight non-value adding waste. 3. Flow: Make these value creating activities flow without interruption, detours, backflows, waiting or scrap. 4. Pull: Only make what is ordered by the customer. 5. Perfection: Strive for perfection by continually removing successive layers of waste as they are uncovered. A key part of the Lean paradigm is the need to control processes via the management of key performance measures (Imai, 1997). The search for a universally accepted set of supply chain performance indicators to support the implementation of lean principles continues (Bateman, 2000) and the performance measurement literature in this field continues to grow. So far, the general performance measurement and benchmarking literature has focused on measuring the results of supply chain improvements (see for example, Caplice and Sheffi, 1994; Ploos van Amstel and O’hert, 1996). In this paper, we wish to draw attention to the importance of focusing on the determinants (after Fitzgerald et al., 1991) of those results (Francis, 2002). Until the 1990’s, U.K. government policy primarily encouraged and facilitated economic performance within the manufacturing and service industries. In the last five years, that government policy has broadened its approach to industry support to encompass sustainable development, which has amended the focus on key outputs of commercial organisations to include profitability within environmentally and socially acceptable boundaries. By contrast, the DTI Industry Forum model focuses mainly on the determinants of these results. For example, the measures developed by the Society of Motor Manufacturers and Traders (SMMT) Industry Forum (the first of the DTI Industry Forums) are quality, cost, delivery, measuring change, delivery schedule achievements, people productivity, stock turns, overall equipment effectiveness, value added per person and floor space utilization (see

http://www.industryforum.co.uk). These are all internal (intra-company) measures. An objective of the RMIF’s VCA project is to transfer these internal measures for individual companies to supply chain-wide measures and to establish how these determinants might facilitate supply chain improvement. There is often a time lag between determinants being controlled and outputs being realized. An analogy for this is comparing a supply chain to driving a car (Forrester, 1958). The determinants are the controls of the car and the road ahead, and the results are the instruments and the rear view mirror. Using this analogy, purely results-based supply chains receive data after the event and then take over corrective action, like steering a car based on what is seen in the rear view mirror. In this paper, we argue that it is more effective to look ahead, or more specifically to focus on why and how we arrive at our destination (competitive position) rather than ask questions after the event, which is often an accident (loss of business or even bankruptcy) or at best, arrival at an unforeseen or unpleasant destination (loss of margin, market share or competitive advantage). To successfully manage the supply chain we believe there needs to be equal attention on both determinants and results in the measurement of value in the supply chain. We also believe that only a small number of measures can be continually monitored and acted on across a supply chain effectively. Thus, the key questions for the analysis of value and supply chain performance are: What are the vital measures of performance? Who in the supply chain is measuring them? Are those measures being shared? How soon are they shared? The second theoretical underpinning for VCA is Integrated Supply Chain Management (ISCM) which is the model that has been developed to facilitate Lean manufacturer-supplier working relationships (Hines, 1994). ISCM provides these firms with the benefits of vertical integration, without the ownership of the assets. However, the success of ISCM depends on the distribution of those benefits amongst

Figure 1. Rate of improvement and the ‘win-win’ gap. Source: The Authors

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Identifying the determinants of value in the U.K. red meat industry: A value chain analysis approach

participating firms, which some researchers argue is associated with market power and the abuse of it by the dominant players within the supply chain (Watson and Sanderson, 1997; Cox, 1999, 2001). Thus, while ISCM is recognised as a highly successful supply chain model, some would argue (Cox, 2001) that the success of ISCM is contingent upon suppliers perceiving a ‘win-win’ situation, developed as a consequence of its implementation. Indeed, we would go even further and suggest that the level of supplier buy-in will influence the rate of improvement in that supply chain. Failure to deliver benefits to all stakeholders in the supply chain results in a sub-optimal or partial improvement trajectory as illustrated by Figure 1. For the above, Beth et al. (2003) stress the need for trust development between supply chain partnering firms. They argue that trust provides agility, flexibility, fast decision making, innovation and a competitive advantage to the firm that succeeds in aligning partnering firms’ interests so that joint values, goals and benefits are achieved. Before engaging in the trust development process however, supply chain partnering firms need to consider carefully the implementation of appropriate contractual mechanisms that will safeguard the satisfactory distribution of benefits between them (Beth et al., 2003). In our case, an example of a contractual mechanism is the annualised target rate of improvement for suppliers. Under this regime, the supplier keeps the extra benefit if they exceed their target. Under these circumstances, any supplier inhibitions of sharing information across organisational boundaries are significantly reduced. It is important to stress that such arrangements reward consistent improvement over time. A major problem associated with the implementation of ISCM in the food industry is the contrasting (and invariably conflicting) time horizons to which the different stakeholders work. For example, we would suggest that supermarkets have a time horizon that rarely extends beyond the current financial year, and is very often much shorter. By contrast, food manufacturers typically work to a 3-5 year strategic plan, whilst farmers take a lifetime perspective.

4. Findings from the value chain 1 project In this section, we present a summary of the findings from the first of eight VCA projects to be undertaken as part of the RMIF’s programme of change. Data collection for this first value chain extended from July to November 2002. It involved a supermarket retailer (Superbuy), a meat processor (MeatCo) and a primary producer of sheep (Lamb Farm). The names of these firms have been disguised in conformance with the commercial confidentiality agreement discussed earlier.

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The findings are summarized in four parts. The first part briefly describes the maps produced to build a collective understanding of the current state of this value chain. The second part explains the key issues that emerged from the production and analysis of these maps and the associated data that was collected. Part three elaborates upon the immediate waste elimination opportunities that were revealed by an exercise of challenging the causes of these issues; subsequently, the final part illustrates the key performance measures. Current state maps MeatCo has been working with Superbuy and Lamb Farm for over 30 years, so it was surprising to find considerable resistance to information sharing from the start of this project. In fact, due to the difficulty faced in getting all three of these stakeholder firms together to discuss the supply chain issues at the outset of the project, the initial data collection focused on intra-firm mapping at each of the participant firms. Superbuy was in the midst of implementing a supply chain project that involved a new corporate computer system. This state of flux meant that it was difficult to establish a current state to map. Data collection was consequently confined to interviews and secondary sources that were obtained to establish an indicative current state and projected future state for this value chain. Because of the more stable situation at MeatCo, it was possible to create a map of the main information flows and physical flows at the company. Data collection at Lamb Farm enabled the production of a map of its sheep and feed growth and production process. It also enabled an input-output diagram to be produced that identified the farm’s stakeholders and its approximate costs and revenues. Based on these intra-firm mapping exercises, a Big Picture Map (Rother and Shook, 1998) of the current state was produced for the whole value chain. This map identified the chain’s key information and physical flow activities, along with the cycle time of each. It also identified the key performance measures used to control the chain. After analysis, the physical flow activities were colour coded as green for value adding, yellow for possible waste and red for definite waste. The cycle time details from these colour coded activities were then used to construct a value chain metric that was used to establish the proportion of total time the product spent having value added as opposed to waste. This metric was then available to compare scenarios.

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Key issues The fieldwork and analysis of the current state map revealed three key issues. These were relationship management, the sharing of benefits between trading partners and the determination of consumer value. Cox (2001) identifies four types of buyer-supplier power relationships (Figure 2). At each ‘link’ of this value chain (Superbuy-MeatCo and Meatco-Lamb Farm), the Buyer Dominance type was clearly prevalent because of the high shares of the suppliers’ markets represented in each case. This dominance was potentially positive from the viewpoint of focusing supply chain development resource, but presented potential barriers to the sharing of benefits. Commercial arrangements between MeatCo and Superbuy were based on minimizing transaction costs (Williamson, 1986) through relationship contracting, which can evolve over time with minimum overhead in terms of transaction costs (e.g. contract provision, monitoring and arbitration). In principle, the Buyers from Superbuy and Customer Account Managers from MeatCo were continually changing their terms and conditions to establish a fair return for each party. However, in common with most supermarket retailers, Superbuy pursued a career development policy for its Buyers that involved rotating them through different product categories. This was found to have a significant impact on the continuity of trading relationships. This policy aimed to provide a broad base of experience for Buyers but also meant that a new Buyer might not be aware of (unwritten) understandings that had been established by their predecessor. This was identified by MeatCo to be a major

barrier to cross-supply chain co-operation. Simple ‘WinWin’ agreements with suppliers on how benefits are shared could potentially leverage the performance of ISCM for Superbuy. Overall, Beth et al. (2003) call for “trust institutionalisation” between supply chain partnering firms, so even when the key personnel of the partnership depart or move to another firm’s division, there are mechanisms in place that will guarantee that the partnership will continue to flourish. As a supplier, MeatCo had the capability, due to long-term investment in its people (training) and equipment to make a real difference across the chain. As part of this project MeatCo appointed a dedicated Continuous Improvement Manager to invest in improving their production process. The resources were in place to make major improvements in the value chain, but the catalyst for this was a clear commercial understanding on how benefits would be shared. It was evident that that Superbuy needed to adopt this principle so that their buying team could work with MeatCo’s improvement team to establish a benefit sharing agreement early in the improvement cycle. Based upon Superbuy’s product specification, MeatCo processes lamb carcasses that were classified in the range E-O for confirmation and 2-4L for fatness, using the EUROP carcass classification grid. Lamb was procured on a deadweight basis, with the farmer being paid per kilogram of useable meat per carcass (between 14.0 - 20.0 kg). A premium was paid for Farm Assured lamb and a penalty might be levied for heavy lambs. This information was conveyed to the producer in a grid-payment format, with the basic price per kilogram fluctuating with market forces.

High Buyer Dominance

Interdependence

Interdependence

Supplier Dominance

Buyer Power

Low Low

Supplier Power

High

Figure 2. The buyer-supplier power model. Source: Cox (2001)

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Identifying the determinants of value in the U.K. red meat industry: A value chain analysis approach

This process resulted in the numerous issues that were annotated onto the Big Picture Map as a communication aid. For example, MeatCo updated their prices and the associated new payment grid twice a week (approximately every three days). However, the producer (Lamb Farm) was required to provide seven days lead time for the delivery of his lambs for slaughter. He was therefore called upon to book in his lambs for slaughter before knowing the going rate for the period concerned. Again, this required trust. On that basis, the grading of carcasses crossing the scales was a skilled, high-pressure job that determined the revenue generated by the producer (Lamb Farm). This was an art and not a science. However, the evidence indicated the need for trust by Lamb Farm in the accuracy of this grading process. For the latter, there seemed to be an issue of inter-abattoir inconsistency in the specification of the carcass for conformation purposes. There were slight differences in the parts of the animal that were included or excluded when considering the weight of useable meat. As a result, producers seemed to be transactional and particularly influenced by the price offered per kilo and they often failed to make an holistic assessment of their total costs, which could outweigh the ‘premium’ on offer. For example, the additional transportation costs and administrative costs that might be associated with the deadweight or liveweight route, or selected abattoir. This issue seemed to result from a lack of awareness of the total cost approach and / or lack of knowledge of the actual costs concerned. It is worth stressing that in the U.K. lamb industry as a whole, poor conformance (high standard deviation) was reported against the EUROP/1-5 specifications of the leading supermarket retailers and food service chains. Over 50% of lamb carcasses were reported to be outside acceptable tolerances. By contrast, MeatCo’s producers recorded over 90-95% of their supply within such tolerances. However, it was unclear whether the conformation quality of all of their production lay within tolerance or whether they were disposing of their poorer quality lambs through an alternative route and hence, incurring additional costs. Overall, deadweight selling was the only route that provided the producer with feedback on the conformance quality of lambs and was understood that nationally, only approximately 50% of UK lambs are purchased via this route; however, this figure was 100% for MeatCo. An emerging issue was the dislocation between the EUROP/1-5 conformation system and true customer demand. The system seemed to be developed for production and retail distribution purposes (supply-oriented) rather than to reflect consumer needs, want or demands (customer / demand-oriented). Even given the above, many producers did not seem to respond to market signals as they are not

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producing what the consumers / retailers want. This seems to be attributable to three main causes. Firstly, it was the nature and magnitude of subsidies. Secondly, it was the cultural adherence and belief in the superiority of the ‘production concept’ where you push on the market, what is produced and is in turn premised upon what their ancestors had traditionally produced on that farm or what they believed to ‘grow best there’. Thirdly, it was the poor communication of the market demand signal itself. Finally, the actors in the value chain had widely different rates of adaptation. For example, the retailer needed to respond within weeks or months to changes that were detected in consumer demands or buying behaviour. However, the lifecycle of the producer’s in situ flock was 67 years. Given that significant changes in conformation, carcass yield and eating quality were only likely to arise through genetic changes arising from a selective breeding programme, the producer was constrained to a 6-7 year cycle even if he / she was amenable to responding to the market signal. This issue highlights the importance of transmitting a consistent and unambiguous message of consumer demand to the producer during this intervening period. Opportunities From the analysis of the value chain maps that were produced by the project team, an immediate opportunity for waste elimination (‘quick win’) was established to be the de-coupling of MeatCo deliveries from Superbuy demand, along with the dampening of demand amplification between these two parties. Given the lifecycle issues discussed above and the complex nature of the constraints facing the producer, it was not possible to identify a waste elimination (‘quick wins’) for Lamb Farm. There is evidence that supply chain and manufacturing costs correlate closely with volatility of demand. Greater demand variability leads to higher transformation cost (more storage, overtime, etc.) and higher transaction costs (planning, scheduling, etc.) Some variation the consumer perceived as ‘value adding’ related to the daily fluctuation due to the consumer propensity to consume meat at the weekend. At the point of sale, there may be other variations in demand that the consumer is willing to pay for that are ‘necessary but non-value adding’. For example, the consumer’s base level of demand may be boosted by two marketing strategies such as ‘Every Day Low Price’ or Promotions. Superbuy have elected for a bias towards the promotions strategy because of their customers, market position and company resources. Figure 3 shows the principle of Demand Amplification (illustrative figures only). The consumer line (dotted line with the diamonds) shows the ‘Value Added Spikes’ that

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on day -1, and an final order on the day of delivery. From three months of order data comparing weekly, daily and final orders, there is evidence to suggest that there is a significant cost in the chain due to demand amplification. Table 3 summarises the Weekly and Daily errors for a range of products demonstrating that the examined product is not an isolated example. In many manufacturing sectors, there is an expectation that uncertainty in demand should be set within limits. Wider limits may be more appropriate in this sector due to consumer buying patterns, but even if generous limits are set, it allows all parties in the chain to plan within reasonable

the consumer is willing to pay for. The promotion line (dotted line with the squares) shows the ‘Necessary but Non-Value Adding Spikes’ of promotions and the factory line (solid line with the triangles) shows the ‘Non-Value Added Spikes’ due to interaction of forecasting and ordering systems in the supply chain. The difference between the factory line and the promotion line is inter-company waste caused by the interaction of information systems and realized in extra cost of doing business and where the supplier must charge for this waste to stay in business. Superbuy’s current ordering process issues a weekly order on a Thursday for the next week, followed by a daily order

100 Consumer 90

Promotion Factory

80 Meat Cases (Units in 000s)

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70 60 50 40 30 20 10 0 1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Time (Weeks)

Figure 3. The demand amplification effect

Table 3. Weekly and daily orders comparison to final. Retail packing

Weekly v Final Average difference %

Daily v Final Average difference %

U.K. family pack chops U.K. neck fillet U.K. chumps x 2 (Frozen) U.K. / N.Z. chumps x 4 (Frozen) U.K. chops x 2 (Frozen) U.K. / N.Z. chops x 4 (Frozen) U.K. / N.Z. half leg U.K. / N.Z. half shoulder Lamb mince 500gm

37 42 21 31 24 35 95 61 121

47 65 37 38 40 43 146 128 124

Key: U.K. = United Kingdom, N.Z. = New Zealand

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Identifying the determinants of value in the U.K. red meat industry: A value chain analysis approach

boundaries. Applying this principle to meat, one week out +/- 30% may be acceptable, one day out +/-15%, and on the actual day the order is fixed. MeatCo’s ability to plan and schedule their facility would be infinitely better with such an arrangement. Currently, MeatCo is in a position where orders are not within such pre-defined limits and even change during the production day is possible as the final order isn’t really final. MeatCo has always thought positively about these late changes, seeing it as giving the customer (Superbuy) good service and flexibility. However, the cost of this is high in terms of having rescheduling and manufacturing transaction costs of varying capacity without notice. Improving information process to give predictability would have a significant impact on the freezing of the actual order on receipt as no changes will be allowed. It will also set target limits where each type of order should fall within and will allow the measurement of demand amplification and the removal of ‘Non-Value Added’ variation. Consumer requirement for seven day shelf availability requires seven day delivery into stores and distribution centers. The extent to which this requirement stretches up the supply chain is a key cost driver in the current high employment situation in the U.K. So, any opportunity to decouple seven-day demand from seven day working in the supply chain will have a positive impact. The optimum situation would be to dampen variable demand in the marketplace to level demand at the processor over five days, i.e. negative demand amplification. Leading Efficient Consumer Response and Lean supply projects in other sectors have established a single point of control and a single supply chain inventory point. For example, in the U.K. automotive sector, all parts are delivered ‘Just in Time’ for assembly of the car, and finished stocks of cars are managed. That sector has to deal mainly with market variability (March and September registrations), but has a very responsive supply system. In this case study, the processor is squeezed by two forms of variability / constraint. These are namely promotional activity and carcass imbalance. For example, following the slaughtering of an animal, there are a number of primal sections of the animals. If these sections are sold simultaneously, a perfect carcass balance exists. If some sections are sold slowly than others, a carcass imbalance occurs and storage of the slower moving sections is required. Therefore, the root cause of carcass imbalance is demand amplification. Promotions Planning is a key issue regarding the amount of demand amplification and carcass imbalance in the system. There are positive aspects to medium term planning of promotions to retain carcass balance. However, there are also weaknesses in the interactions between decisions in the system. Each player in the system makes a logical decision, but the interaction of these logical decisions is

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quite different to that from a ‘single real time decision’. The current process commences with the Buyer’s initial estimate based on, inter alia, historic data, weather data and other category promotion activity data. This estimate is quite reduced as Buyers expect Store Managers to provide more optimistic estimates. Subsequently, Store Managers’ feedback does increase the promotional uplift. From the analysis, specific recommendations were made to overcome some of the inefficiencies that this process invariable creates. For example, there is a need to measure the demand amplification and the carcass imbalance that should be shared on a daily basis to determine the output of the system. Regarding Superbuy, demand amplification would measure the effectiveness of the new systems as unlike other forecast measures, it measures non-value adding errors and indicates the cost to the system. Lastly, the products that are out of control, need to be monitored with a crosscompany focus on getting them back within limits. The new information system that Superbuy was in the midst of installing, was intended to do much of this. Key performance measures During the Current State Cross Value Chain Workshop (see Table 2), each of the participants was asked to respond to questions related to supply chain performance. The performance measures that these participants used for managing this value chain are listed in Table 4. There are approximately 50 measures. Many were found to be functional in scope, some were company-specific and two were supply chain-wide. Customer complaints (per million) was identified as an important measure within the above list because it dealt with the safety and eating quality of the meat, which were key dimensions of customer value. It was also important because it was the only measure that was shared on a regular basis between two value chain participants (Superbuy and MeatCo), and was continually monitored by them to ensure it was in control. When performance against this measure went outside predefined limits, an investigation was immediately conducted to establish the root cause. All three parties also recognised carcass imbalance as a vital cost driver within the value chain, although Lamb Farm was powerless to directly influence this measure. MeatCo monitored this measure on a continual basis and shared its projections of carcass imbalance with Superbuy when collaborative promotional planning took place for the months ahead. However, there was no precise published measure of the determinants of carcass imbalance on that short time-scale. At the time of writing, follow up fieldwork was being undertaken with the workshop participants to establish

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Table 4. List of key performance measures used by the value chain participants. Key performance measure

Used by

Sales Profit Promotional participation (% turnover planned) ceiling set Availability (end of day) Availability (within day) Inventory accuracy (changes) Sales budget (store) by Point of Sale (POS) group Loss targets day (by week/ category) Service level to stores (2hr deliver slot) Supplier service level % (ordered v delivered) Depot service % (how much delivered via ordered thro’ them) Temperature at supplier Temperature at depot Temperature at store Store stock levels Forecast accuracy (to commodity) area/region/store Loss % of sold by value (codes) Customer complaints (per million)

Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy Superbuy

Livestock prices and trade Lairage intake Slaughter line rate per hour EUROP 1-5 and weight at scale Customer selection and numbers at fridges Temperature at fridges Provisional and contingency orders Abattoir production volume available Stocks available External Purchases required Stock distribution supply to retail packing Vehicle and Fridge temperatures Stock control temperature and volumes Pre-cut inspection quality Cutting line/ schedule rates Individual rates Yields % Contingency and actual orders Product required Production schedule Giveaway % Stock control-orders - retail packs produced Despatch departure times Service level % Stock control /overs rework/surplus Customer complaints (per million)

MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo MeatCo

Lambing rates Cull rates (breeding stock) Average price of lamb performance feedback

Lamb Farm Lamb Farm Lamb Farm Lamb Farm

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Identifying the determinants of value in the U.K. red meat industry: A value chain analysis approach

what the main cross-value chain measures should be. Table 5 introduces the research team’s interim suggestions of what these whole chain measures should be, along with an assessment of the degree to which they are currently measured and shared throughout the supply chain. Only whole chain measures that are regularly quantified and shared have been classified as ‘D’eterminant or ‘R’esult. Issues that are recognized, but not regularly quantified are termed ‘A’ware. Table 5 demonstrates the strength of the supply chain partners and mainly, the relevant financial (results-based) metrics. This needs to be balanced with complimentary determinant metrics, shared throughout the chain on a regular basis, and when out of control, to form the basis for corrective action and targeted improvement activity; a similar view is also proposed by Beth et al. (2003) for a range of sectors. In order to achieve improved performance measures, it is recommended to quantify the determinant measures within pre-defined limits, to monitor them on a daily basis and to draw attention via colour coding (e.g. Red, Amber and Green). In that way, the red colour implies corrective action / improvement activity taking place immediately whilst the green colour leads to more ambitious limits.

5. Improvement scenarios The team developed two progressive improvement scenarios during the project’s Future State Cross Value Chain Workshop (see Table 2). Each considered a different time horizon and was conceptualised in the form of a Big Picture Map. The key recommendations that emerged from these scenarios are now described along with their predicted outcomes. Again because of the producer lifecycle issues discussed earlier, these scenarios concentrated upon the Superbuy-Meatco trading relationship.

Interim state MeatCo has a history of investment in people and infrastructure that can be further leveraged by an internal improvement process through a newly formed Continuous Improvement Team. With the support of the Master class programme that includes events facilitated by SMMT Industry Forum engineers, sustainable improvements in quality, cost and delivery in the plant can be achieved. The value chain has far too many measures to manage on a continual and connected basis in its current state, and most of these measures are results rather than determinants. Returning to the analogy used earlier in the paper, the current value chain can be characterised as a car being driven on rear view mirror with a complex array of instruments on the dashboard. By contrast, a smaller number of measures expressed as determinants and results that are shared across the whole chain, could improve this analogy to a car being driven using a balance of controls, road, rear view and clear instrumentation. Achievement of the interim state is based on suggested / planned initiatives and was discussed in the workshop and during site visits. Subsequently, five supply chain-wide ‘determinant and result linked to root cause analysis’ measures are proposed: 1. The actual order communication that needs to be tightened up so that it is frozen at the start of the day. 2. The advanced shipping notice that is part of Superbuy’s new information technology integrated system. 3. The carcass imbalance between shoulder and leg to be monitored and communicated. 4. To examine the position in the supply chain of decoupling point between 7 day demand and 5 day production. 5. To apply electrical stimulation to help the product’s maturation process

Table 5. The ‘vital few’ determinant performance measures for whole-chain control. Whole chain measure

Why?

Superbuy (Retailer)

MeatCo (Processor)

Lamb farm (Producer)

Supply chain

Customer complaints Shelf availability Demand amplification Carcass imbalance Product waste Carcass specification (Weight, fat, conformation) Revenue and profit

Quality safety cost Cost sales Sales cost Cost Cost Quality, cost Sustain partners

D/R D/R

D/R

A

D/R A

A R R R

R R D/R R

R D/R R

A A A A

Key:D= Determinant, R=Result, A= Aware

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Other sectors have experienced difficulties in repeating the automotive sector’s success of ISCM. Superbuy has the potential structure and support to make ISCM work with MeatCo and other suppliers and to eliminate waste at the company interfaces. To capture these potential benefits from realizing the full potential of ISCM, MeatCo and Superbuy can form a simple medium-term agreement based on benefit sharing that will transcend the buyer - account manager tenancy. These two firms can also identify and drive supply chain improvement through a balanced scorecard of determinant and result metrics and can develop a cross-functional, cross-company team to monitor, control and improve these metrics. Future state The Future State scenario splits consumer demand between non-promoted and promoted product value chains. It also takes a radical look at how the MeatCo could be linked more closely with Lamb Farm and its other producers. NonPromoted products are managed via a single inventory control point based on EPOS data and total stock in the system, a process that is largely automatic. Promoted products are controlled by cross-company teams and are based on existing collaborative planning initiatives that bring together actual sales and production systems. Here, the level of carcass imbalance is continually monitored and linked to the promotions plan. Finally, other longer-term opportunities identified during the mapping, include the pressing need for a flock breeding and improvement strategy to ensure the maximum (shortmedium term) carcass conformation performance on the part of Lamb Farm. On that basis, more frequent and consistent communication of projected market needs and wants emerge, so that the producer might plan a longerterm breeding and improvement strategy; normally, it takes 6 - 7 years to substantively alter the generic characteristics of a flock. This direct communication is required from both the abattoir and the retailer.

6. Conclusions In this project, it was demonstrated that VCA can be a valuable tool for the identification of a range of salient issues and waste elimination opportunities at the intra- and inter-company level. Intra-company process wastes have started to be eliminated at MeatCo through the formation of a Continuous Improvement function. At an intercompany level, as with other studies (see Jones and Simons, 2000), demand amplification and forecast error has been found to be the driver of major costs to the chain. As in other sectors, financial results-orientated performance

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measures dominate the in situ performance measurement systems, and there is an opportunity to introduce complimentary operational determinant measures. It is argued that the collective implementation and monitoring of the proposed ‘vital few’ measures in Table 5 will facilitate real time correction of value chain inefficiencies. This will enable more proactive management and control of these chains, with consequent reductions in the levels of waste and cost incurred by each partner. Whilst VCA has been successful in identifying the wastes in this chain, the building of a collaborative cross-company team enjoyed limited success. The evidence suggests that this was due to a lack of trust between the participants in the project, and in the case of the retailer, only limited resource available to participate because of the time demands of internal improvement project. This lack of trust was reflected in the initial resistance to share information and collectively map the chain. It should be added that this issue was also reflected more generally in the terms of the RMIF-VCA project’s commercial confidentiality agreement, which were more stringent than any similar agreement previously encountered by the research team. These learning points have been taken forward into the project management of the subsequent chains in the RMIFVCA project. During future projects, participant firms will be called upon to commit a dedicated project team member. They will also be called upon to commit to the diary dates established at the outset of the project for each of the fieldwork events listed in Table 2. Finally, it is planned during the first stage of future value chain projects to obtain a consensus on a benefit sharing protocol. This can provide a solid platform for the gradual and continuous development of trust between participant firms and can result in the formation of a harmonious and mutually beneficiary relationship (Beth et al., 2003).

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