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Case Study - Cargills ( Millers Ltd )


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Case Study - Cargills ( Millers Ltd )

  1. 1. Case Study –Cargills Supply Chain Ganeshan Anuruddha 101402T Janaka Bandara 101406J Wimukthi Nelaka 101407M Suneth Dharmaparakrama 101413D Thushan Dharmawardana 101414G Kasun Priyantha 101437E Mohomed Roomy 101439L Gayashan Weerawansha 101449R Frank Perera 101457N Kanthasamy Kirubakaran 101464H Submission Date : 3/18/2013
  2. 2. Case Study –Cargills Supply ChainHistorical DevelopmentIn 1844 “House of Cargills” was formed by William Miller and David Sime which ventured in toimport and wholesale business in Colombo Fort. Consequently it became a Public LiabilityCompany in 1946 just before the independence.Cargills are the pioneers of introducing super markets to the Sri Lankan consumers as theyopened their first outlet in Staple Street in 1983. This obviously made a great leap in retailindustry resulting in more and more convenience for customers.1999 is one of the most important years for its supply chain since the first collection centerestablished in Hanguranketha. Cargills always had innovative ideas which make them developedover the years. One of the classic examples is their diversification strategy which started in 2002by investing in dairy processing plant and benefiting dairy farmers in Sri Lanka. Cargills Magicice cream was the outcome of this endeavor. Also they diversified into agri-processing withCargills Kist which makes them one of the stable performers in the market. Image 1Supply Chain Management : TL 2050 Page 2
  3. 3. Case Study –Cargills Supply ChainFacts and FiguresSince the commencement of Cargills (Ceylon) PLC group, retail has been the mainstay ofsuccess and the profits generated by the sector has been increasing every year. The chairman’smessage in the annual report 2012 states “The retail performance remains robust despite thechallenging market conditions of spiralling fuel prices and increased electricity tariff. YourGroup remains committed to safeguarding the interest of the consumer while mitigating anyrisks to margins through internal efficiencies”. Figure 1 shows the group revenue mix of Cargills(Ceylon) PLC in 2012 and 2011. Figure 1It is a fact that over the past years, Cargills Supermarket Chain has shown a steady growth and in2011/2012 the revenue and profits grew by over 24.6% and 29.3%.Cargills retail has expended their outlets into every district in the country and currently Cargillssupermarket chain holds 194 Outlets island wide. The team has expected to reach its target 100new outlets with the opening of 240th Cargills FoodCity in 2013/2014. With the intention ofachieving the above mentioned target effectively, an investment of Rs. 1.2 Bn has been budgetedfor this expansion drive in the forthcoming quarter. The growth of the Cargills retail outlets areshown in the Figure 2.Supply Chain Management : TL 2050 Page 3
  4. 4. Case Study –Cargills Supply ChainThe supermarket chain has been highly profitable in the last few years. The revenues of the retailsector have been rising constantly. In the year 2012 the revenue has reached over Rs. 39 million.Figure 3 shows the financial achievements of the Cargills retail during the past 2 years. Year Outlets 2012-2011 194 2011-2010 163 2010-2009 142 2009-2008 136 2008-2007 116 2007-2006 110 Figure 2 Figure 3Cargills retail has substantially increased its revenue over the past two years. Revenue growth inyear 2011/2012 is 24.56% relative to year 2010/2011 which is a significant amount. The earningsbefore tax and interests display a higher growth of 55.26%. Figure 4 shows the steady growth ofrevenue and the earnings before tax and interests over the past few years.Supply Chain Management : TL 2050 Page 4
  5. 5. Case Study –Cargills Supply Chain Figure 4Cargills Retail is the backbone of Cargills (Ceylon) PLC group’s success. Therefore the retailsector holds a larger portion of the group’s profits. When considering the revenues and theprofits of the group, they have also increased simultaneously with the profit increase of the retailsector. Comprehensive ratio analysis is used to measure performance related to liquidity,profitability etc. Financial statement analysis helps to evaluate past and predict future financialhealth of the company.The Cargills group’s Price Earnings Ratio is measured over the past few years in the figure 5.Market Ratios 2006 2007 2008 2009 2010Price Earnings Ratio 20.70 36.73 91.48 19.58 50.00 Figure 5Price earnings ratio compares the price of a share to the earnings per share. It relates to the priceof a share to the proportion of the company’s profits. When considering the figures, Cargills hasmaintained a high Price Earnings Ratio throughout the past few years. This fact has beenimmensely helpful in order to attract new investors towards the company. Thereby Cargills hasalways been able to invest on CSR and expansion projects such as the 100 outlet project.Supply Chain Management : TL 2050 Page 5
  6. 6. Case Study –Cargills Supply ChainGeographical DistributionFollowing table gives an idea about the number of outlets in each district and how those outletsspread in each district. District # of Cargills food # of Cargills express Total cities Ampara 5 0 5 Anuradapura 2 0 2 Badulla 3 0 3 Baticaloa 4 0 4 Colombo 64 16 80 Galle 3 2 5 Gampaha 28 8 36 Hambanthota 3 2 5 Jafna 3 1 4 Kalutara 11 2 13 Kandy 8 2 10 Kegalle 2 2 4 Kilinochchi 1 0 1 Kurunegala 6 4 10 Mannar 0 0 0 Matale 3 1 4 Matara 3 1 4 Monaragala 1 0 1 Mullativu 0 0 0 Nuwara Eliya 2 0 2 Polonnaruwa 1 0 1 Puttalam 3 0 3 Rathnapura 5 1 6 Trincomalee 1 1 2 Vavuniya 1 0 1 Total 163 43 206Supply Chain Management : TL 2050 Page 6
  7. 7. Case Study –Cargills Supply ChainCargills having over 163 food city outlets and 43 express outlets spread across the islandcovering 25 districts. Cargills operates around 60 outlets within Colombo district. And indistricts where the population is limited they operate only few outlets. This method has taken acompetitive advantage for Cargills over their competitors. When their outlets are available inmany locations then it increases the accessibility to their customers. When they place an outletthey mainly concern about some factors such as,  Population  Life styles  Income levelsThey collect these data by doing surveys and finally they come with decisions by analyzingsurvey data. Cargills maintain warehouses and collecting centers also in different locationsacross the country. They collect their own mostly through direct channels, and this has taken ahuge advantage for Cargills over competitors, Cargills could offer best prices for the farmers which competitors cannot achieve and Cargils offer their products for customers at comparatively low prices than their competitors. Their main Distribution center is situated at Mattakkuliya. Mattakkuliya is situated near Colombo area and it is easily accessible for their mainly focused districts. Then they can improve their logistics function and take a best use of logistics function in line with total supply chain objectives.Image 2Supply Chain Management : TL 2050 Page 7
  8. 8. Case Study –Cargills Supply ChainSupply Chain StrategiesConsidering the other super market chains there are certain things that make them competitiveamong others .Cargills super market chain has categorized the products into branded productsand perishable products and they have distinctive supply chain strategies for these twocategories.Considering the branded products they use a centralized warehouse to distribute the products toall the 206 super markets located all over Sri Lanka. They have graded the outlets based on thedemand they have. Altogether there are around 5 grades and for each grade delivery pattern isdiscrete. Order processing is done automatically based on past information by an internallydeveloped information system. So according to the order processed deliveries are done by thecentralized warehouse depending on the grade of the outlet. A Cargills outlet never gets shorterof products since they always maintain a minimum margin of products that should be kept in theshelves of the outlet. There are certain strategies implemented by them to make sure all the15000 SKU s are delivered with the lowest cost and time and wastage which are described under.These strategies make them really competitive along with their impressive marketing strategiesimplemented.What makes the supply chain of Cargills unique is the strategy they’ve been using for perishableproducts. These perishables can be categorized into four parts, vegetables, fruits, dairy productsand meat products. Of these vegetables and fruits is their main strength since they have a farmerbase of around 5000 spread all over the country. Cargills directly purchase the required amountof vegetables directly from farmers by around 10 collection centers around Sri Lanka. Thereforethe middle man has been omitted from the process resulting in higher prices for farmers and lowprices for customers.Supply Chain Management : TL 2050 Page 8
  9. 9. Case Study –Cargills Supply Chain Image 3By this unique model Cargills has been able to be one of the forerunners in the industry. In aconventional supply chain there are many players who try to gain the maximum profit resultingin higher operational costs. Around 30% of the market value is received by the middleman whilethe process after harvesting is costing around 40 % of the market price therefore resulting in only30 % final value accruing to the producer.Supply Chain Management : TL 2050 Page 9
  10. 10. Case Study –Cargills Supply Chain Figure 6Other than this there are many problems involved with this normal model of supply chain.Normally the consumer is consuming a product which has deteriorated endlessly moving fromone middle man to another. Since the farmers are not encouraged by the lower price generated inthis system the products that are been produced uses lower quality planting materials andsometimes premature harvesting resulting in inferior products entering into markets.Understanding the reality Cargills invested a lot to change this conventional model. Farmerswere given free seeds and also technical advices were given in order to improve their skills andknowledge in producing a good quality product. They were assured of a price that is higher thanthe competitive market price prevailing.As the below figure shows farmers can receive a higher price as few intermediaries are involvedin the supply chain which also enables Cargills to lower the retail price and improve theircompetitiveness considering other super market chains.Supply Chain Management : TL 2050 Page 10
  11. 11. Case Study –Cargills Supply Chain Figure 7Therefore a strong base is there for Cargills which resulting in a constant supply of vegetables.Since their collection centers are located all around the country somehow the demand will befulfilled using alternative sources in case of a sudden disaster or supply fluctuation.As per an example the demand of the perishable products pre-determined for tomorrow will becollected today morning from those centers. Then the products will reach vegetable processingcenter at Wattala on that day itself which will make sure consumers are getting the fresh productsdistributed to their closest Cargills outlet. Cargills have implemented strategies to reduce their wastage and is able to reduce their post harvest wastage from around 40% to 3% mainly by investing on plastic crates long before government implemented the policy, which makes them the best among others.Supply Chain Management : TL 2050 Page 11
  12. 12. Case Study –Cargills Supply ChainConcisely features in the supply chain can be highlighted which are making it one of theexceptional supply chains in spite of the fierce competition of the other super market chains.  Effective governance- Quality supplies  Coordinated delivery of services- Increase production and improve quality  Vertical integration – Direct linkages between Cargills and suppliers  Information Flow – Suppliers getting state of art knowledge on producing the best  Trust – Minimum guaranteed price for farmers  Corporate Social Responsibility – Empowering farmers  Diversification - Improved product quality  Chain Efficiency – Reduced wastage  Inputs – Free seeds  Sustainability – Creating a win-win situation for both producers and buyers.Supply Chain Management : TL 2050 Page 12
  13. 13. Case Study –Cargills Supply ChainSuppliers Suppliers Suppliers Suppliers Suppliers Suppliers Miller Transport Miller TransportMeat Factory Vegetable Collection Center Ice Cream & kothmale Factory Suppliers Suppliers Suppliers Suppliers Kist Factory FMGC DCMiller Transport Miller TransportSupply chain of CargillsSupply Chain Management : TL 2050 Page 13
  14. 14. Case Study –Cargills Supply ChainDistribution system in Cargills Cargill’s supply chain is totally different from the normal supply chain system becausethey use their own distribution system. Millers ltd involve in their all distributions not as a thirdparty as an own distribution section. As shown in the supply chain their distributions alsoseparate from each other’s like vegetable section use different root plan system and brandedproducts distribute in other way etc... We can study that they have excellent root planning systemto deliver products. Cargills have their own 10 collection centers for vegetables around Sri Lanka and around5000 of suppliers and those collection centers act as distribution centers also. Usually vegetablesection makes one delivery for a day directly food cities and one truck cover few food cities toget maximum truck utilization from the nearest collection centers. And also collection centersexchange the vegetables that cannot collect them. Some other factories like meat and sausage section, dairy and ice cream also makeseparate deliveries once a week directly to the outlets. Here they need special cooled trucksbecause those are perishables and each truck usually covers more than one outlet for maximumtruck utilization. And also Cargills have some other their own products like soaps and FMCG items, KISTand biscuits manufacturing at factories are sent to the main distribution center at Mattakkuliya.After that all of branded items sent through the main distribution center. Cargills use differentdistribution strategy at main distribution center which they send all the branded products to alltheir food cities from there. Usually they make one delivery for one week for each branch withfully loaded truck. This distribution system help them to manage all the food cities at one placewith their cooperate plan.Information system in Cargills Now Cargills use their own information system to manage their entire business. Theyused AS400 system early and now it is out of use. Usually every sale on retail outlets are countedSupply Chain Management : TL 2050 Page 14
  15. 15. Case Study –Cargills Supply Chainby the information system and after analyze uses them to forecasting and decision making.Accordingly to sales and some other factors they have graded their food cities and they analyzeeverything about them. Earlier food city manager decides what the quantities they need andmade the order and now it decides by the system and sends the orders for each section separately.As an example separate order send to meat section, vegetable section etc... Then those sectionscan easily manage their route plan system to reduce the distribution cost. Better information system at Cargills, centralize the all information to the maincontrolling center and to the management and it makes easy to analyze all the chain and decisionmaking.Inventory management at Cargills Cargills have more than 15000 of stock keeping units and it is necessary to have a betterinventory management at Cargills stores. Therefore they have excellent store managementsystem with allocated slots for each categorized item. As they keep only one distribution centerfor branded products at Mattakkuliya they manage larger size of stocks there. They use forkliftsto move pallets and boxes within the store and move to and from trucks and Lorries. They havetheir own transportation sector, so they can maintain their inventory management their own way.Because of that they can continue inventory management to the lowest cost. As well as they calculate their inventories based on storage structure or enter inventoriesdirectly from feeding management software. Other thing is their inventories include all diets usedon the farm. As examples regarding total daily usage and value, period usage and value,beginning inventory and value, ending inventory and value, and the date that current inventorywill run out if used at the current daily usage rates. According to this scenario Cargills InventoryManagement can consolidate their future forecast and overall amount and value numbers.Supply Chain Management : TL 2050 Page 15
  16. 16. Case Study –Cargills Supply ChainRecommendations for future improvementIt’s true that Cargills has a better supply chain than most of the other players in the market butwill it be capable enough to survive in the long run. Cargills is using lucrative marketingpromotions which are so close to the hearts of the consumers but it was seen in the real scenariothey don’t put more interest on customer service. Cargills head office is the best example forthat. Yes they promote that they are paying a higher price for the farmers but they don’t ever buyadditional amounts more than their demand which is pre-determined. So in the peak harvestperiod farmers can only sell about 60% of their production which makes the traditional farmersintegrated with Cargills to look for other alternatives. Even the price level they are keeping isjust only 50 cents or 1 Rupee higher than the normal price for one Kilo Gram which doesn’tmake it much difference to the social development scenario. Even the ethics integrated in thesupply chain is a bit problematic since it can be seen that alternative products are been made byrotten vegetables fruits and meat and directly sell via there outlets. Therefore if they can developthe supply chain involving more good aspects they can retain their name and fame in the comingfuture.ReferencesCargills Annual Report 2012/2011/2010/2009/2008/2007/2006 “Production Resources in Lagging Regions”, World Bank Report: Case Study – Sri Lanka, June2007.Supply Chain Management : TL 2050 Page 16
  17. 17. Case Study –Cargills Supply ChainSupply Chain Management : TL 2050 Page 17