Supply chain from manufacturing to shelf

Introduction
The Kellogg’s Cornflake Company began in 1906 with the Kellogg brothers who originally
ran a sanatorium in Michigan, USA. They experimented with different ways to cook cereals
without losing the goodness. Their philosophy was ‘improved diet leads to improved health’.
Between 1938 and the present day Kellogg’s opened manufacturing plants in the UK,
Canada, Australia, Latin America and Asia. Kellogg’s is now the world’s leading breakfast
cereal manufacturer. Its products are manufactured in 19 countries and sold in more than
160 countries. It produces a wide range of cereal products, including the well-known brands
of Kellogg’s Corn Flakes, Rice Krispies, Special K, Fruit n’ Fibre, as well as the Nutri-Grain
cereal bars.
Kellogg’s business strategy is clear and focused:
• to grow the cereal business – there are now 40 different cereals
• to expand the snack business – by diversifying into convenience foods
• to engage in specific growth opportunities.
By acting responsibly, businesses win respect and trust from communities, governments,
customers and the public. This enables the business to grow. In the community, Kellogg’s is
known for its approach to Corporate Social Responsibility (CSR). For example, its programme
to promote the benefits of breakfast clubs has provided over one million breakfasts to
schoolchildren throughout the UK.
Businesses focus primarily on the creation of profit but increasingly understand that their
social and environmental impacts are important. Kellogg’s believes in acting responsibly in all
sections of the supply chain. This is a better long-term business model for both the
organisation and its customers. Amongst other activities, it aims to do this by reducing energy
and emissions in manufacturing and distribution and improving packaging.
Kellogg’s Global Code of Ethics demonstrates a commitment to act respectfully and ethically.
‘Our mission is to drive sustainable growth through the power of our people and brands by
better serving the needs of our consumers, customers and communities.’
This case study shows how Kellogg’s fulfils this mission in the later parts of the supply chain
from manufacturing to shelf.
The supply chain
The industrial supply chain consists of three key sectors:
1. Primary (or extractive) sector – providing raw materials such as oil and coal or food
stocks like wheat and corn. Some raw materials are sold immediately for consumption,
such as coal to power stations. Others are used further up the supply chain to be made
into finished goods.
Supply chain from
manufacturing to shelf
CURRICULUM TOPICS
• Supply chain
• Sectors of industry
• Lean production
• Sustainable business
GLOSSARY
Business strategy: the overall
plan a company has for itself.
Supply chain: the chain of
processes linking the manufacture
of products with physical
distribution management so that
goods are moved quickly and
efficiently through various
processes to meet consumer
needs.
Primary sector: the first stage in
producing goods concerned with
growing or extracting raw materials
e.g. oil drilling, mining,
agriculture, fishing and forestry.
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2. Secondary (or manufacturing) sector industries make, build and assemble products.
Examples include car manufacturers or bakers who use primary products. For example,
Kellogg’s purchases rice for Rice Krispies and corn for Cornflakes.
3. Tertiary sector industries do not produce goods. They provide services such as in
banking, retailing, leisure industries or transport.
From start to finish of the supply chain a range of agencies or departments are involved.
These include research, quality, purchasing, sales, and transport and distribution. As part of
their business strategy, companies need to consider how best to acquire and distribute raw
materials. Businesses such as Kellogg’s recognise the importance of storing and transporting
products effectively. Kellogg’s seeks to organise transportation and storage of materials and
finished products to minimise costs and environmental impact. Increasingly governments are
working to encourage businesses and individuals to reduce their carbon footprint and the
effects of global warming.
In the supply chain, there are a number of areas where waste can be identified. Lean
production is an inventory system enabling the streamlining of processes and elimination of
waste. Kellogg’s regularly evaluates its production methods to ensure that they give the
required outcomes and that waste is reduced. This aids competiveness and profitability by
lowering overheads and unit costs.
In the past, businesses thought it was more effective if they carried out several parts of the supply
chain, like manufacturing and transportation, themselves. To meet requirements and provide
customer satisfaction, this meant deliveries taking place frequently and often without
consideration of impacts on the environment. An urgent order might result in a half-empty
vehicle making the delivery to a waiting customer. If this happened regularly it would be a waste
of time and fuel. Consumers and governments now look for more environmentally-friendly
methods of production and distribution systems. It is therefore more efficient and cost-effective
for Kellogg’s to specialise in the area in which it is expert – manufacturing. It does not have its
own distribution fleet but uses partners for its transport needs.
The supply chain – the secondary sector
Kellogg’s is a secondary sector business. It obtains its raw materials of wheat, corn, cocoa, rice
and sugar from primary suppliers around the world. These materials help make over 40 different
breakfast cereals and snacks to sell to customers through the tertiary sector. It is a large-scale
manufacturer and stores sufficient stocks to meet customer orders. As part of its Research and
Development (R&D) programmes, it develops recipes to extend its range of cereals and snacks.
Large-scale manufacturers like Kellogg’s need to consider many different aspects of their
operations:
• where to locate the business – this could be near to materials’ suppliers. For example,
power stations are often sited near to coal sources to reduce delivery costs. Frozen peas
factories may be near farms to ensure the product is fresh. Kellogg’s ingredients are grown
in many countries. It is more important for its manufacturing sites to be near to distribution
channels and customers so products can reach shelves quickly.
• size and scale– they need large factories with adequate space for equipment and
production processes. They also need to accommodate the frequent delivery of incoming
materials and outgoing finished goods.
GLOSSARY
Secondary sector:
manufacturing, assembly and
construction.
Tertiary sector: service
industries e.g. transport, banking,
insurance or hairdressing.
Lean production: an approach
to production that seeks to
minimise waste and inefficiency.
Overheads: costs arising from
the general running of a business
e.g. rent, rates.
Primary
sector
Raw materials
suppliers
Natural
products
e.g. wood,
oil, food
stocks, earth
and minerals
Secondary
sector
Manufacturers/
producers
e.g.
cornflakes,
card and boxes,
glass and pottery
Tertiary
sector
Wholesalers/
retailers
e.g.
supermarkets
Consumers w
Transport
and
arehousing
Transport
and
warehousing
Transport
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• where and how materials and finished goods are to be stored until needed for sale. As part
of Kellogg’s manufacturing process it packages products ready for immediate distribution.
• where its customers are – Kellogg’s does not sell its breakfast cereals directly to
consumers. It uses intermediaries like wholesalers, supermarkets, high street stores and
hotels. Transportation and storage occur between all stages of the supply chain.
Kellogg’s largest UK production plant is at Trafford Park in Manchester. One of its storage
depots was 15 miles away at Warrington. Kellogg’s moved this storage to a new warehouse
site in Trafford Park, only one mile away from its production base. This provides specialist
energy efficient warehousing of stock 24 hours a day. To improve its distribution, Kellogg’s
collaborates with TDG, a logistics specialist. This reduces transport costs considerably and is
energy-efficient. Kellogg’s has reduced both its carbon footprint and costs as a result.
The Food and Drink Federation (FDF) is an umbrella organisation for food and drink
manufacturers and has called on its members to improve their environmental performance by
reducing:
1. levels of packaging to consumers
2. use of water during production
3. impact of transportation
4. waste to landfill
5. energy use during production.
Through the FDF, Kellogg’s has signed an agreement with 21 major companies to improve
water efficiency, reduce wastage and cut CO2 emissions. Together these companies aim to
save 140 million litres of water per day. This will reduce their water bills by £60 million each
year. Kellogg’s has also joined with the international company Kimberley Clark, which makes
paper products like tissues, to reduce carbon emissions by sharing delivery services.
Kellogg’s now has targets in these areas and where possible builds these aspects into
Service Level Agreements with partner companies in the primary, secondary and
tertiary sectors.
The supply chain – tertiary sector
The final stage in the industrial supply chain is the tertiary sector. The tertiary sector provides
services. It does not manufacture goods. This sector involves:
• retailers like supermarkets that purchase manufactured goods from secondary sector
businesses and sell them to the consumers
• service companies who may deal in, for example, finance, computer systems, warehousing
or transportation.
Storing stock and transporting it are key activities that link all three parts of the supply chain.
Kellogg’s employs specialist transportation and storage companies to be responsible for all the
logistics aspects of its business. One of Kellogg’s partners, TDG, stores and transports pallets of
Kellogg’s cereals. This allows Kellogg’s to concentrate on its specialist area of manufacturing
cereals and other food products. Kellogg’s also shares transportation with another manufacturer,
Kimberley Clark. This has reduced distribution costs, helping keep Kellogg’s products
competitive. The system helps reduce the number of part-full or empty vehicles on the road.
This saves time, road miles and provides additional benefits of reducing CO2 emissions.
Kellogg’s has major relationships in the tertiary sector. These include the major retail
supermarkets such as Tesco and ASDA and some of the wholesale sector such as Makro.
Kellogg’s relies on retailers to help them promote a good relationship between the consumer
and its products. To drive sales, Kellogg’s is involved in initiatives that help add value for
retailers. An example of this is the Shelf Ready Unit that Kellogg’s developed with Tesco. This
displays Kellogg’s products easily and effectively. This means that the supermarket uses less
staff time (and cost) in setting up a display. The display is attractive and easier for consumers
to choose from, increasing turnover for Kellogg’s and Tesco.
GLOSSARY
Intermediaries: someone who
works between people or groups
to help them agree on or carry out
something important.
Logistics: the orderly movement
and storage of goods throughout
the supply chain i.e. from raw
materials to finished goods.
Service level agreements:
part of a service contract where
the level of service is formally
defined.
Turnover: the total value of all
sales made in a given period of
time. Sometimes referred to as
sales revenue.
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Managing the supply chain effectively
Having the right marketing mix ensures businesses have the right product, in the right place,
at the right time. Kellogg’s manufactures the right products based on research into consumer
needs. It manages the distribution channels to place its products in stores. Its focus on costeffective
systems ensures its prices are competitive. It works with retailers to improve promotion of
its products. Retailers want to hold limited stocks of products to reduce warehousing costs.
Kellogg’s uses a system called just-in-time to provide an efficient stock inventory system.
Just-in-time means that just enough product is made to fulfil orders and limited stock is kept.
Kellogg’s needs to get the balance right at each section of the supply chain. Late deliveries or
inability to deliver due to a lack of products might make retailers buy from competitors. Through
its collaborations with TDG and by relocating some of its warehousing, Kellogg’s now has a more
efficient distribution system. Computerised stock holding systems ensure shelves are always full
and orders are delivered on time. This helps Kellogg’s to keep stocks to a minimum. It also helps
customers like ASDA and Tesco to reduce their stocks too.
This illustrates the effectiveness of Kellogg’s supply chain management (SCM). This was
achieved by a collaboration of industries within the supply chain. Each company works within
their specialist area to provide products and services to consumers.
a) Distribution has improved through the collaboration of Kellogg’s, Kimberley Clark and TDG.
Storage, in itself, is investment without returns. Every day materials or products are on a shelf,
they are costing money without earning any profit. Retailers do not want a warehouse that is
unnecessarily full and neither do manufacturers. When deliveries are made, lorries need to
be full to minimise unit costs of transportation. This collaboration has helped all of these
aspects. Customers are guaranteed deliveries on time because stocks are monitored
effectively. Deliveries are cost effective as lorry capacity is used effectively. Retailers like ASDA
and Tesco benefit as they are kept stocked without storage costs. Therefore their advertising
yields good returns, as customers are always able to buy Kellogg’s products.
b) The lean production system streamlines processes and eliminates waste. Computerised
warehousing means that products are manufactured efficiently, then transported straight
from the warehouse to retail customers. This avoids delay to customers. TDG keeps the
warehouse costs low through computerised heating and specialist transportation skills. The
computerised stockholding shows immediately when shelves are empty. This then
automatically generates orders to the manufacturing base at Trafford Park to replenish
stocks. This minimises waste and the lower costs have increased Kellogg’s profits. This also
helps the company to keep prices competitive, which keep customers happy and loyal. The
effect on the environment is good too as heating and fuel costs are minimised.
Conclusion
The three sections of the industrial supply chain need to interact to ensure goods or services reach
consumers. The efficient delivery of the product to the consumer at the right price, in the right
place and at the right time will result in good business for each link of the chain. This takes
strategic planning and effective collaboration with all partners. Specialisation is more cost-effective
for Kellogg’s and partnering with other industry specialists reduces costs to the business, the
customer and the environment. Kellogg’s champions socially responsible operations. Through
effective supply chain management, it benefits itself, the environment and other businesses.
Questions
1. Name the three sectors of the supply chain. On what occasions could certain sections of
the primary sector operate as retailers?
2. Give three examples of how Kellogg’s demonstrates good supply chain management.
How can Kellogg’s make improvements both for its business and for the environment?
3. Why is it important for Kellogg’s to build good relationships with businesses in the tertiary
sector?
4. Evaluate the benefits of large manufacturers like Kellogg’s handing over the logistical side
of their business to specialist companies like TDG.
GLOSSARY
Marketing mix: a series of
variable factors such as the four Ps
(product/price/place/promotion)
used by an organisation to meet
customer needs.
Just-in-time: production that
produces goods to order. The
business does not hold any
significant level of stock, either of
finished products or required
supplies e.g. raw materials,
components.
Supply chain management:
creation of effective systems for the
organisation of the distribution of
items (components, end products,
etc).
www.kelloggs.co.uk
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