Case Study- Direct Food Supply

Case Study- Direct Food Supply (DFS)

Company background

DFS is a rapidly growing food distribution and wholesaling company located in the North East of England. It was founded by Mr Abbas, who started the business from a small storage room with only 3 employees back in 1995.

 Between 1997 and 2007, DFS experienced tremendous growth in sales volume. In order to meet the increasing demand for its services, Mr Abbas began an ambitious expansion plan in 2007. In order to fund this expansion, Mr Abbas decided to join forces with three other major investors – Mr Jones, Mr Mehdi and Mr Dimitry. As part of the plan, the company’s operations were relocated to a bigger, dedicated site in an industrial estate near Gateshead.

DFS subsequently employed more staff, extended its existing production capacity to include facilities such as industrial chill rooms (30 pallet* space), freezers (200 pallet space with racking system) and a massive dry good storage area (480 pallet space with racking system). Expansion work was completed towards the end of 2008, and the “new” DFS became by far the largest food supply and distribution company in the North East of England.

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*pallet – a small, low, portable platform on which goods are placed for storage or moving

Since 2008, the four significant owners have all remained as major shareholders. Each holds the same proportion of ownership at 25%. Of the four of them, two (Mr Abbas and Mr Jones) are involved in the day-to-day running of the company in their official capacities as co-Managing Directors. Annual turnover was £5m in 2009.

DFS remains primarily involved in supplying raw materials and packaging to an extensive range of fast food outlets mostly within the North East region.

The North East Fast Food Outlets Supply and Distribution Market

The fast food supply and distribution market within the region is currently dominated by DFS. Competitive pressure was relatively low originally as there were a limited number of competitors (mostly general distributors) who supply raw materials and packaging specifically to fast food outlets (i.e. local fish & chip shops, burger bars, pizza outlets, Indian & Chinese takeaways). This was despite the steadily growing number of fast food outlets in the North East of England. The few notable competitors in the area were “QUICK Supply” and “Express Food Distribution”, both rather well-established but with relatively smaller market share in the region compared to DFS. All three organisations (DFS, QUICK and Express) operated quite independently, each with their own “list” of fast food outlet customers (partly due to the fact that the growing fast food industry being able to absorb their combined expanding capacities).

Since the mid 2000s, however, DFS’ two competitors are becoming more aggressive in their expansion, especially in trying to capture market share from DFS. Even so, in order to keep margins high, all three organisations are unwilling to become engaged in an all out price war.

Another significant development that is of particular concern to DFS is the fact that many new competitors have entered the market in recent years. This is hardly surprising as supplying raw materials to numerous fast food outlets around the North East is a highly lucrative business. This increasing market pressure on DFS both from current and new competitors have persuaded the company’s four major shareholders to respond by undertaking a bold restructuring of the business. This mainly involved the creation of a sister trading company named Sopco.

Essentially, Sopco imports branded goods that are in high demand from suppliers outside of the UK. By negotiating sole distribution rights to those goods/brands of products within the UK, Mr Abbas and the other three major shareholders hope that they will be able to limit the expansion of its competitors, especially in preventing them from taking market share from DFS itself. This is because, with sole distribution rights, all competitors would have to purchase these goods (that are demanded by their customers – the fast food outlets) from Sopco. Therefore, the strategy is to make use of Sopso to supply the entire supply and distribution market with such goods, including its sister company DFS.

The positioning of both DFS and Sopco in the North East fast food outlets supply and distribution market is depicted in the diagram below.

Diagram 1: The North East Fast Food Outlets Supply and Distribution Market

Sopco itself is a small outfit consisting of only three employees and is managed by the other two major shareholders (Mr Dimitry and Mr Mehdi). It has, however, significant buying power from both inside and outside of the European Union. In effect, buying in large quantities (bulk) allows them to offer their goods at the cheapest prices. It is hoped that the combined market share and buying power of both DFS and Sopco will prevent competitors from being able to purchase similar substitutes/alternatives at lower prices without sacrificing considerable amounts of quality.

It must be noted, however, that even though Sopco is a sister company, it has no intention of selling any of its prized goods to DFS at a discount. This is to maintain its selling power in the market by being able to cover as many food distributors and wholesalers as possible. This will steadily increase Sopco’s cash flow, which is highly attractive for all four major shareholders. Hence, Sopco’s operations mainly involve taking orders from food distributors and wholesalers in the UK, ordering them with the suppliers and manufacturers and facilitating direct deliveries to these customers. Currently, Sopco supplies about 70% of DFS’ total food and packaging products.

Even with this seemingly good overall strategy adopted by DFS to keep its competitors at bay, these rivals have also responded with a number of aggressive strategies of their own, thus creating a highly competitive environment.

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The Current Competitive Environment

In terms of the increasing competition within the fast food distribution market, the number of competitors in the North East of England increased to nine in 2008.

One of the biggest newcomers was “Yummy Foods”. This competitor has opted for a highly aggressive market entry strategy. It is offering the lowest prices by pricing their goods even lower than the break-even margins (i.e. at loss-making prices) so that it is able to sign up new customers quickly. In fact, it did manage to wrestle some of the shared customers away from DFS using this strategy of “underpricing”, but the overall quality of their service remains poor, especially in terms of on-time delivery and flexibility. DFS, on the other hand, has retained the strategy of differentiating itself from competitors by being distinctive in quality of service.

Other new competitors (Joe’s Supply It, The Flying Singh, Get-It-Delivered), who have only entered the market in the past two years, are much smaller in size and have much simpler operations. These competitors typically operate from ‘cheap’ shops using manual-labour (often with members of their respective extended families as workers). As they service only a small list of customers within a relatively small area, they are able to respond to customer orders very quickly and are able to offer frequent, as-and-when-needed delivery service. Conversely, with many hundreds of customers to service across the region, DFS can only offer regular, fixed-time-of-the-week delivery even with its bigger and more extensive fleet of trucks.

Even more worryingly, since the 2008 economic crisis, many more fast food outlets are choosing and/or considering sourcing cheaper raw materials and packaging in order to cut costs. This is because intense competition, frequent discounting and the popularity of “set meal deals” have reduced most fast food outlets’ profit margins considerably. In response, some newer competitors such as The Flying Singh have begun directly sourcing low-quality but extremely cheap goods from Eastern European and Asian countries (and, in effect, bypassing Sopco). These low-quality goods have proven to be very popular and are increasingly “acceptable” to many fast food outlets, especially those who are struggling for survival. In hard economic times, cost may be the sole consideration when sourcing raw materials even at the expense of reputation and quality.

DFS, on the other hand, has very strong and long-standing relationships with its high-quality and well-known branded suppliers. Even with its superior economies of scale in operations as well as bulk buying power, the average costs of these high quality goods are still considerably higher than the generic, low-quality materials sourced by DFS’ new competitors in smaller quantities. The dilemma is that, if DFS terminates such long-standing relationships, the discounts and good trading terms developed over many years will be lost. Also, DFS has to consider its strong reputation for high quality and dependability.

At the same time, DFS’ directors are fully aware of the fact that, as a business, it needs to take into account the demands of an ever-growing list of customers for more cost-effective raw materials and packaging. In fact, according to feedback from DFS’ own delivery drivers, some of its customers have been buying more types/amounts of products from cheaper suppliers such as The Flying Singh and lesser from DFS lately.

This intense market pressure applied by new competitors has forced DFS to establish another depot in Middlesbrough to expand its market geographically. A purpose-built warehouse with state-of-the-art facilities was built on a piece of newly purchased land (30 pallet space chill room, 200 pallet space freezer and 800 pallet space dry goods, all with racking systems) in 2013 in order to realize its new strategy and push its products and brands market further south. This strategy of expanding its market to different regions is an ambitious one, especially as the threat of losing further market share in its primary North East region still needs to be addressed.

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Supply Chain Management and Logistics

 Main DFS’s logistics activities rely on order processing, storage and delivery. However, Mr Abbas gave the responsibility of supply chain and logistics improvement to the logistics department. Anthony Parkes, the head of the logistics department has been appointed as the project manager by the board of directors to identify the key areas of improvement in the supply chain and logistics for DFS. Mr Abbas has criticised the existing operations in logistics and emphasised that the current performance is not meeting the competitiveness strategic measures in the Company.

As the initial stage, Anthony Parkes started more collaborative work with the quality management department in order to identify the key areas of improvement in logistics operations. Hamid Nouri who is the head of the quality management department worked closely with Anthony to develop the most important Key Performance Indicator (KPI) in relation to the logistics and supply chain operations. For the strategic decision making, they need to select the most important KPI for the logistics and supply chain performance and justify that selection for the board of directors in relation to the organisational competitiveness and excellence. They decided to focus on logistics measures that would have impact on organisational excellence and efficiency factors such as cost reduction and improved quality of service.  They identified key logistical measures under the Balanced Score Card strategic modelling. These measures could potentially have impact on cost reduction and quality of the service. Table 1 below has been produced as the result of this analysis.

Process Measure Financial

Perspective

Customer

Perspective

Organisational Perspective
Ordering Process Order Fulfillment Rate  
Response Time to Customer Enquiry  
Order Lead Time
Supplier On-Time Delivery    
Forecast Accuracy  
Order Accuracy  
 

Storage and Retrieving

Storage Cost  
Storage Quality  
Inventory Cost    
Number of Damages and out of date Stock    
 

 

 

Loading

Loading Time  
Loading Accuracy  
Product Quality  
Truck Fill Rate    
 

 

 

 

Delivery

On-Time Delivery  
Flexibility in Delivery    
Driver Behavior  
Transport Cost  
Empty Running    

 Table 1: Logistics measures that have an impact on organisational excellence

Having agreed that the key improvement strategy for the supply chain and logistics performance must rely on improving quality of the service and increasing the operations efficiency (cost reduction), the project team decided to focus on application of Lean and Six Sigma methodologies to systematically reduce the waste in the supply chain and logistics operation. They need to analyse eight different types of the waste and critically evaluate which of them could potentially or actually help DFS to achieve the highest level of performance in relation to the presented logistics measures as per bellow table.

This means that in order to execute the project in a best possible way and with the best outcome, they are required to prioritise the most important KPIs for the supply chain and logistics, then identify the most critical measures that can address that KPI followed by identifying the key waste element and Lean technique that can reduce it. However, they need a systematic application methodology to support them that the waste problem has been removed or minimised and they have already thought about Six Sigma methodologies. But, the project team needs a further study about cultural and resource requirements for Six Sigma and how they can apply the Six Sigma methodology in their supply chain and logistics operation.

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 Accounting

Given the intense competition currently faced by DFS in the fast food outlets supply and distribution market, Mr Abbas and Mr Jones (in their role as co-Managing Directors) have expressed their concern regarding the company’s increasing overhead costs. The typical approach to budgeting that the company has taken for many years is to simply add a small increment to each department’s actual spending for the previous financial year (to account for inflation), while making some adjustments for any specific cost increases or reductions. Given the current competitive environment, there is increasing concern about how to keep costs under control.

 

At a recent board meeting, Mr Abbas said the directors should take a harder line with their managers and supervisors if DFS is to become more competitive in terms of cost.  He suggested that for the next financial year, managers who exceed their budgeted spending should be penalised in some way, including the possibility of them losing their jobs.  He commented, “We should stop listening to their excuses! If they can’t do their jobs properly then they should go! We need to set the cost budgets at the absolute minimum possible; don’t ask them what they think, they’ll pad the budgets out.”

Mr Jones has also expressed concern about the management information pack that is supplied to the directors at the board meeting. “While the updated accounts information given such as the Profit and Loss account, Balance Sheet and other budgetary information is useful, I think we need to a adopt a broader set of indicators to judge the performance of the business particularly given all the plans we are currently considering”.

Marketing

The Marketing Department provides the link between DFS and its customers. First established in 2000, it was originally set up by Verity Thompson and Guy Smith. Following DFS’s expansion a decade ago, a further two employees were recruited – Rachel Hemming and Connor Brown. Both Rachel and Connor had experience of working in the food marketing industry and were given the task of developing the company’s website. Nevertheless, after eight years of working for DFS in 2008, Connor was appointed the new Marketing Manager for Yummy Foods, reducing the team to three. After three years of working with only three members of staff, in 2014 a further two employees (Joey Atherton and Emma Dunlop) were recruited with the expansion of the Middlesbrough site.  Information on their specific job roles is given below:

Name Position Background Job role Length of service
Verity Thompson Marketing Director Verity worked as a marketing manager before joining the DFS in 2000 To oversee all marketing and sales activities within DFS 14 years
Guy Smith Assistant marketing Director Guy worked in a number of junior marketing roles after leaving university, before joining DFS in 2000 To assist Verity to overseeing marketing activities within DFS 14 years
Rachel Hemming Online and Sales manager A graduate from Northumbria University (BA Business Studies), Rachel worked in the marketing department of a food manufacturing business as part of her placement and joined DFS in 2002 To work with Google and the web designers to promote DFS and look after their online interests 12 years
Joey Atherton Marketing and sales coordinator Joey met Rachel whilst at Chartered Institute of Marketing (CIM) event and joined DFS in 2014 Marketing and sales support Less than 12 months
Emma Dunlop Placement student From business and/or marketing programmes at Northumbria University and joined DFS September 2014 Ad hoc research projects and interim admin support Less than 12 months

Despite the new appointments, the team have been struggling to keep on top of their workload. Much of their time is spent answering the phone and dealing with incoming calls from advertising agencies trying to sell them advertising space. This has resulted in the team adopting a more reactive rather than proactive approach to marketing. Furthermore, since October, Emma Dunlop has been absent on sickness leave. This has had a major impact on the department as Emma had just started some research with existing DFS customers exploring levels of satisfaction. Emma’s absence has also impacted the number of electronic enquires, with many of the incoming emails not being looked at or actioned since October 2014. To make things worse, there has never been a systematic approach to recording incoming enquires.

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DFS is a well-established brand, with most of its business is based in the North-East region. Since 1995, DFS has carried out B2B (Business-to-Business) advertising with its customers; however, most of its business has come from word of mouth. DFS has also benefited from strong links with the Chartered Institute of Marketing. In fact, Verity and Guy have delivered a number of presentations to the Institute about the importance of customer service. However, to date DFS has not conducted any research into price and this remains an area of marketing that both Verity and Guy have little experience in managing.

 Verity Thompson has identified some key marketing challenges for DFS. Despite traditionally having little competition, Yummy Foods now poses a real threat to DFS’ current business. A list of the most prominent problems is as follows:

  1. Lack of clear articulation between the business objectives and the marketing objectives;
  2. No systematic process for new product development;
  3. Lack of a Marketing Information System, with ad hoc reports being commissioned and no organised system for pooling and disseminating information to decision makers;
  4. Little awareness of satisfaction or dissatisfaction;
  5. Limited KPI’s to benchmark the team’s performance against;
  6. No clear brand strategy for the DFS branded range;
  7. Lack of an expansionary budget.

Human Resource Management

DFS has paid little attention to the development of a strategic approach to the management of its human resources. In particular, there has been no significant focus on a strategic and integrated approach to sustaining organisational success by improving staff performance through development of staff capabilities.

In addition, as a result of the increased competitive pressures facing the business, it has become apparent to the co-Managing Directors that the paybill for the company is simply too high. Having considered the current pay bill and inadequate arrangements for pay and performance that are currently in place, the directors have invited a specialist HR consultancy to provide expert advice on ways forward to address the following issues:

  1. To significantly reduce the company’s overly high pay bill. Directors are looking for a 10% reduction this year with any subsequent rises to be “rigorously based on performance and only performance”.
  2. There are no records of reasons for the awards of bonuses at senior levels. Bonuses have been agreed at un-minuted meetings between employees and senior staff. There is minimal accountability within the current organisation.
  3. The co-Managing Directors cannot see how the objectives and performance of different departments have been reflected in performance objectives and rewards.

The current numbers of employees within the business with their existing levels of remuneration are as follows:

 

Co-Managing Directors (2) £120,000 + bonuses of up to 50% of salary related to operating profits of the company.

Other Directors (2) £80,000 + bonuses of up to 30% of salary related to operating profits of the company.

Managers (5) £35,000-£60,000 with the actual salary being based on annual performance review.

Supervisors (5) £20,000-30,000 with the actual salary being based on annual performance review.

Operatives (50) £7-£8 per hour (for a 40-hour week).

In addition, all employees are members of the Company Pension Scheme, with DFS currently contributing 10% of salary for each employee.

For the past ten years, the minimum and maximum figures for each pay grade have been increased by the inflation rate (RPI) recorded in January. Most employees above the operative level have become used to a performance review increase of around 5% a year, but this arrangement is entirely informal and increases far in excess of this have been offered in the past for particular successes.

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Current salary levels within the business (for all roles) are considered to be higher than the average market rate and, although the current numbers of staff are justified in respect of current workload, it is considered that these numbers could be reduced through both reorganisation and the introduction of more effective performance management systems.

The business is not unionized and the operative jobs at DFS are highly sought after. Employee turnover and levels of absenteeism are low throughout the company. Workers and managers are said to value the “family atmosphere” at DFS and the organisation has no difficulty in recruiting staff.

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