Thailand, The Kitchen of the World: Logistics and Supply Chain Efficiency

Dr. Churdchai Cheowtirakul Dean of Biotechnology Faculty

<churdchaichw@au.edu>

The Faculty of Biotechnology Assumption University

June 2005 Bangkok, Thailand

Abstract After two years of working closely with Thailand’s leading supermarkets in the project of “Food sanitation and hygiene” for the country’s leading super markets, with the sponsorship of the Ministry of Science and Technology via Food Science and Technology Association of Thailand, the result clearly reflects that the quality of the food in the supermarket is not by any incidence better than what we buy from the fresh market. The question which remains to be asked is: why is the market share of the supermarkets keeping on expanding while the market share of most of the fresh markets

are in jeopardy? The answer is obviously on the edge of management skills of these two types of markets. The fresh market management still nibbles on the traditional style of management with not much use or help from the electronic and informative technology. On the other hand, the supermarkets are solely depending on systematic management with the help of sophisticated databases and information technology, which has further integrated into logistics and supply chain technology. The result of this application is “management visibility” which helps tremendously in the decision making for customers, satisfactory. This paper intends to lay some fundamental background of the means and ways that will be drivers to the success of the policies of Thailand, ‘The Kitchen of the World’. Introduction Evolution of Food Retail Chains in Asia The “take-off” stage of supermarkets in Asia started 5-7 years behind that of Latin America, but currently, they are registering a much faster growth. The data below reflects the market shares of supermarkets in sales of fresh and packaged foods:

– Latin America - 50 per cent – Southeast Asia - 30 per cent – China - 48 per cent

Retailing is a sunrise-supermarket industry in Thailand with many challenges like exclusion of small farms, management of processing and distribution chains. Supermarkets were viewed as shopping destinations for the rich and affluent. This is no longer true. Supermarkets are fast expanding in developing countries. Among the developing situations, Latin American countries are the pioneers in establishing supermarkets. There has been an explosive rise in supermarkets in the Latin American countries in the past 5-10 years that has transformed agri-food markets. (Prabir K. Et al,2002) The evolution of super markets and fast food chains is a recent phenomenon in Thailand. Various demand and supply side factors have contributed towards this growth.

Supply Side: Liberalization of the Thai economy in 1990s led to a boom in consumer goods industry with reductions in custom duties and a shift from quota to tariff based system; entry barriers on multinationals were largely removed; Kellogg, Heinz, Dole, Campbell, etc. have entered the Thai food industry as a result; development of sophisticated supply chain & logistics; and growth in food processing & packaging industry are other factors. Demand Side Increase in the income levels of middle & higher income groups in the 1990s together with the reduction in poverty levels:

• Changing consumer lifestyles-increasing time value, nuclear families

• Increasing level of quality awareness • Advent of cable television and overseas travel

Opportunities of Retailing in Thailand In Thailand, the share of a household’s spending on food is one of the highest in the world at around 41% of income. Also, Thai consumers are increasingly spending more on eating out as compared to 5 years ago, which clearly indicates that there is high potential for food service players. Such situations provide opportunities for realizing higher incomes, employment generation, improving marketing efficiency, increasing the demand for agriculture products and risk minimization. Types of Retail Outlets The emergence of new sectors has been accompanied by changes in existing formats as well as the beginning of new formats:

• Hyper marts, typically 8,000 sq.ft and more (Carrefour, Lotus) • Large supermarkets, typically 3,500-5,000 sq. ft. (Tops, The Mall) • Mini supermarkets, typically 1,000-2,000 sq. ft. (Food land) • Convenience stores, typically 750-1,000 sq. ft. (Seven-Eleven, Family

Mart) • Discount outlets

Super Markets are popular because: - Economies of Scale - Tracking of customer needs through Customer Relationship

Management using software (CMR) is very feasible. - Tight inventory control

- Proper sourcing of products - Product ranges - Working housewives - Traffic congestion Critical questions to be asked:

1) What is the driving force behind the extremely successful supermarket industry in Asia, especially in Thailand?

2) What can we learn from the supermarket industry? 3) How can we use the food chains experience to improve the marketing

efficiency of Thailand’s agricultural commodities and benefit both our farmers and the consumers?

4) Will the experience learned from retail food chains serve as the panacea for Thailand’s agriculture to compete against global competition through the increased efficiency, and declare ourselves to be the kitchen of the world?

5) The major supermarkets of the world belong to the western multinational firms. Will all these firms become “the oligopoly” of the world food suppliers in the future?

As previously mentioned., after two years of working closely with Thailand’s leading supermarkets on the project of “Food sanitation and hygiene” for the country’s leading supermarkets, under the sponsorship of the Ministry of Science and Technology via Food Science and Technology Association of Thailand, the result clearly reflected that the quality of the food in the super market is not by any incidence better than what we buy from the fresh market. The question, which remains to be answered is why is the market share of supermarkets expanding while the market share of most of the fresh markets in jeopardy? The answer is obviously on the edge of management skills of these two types of markets. The fresh market management is still nibbling at the traditional style of management with not much use or help from the electronic and information technology. On the other hand, the super markets are solely depending on systematic management with the help of sophisticate databases and information technology, which have further integrated into logistics and supply chain technology. The result of this application is “management visibility” which helps tremendously in the decision making for customer satisfaction. With the lengthy introduction, it is appropriate at this moment to discuss some general knowledge of the logistics and supply chain technology.

What is logistics? The term 'Logistics' originated with the US Armed Forces and is defined as "the fusion of information, logistics and transportation technologies to provide rapid crisis response, to track and shift assets even while en route, and to deliver tailored logistics packages and sustainment at the strategic, operational and tactical level of operations." The key elements here are the embracing of emerging technologies (particularly information technology), transportation techniques, and business methods of asset control and the concept of 'tailoring'. (Kaminski 1999) What is a Supply Chain? A supply chain can be defined as “the sequence of suppliers that contribute to the creation and delivery of a good or service to end customers. This encompasses virtually all aspects of a business: sales processing, production, inventory management, material supply, distribution, procurement, forecasting, and customer service, and several other areas…” (Technology and Organizations in a Supply Chain, Vol. 14, No. 1 2003)

What is a Supply Chain?

Customer wantsdetergent and goes

to SupermarketSupermarket

Supermarket or 3rd

party DCmanufacturer

Plasticproducer

Chemicalmanufacturer

(e.g. Oil Company)

packaging

Paper manufacturer

Timberindustry

Chemicalmanufacturer

(e.g. Oil Company)

Source: Chopra & Meindl 2001

SupplySupply

Sources:plantsvendorsports

Manufacturers,Regionalwarehouses:stocking points

Field warehouses:stockingpoints

Customers,demandcenters

MaterialProduction/purchase costs

Manufacturing/Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

Source: Simchi-Levi & al, 2000

Supply Chain

Components of a Supply Chain

Demand & SupplyPlanning

Sourcing& Supplier

ManagementManufacturing Storage &

Transportation

Customer & Order

Management

PLAN BUY MAKE MOVE SELLPLAN BUY MAKE MOVE SELL

Logistics vs. Supply Chain Getting the right product to the right place in the right quantity at the right time, in the best condition and at an acceptable cost is the challenge of logistics. It's an area that embraces purchasing and supplier management,

materials management and manufacturing, inventory management and warehousing, distribution and transport, and customer service. (van der Vorst et al 2001)

• Supply Chain is NOT logistics… • Supply Chain is MORE THAN logistics

– Covers the coordination of most activities & flows upstream: • From suppliers to manufacturing

– And activities & flows downstream: • From manufacturing to end-customer

Logistics Costs Worldwide (Donald Hicks website)

Logistics Costs Worldwide

Source: Bowersox, Closs, Cooper, 2002

16.5ChinaAsia/Pacific15.4India

15.0BrazilSouth America

14.7Spain

12.6Greece

13.1Germany

12.0France

11.4BelgiumEurope10.5USA

15.3MexicoNorth America

Logistics as % of GDP (1997)

CountryRegion

What is Supply Chain Management (SCM)? Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements. (Taylor 1999) Drivers of Supply Chain Performance (Togar M 2002) Inventory:

• Role of inventory in the Supply Chain: – Anticipation of future demand

– Production and distribution costs reduction • economies of scale

Transportation: • Role of transportation in the Supply Chain:

– Transportation moves the product between different places in a Supply Chain

• Transportation choices impact the responsiveness and the efficiency of the Supply Chain

Facilities: • Role of facilities in the Supply Chain:

– Where inventory is transformed into another location - manufacturing facility

– Where inventory is stored before being shipped - warehousing facility

• Choices such as number of facilities or capacity impact the Supply Chain

Information:

• Role of Information in the Supply Chain: – Serves as the connection between the Supply Chain’s various

locations (allows coordination of actions) – Allows daily operations of each location of the Supply Chain

(ex. : a production scheduling system needs information) Supply Chain & SCM Benefits

• Reduction of SC costs – Non-transport costs – Transport costs

• Lower inventories • Improved delivery time • Improvement in service quality

Drivers of Supply Chain Performance

• Inventory

• Transportation

• Facilities

• InformationSource: Chopra & Meindl 2001

Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Dedicated Proximity / Flexibility

Information What information is best suited for each objective

Another tool involving information technology will greatly benefit the marketing of our world kitchen product is e-Business. e-Business (Småros Et al 2000)

E-Business is a collection of business models and processes motivated by Internet technology, and focusing on improving the extended enterprise performance:

– e-commerce is part of e-Business – Internet technology is the driver of the business change

– The focus is on the extended enterprise: • Intra-organizational • Business to Consumer (B2C) • Business to Business (B2B)

Sample Web site of B2C and B2B Business Consumer

Business B2B www.dell.com

B2C www.amazon.com

Consumer C2B www.priceline.com

C2C www.ebay.com

E-Business is a powerful tool for Disintermediation or “cutting out the

middle man”

Wholesale

Retail Produce

Consume

E-Business Opportunities & SC

• Reduce facility costs – Eliminate retail/distributor sites

• Reduce inventory costs – Apply the risk-pooling concept

• Centralized stocking • Postponement of product differentiation

• Use dynamic pricing strategies to improve SC performance

Sample of selling Thai wine online

Thai Wine Online Supply Chain

Sales forecasting& Purchasesplanning

Purchases& Supplier

ManagementStorage

Transport &

delivery

Orderhandling& payment

PLAN BUY MOVE SELLPLAN BUY MOVE SELL

Professional Buyers,buyingdirect in Thailand & overseas

UpstreamLogistics withpartners.Storage &platform

Online ordermanagement.Promotions,coupons…Securedpayment.

Outsidepartners.TransportationCost billedto customers.95% of deliverieswithin leadtime.

Information systems

A summary of the integrated supply chain process is shown in the following picture:

SC Collaboration

Information flows

Suppliers - Manufacturers - Distributors - Retailers - Customers

Processes Organizationalstructures

Enablingtechnologies

Material flows

Financial flows

Conclusion and suggestion

The above information hopefully will help us to understand the fundamental knowledge in logistics and supply chain technology. This technology can be used as the tool to drive our country to be the kitchen of the world. There are quite a few tools in the process of logistics and supply chain management we really need to master. The most important one is management of information visibility (CIES, 2004), in which all the information needed for the whole chain has to be precise and accurate. But let’s look from the past till the present, the quality of the information obtained by the Thai people from the much prided one party government. For example: The Ministry of agricultural project in “dry longan”. The purchasing of the ‘rubber propagation plant’ and the popular newspaper front-page issue of “CTX” scandals. How can we classify the efficiency of our government in providing information? I will end this paper with a big question mark. When are we going to get there? When can we get the much-needed down to earth information that can be used as a driver for our supply chain management? Only after having answered these questions, then can we start the next step, which is the planning of the utilization of Logistics and Supply Chain Efficiency to get our country to be the “Real Kitchen of the World.” Acknowledgement My special thanks to Mr. Glen Chatelier, Director, Office of International Affairs, Assumption University for his valuable revision of this manuscript.

Referrences: -Donald A. Hicks, Next Generation Supply Chain Strategic Planning Technology and Application, http://hicks.ASCET.com-Jack G.A.J. van der Vorst, Stephan J. van Dijk and Adrie J.M. Beulens,"Supply Chain Design in the Food Industry," Vol. 12, No. 2 (2001), pp. 73-85 -Johanna Småros, Jan Holmström and Vesa Kamarainen, "New Service Opportunities in the E-grocery Business,” Vol. 11, No. 1 (2000), pp. 61-73. -Implementing Traceability in the Food Supply Chain, CIES, 2004 -Kaminski, P G. 'Lean Logistics: Better, Faster, Cheaper'. Defense Issues. Volume 11, Number 1999. -Prabir K. Bagchi and Tage Skjoett-Larsen, “Integration of Information -Robert Frankel, Thomas J. Goldsby and Judith M. Whipple, "Grocery

Industry Collaboration in the Wake of ECR," Vol. 13, No. 1 (2002), pp. 57- 72. Technology and Organizations in a Supply Chain,” Vol. 14, No. 1 (2003), pp. 89-108. -Sveinn Vidar Gudmundsson and Rita Walczuck, "The Development of Electronic Markets in Logistics," Vol. 10, No. 2 (1999), pp. 99-113. -Taylor, David. 'Supply Chain Improvement: The Lean Approach'. Logistics Focus, Corby, January 1999 -Togar M. Simaputang and R. Sridharan, "The Collaborative Supply Chain," Vol. 13, No. 1 (2002), pp. 15-30. -Using Traceability in the Supply Chain to Meet Consumer' Safety Expectations, ECR Europe, 2004