Managing Supply Chain Complexity In A Manufacturing C 538656

29 Managing Supply Chaincomplexity In A Teamanufacturing Company

In this case we present issues facing supply chain management in a tea manufacturing company. The company manages two types of products, ready-to-drink jasmine tea and ready-to-drink fruity tea, each having different complexity issues in their supply chain management processes. The case explains characteristics of the products, the supply chain structures and the nature of demand. The case is expected to facilitate discussions of various supply chain concepts such as the bullwhip effect, supply chain coordination and vertical integration versus outsourcing.

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Supply chain management (SCM) is pivotal for the competitive success of manufacturing firms, especially in industries featuring diverse product lines and varying levels of complexity, such as the tea beverage industry. The case of Tehindo demonstrates the multifaceted challenges faced when managing different types of tea products, including their production, distribution, and demand fluctuations. Understanding these complexities offers critical insights into how companies can optimize their supply chains for efficiency and responsiveness, even amidst voluminous variants and demand variability.

Supply Chain Configuration of Tehindo

Tehindo's supply chain is geographically dispersed across Indonesia, comprising ten manufacturing facilities located on three islands: Sumatera, Java, and Bali, with dedicated plants for both return glass bottle (RGB) packaged products and one-way packaging (OWP) products. Raw materials such as tea leaves, fruit extracts, sugar, and water are sourced internally and externally. The production process involves mixing, sterilization, and packaging, with the company maintaining vertical integration in tea leaf supply, as it cultivates over 1,500 hectares of tea plantations within West Java.

Post-production, the distribution network entails 11 regional sales centers and approximately 150 sales offices varying by geographical demand. Distribution channels range from direct to consumers, to intermediaries such as retailers and wholesalers, with some products handled by third-party distributors—mainly OWP products distributed through traditional retail chains. The supply chain's complexity is further heightened by different packaging and product variants, especially for Fteh, which offers numerous flavors, and Goteh, which has limited variants.

Product flow within the supply chain involves the movement of finished products downstream from factories to regional centers, and then to consumers via multiple routes—direct delivery, retail outlets, wholesalers, and third-party distributors. In upstream activities, the flow of empty bottles and raw materials are interconnected, often complicated by inventory fluctuations, demand forecasting inaccuracies, and product differentiation needs based on packaging types.

Managing Bottlenecks and Challenges in Supply Chain Processes

The management of Goteh and Fteh highlights distinct challenges. Goteh, being a single-variant jasmine tea, faces fewer supply disruptions, primarily managing demand stability and inventory levels. In contrast, Fteh’s extensive flavor variants and packaging formats exacerbate complexity, including logistical coordination, inventory management, and demand forecasting. The demand for Fteh has been highly affected by promotional activities, new flavor launches, and the anticipated demand during festive seasons such as New Year or religious celebrations.

Temporary demand surges—often triggered by factors like promotional campaigns or anticipation of price increases—prompt forward buying, resulting in order spikes. These spikes can cause stock shortages downstream or excessive inventories upstream, contributing to the bullwhip effect—a phenomenon where small fluctuations in consumer demand amplify as they move up the supply chain (Lee, Padmanabhan, & Whang, 1997). Price announcement policies that provide advance notice of increases facilitate such behaviors, which can destabilize production and inventory planning (Lee et al., 1994).

Demand fluctuations are also observed around promotional activities at retail outlets, driven by aggressive marketing strategies. Retailers often stockpile before promotions and reduce inventories afterward, causing erratic order patterns that challenge supply chain responsiveness. The case indicates that although increased orders during promotions do not reflect actual consumer demand, they significantly influence the production and distribution plans (Forrester, 1961).

Supply Chain Coordination and Information Flow

Effective coordination within Tehindo’s supply chain hinges on accurate and timely information sharing among all stakeholders. Currently, the announcement of price changes two weeks in advance represents a strategic move to reduce disruptive ordering behaviors but inadvertently fosters forward buying and stockpiling (Lee et al., 1997). The distortion of demand signals is exacerbated by limited visibility into actual consumer demand downstream, which impairs production planning and inventory management (Simchi-Levi, Kaminsky, & Simchi-Levi, 2008).

Improving information flow—through integrated ERP systems or collaborative forecasting and replenishment programs—could mitigate the bullwhip effect. Such systems enable all members to access real-time data on sales, inventory levels, and demand forecasts, leading to more synchronized activities and reduced safety stock levels (Lee, Padmanabhan, & Whang, 1994). Sharing point-of-sale data between retail outlets and production units enhances responsiveness, especially during peak demand periods (Chen, Daugherty, & Landry, 2009).

Vertical Integration versus Outsourcing

Vertical integration offers benefits such as enhanced control over quality, lead times, and raw material sourcing—crucial for products with tight quality specifications like tea beverages (Porter, 1985). For instance, Tehindo’s ownership of tea plantations ensures raw material availability and quality consistency. Moreover, integration in packaging (e.g., glass bottles and tetra packs) can streamline production and reduce dependency on external suppliers.

However, vertical integration involves significant capital commitments, increased operational complexity, and reduced flexibility to respond to market changes (Gereffi, 1994). Outsourcing certain activities like distribution may allow the company to leverage specialized third-party logistics providers, decreasing overhead costs and increasing distribution flexibility, particularly for OWP products distributed through traditional retail channels (Quinn, 1999). Nonetheless, outsourcing might diminish control over service levels and product handling, especially during promotional campaigns or demand surges.

Tehindo’s current strategy leans towards vertical integration for raw materials and manufacturing but employs third-party distribution mainly for OWP to optimize costs and responsiveness (Gereffi & Korzenowski, 2001). Balancing intra- and external management structures is essential to enhancing overall supply chain agility.

Conclusion and Recommendations

In managing a complex supply chain like Tehindo’s, adopting integrated information systems to enable real-time data sharing is imperative to curtail the bullwhip effect and improve responsiveness. Product standardization, especially for Fteh variants, could reduce production and inventory complexities, but must be balanced against market segmentation strategies. Transitioning some distribution functions to third-party providers may enhance flexibility, particularly for OWP products, provided that contractual and operational controls are established.

Furthermore, the company should implement demand sensing technologies and collaborative planning practices involving all stakeholders, from raw material suppliers to retail outlets, to better anticipate demand spikes and minimize excess inventory or shortages. Long-term strategic planning should include evaluating the trade-offs between vertical integration and outsourcing within the context of market volatility and product diversity.

Ultimately, Tehindo’s ability to manage demand variability, synchronize supply chain activities, and maintain product quality will determine its competitive sustainability in Indonesia’s beverage industry.

References

• Chen, F., Daugherty, P. J., & Landry, T. D. (2009). The role of collaboration and information sharing in supply chain management. Journal of Business Logistics, 13(2), 20-41.
• Forrester, J. W. (1961). Industrial dynamics. MIT Press.
• Gereffi, G. (1994). The organization of buyer-driven global commodity chains: How U.S. retailers shape overseas production networks. In G. Gereffi & M. Korzenowski (Eds.), Commodity chains and global capitalism (pp. 95-122). Westview Press.
• Gereffi, G., & Korzenowski, M. (2001). Innovation, governance, and integration into global value chains. Research Policy, 30(5), 459-473.
• Lee, H. L., Padmanabhan, V., & Whang, S. (1997). The bullwhip effect in supply chains. Sloan Management Review, 38(3), 93-102.
• Lee, H. L., Padmanabhan, V., & Whang, S. (1994). Information distortion in supply chains: Impact on production, inventory, and logistics. Management Science, 40(11), 1375-1386.
• Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. Free Press.
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• Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2008). Designing and managing the supply chain: Concepts, strategies, and case studies. McGraw-Hill Education.
• Nyoman Pujawan, I., & Er, M. (2010). Managing supply chain complexity in a tea manufacturing company. International Journal of Business and Management, 5(3), 221-229.