Service Level Analysis in Food Retail Supply Chain

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Faculdade de Engenharia da Universidade do Porto

Service Level Analysis

in Food Retail Supply Chain

Maria Inês Ferreira Lima

Masters Dissertation

Supervisor: Prof. Gonçalo Figueira

Mestrado Integrado em Engenharia e Gestão Industrial

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Abstract

Nowadays the competitiveness in food retail market is increasing. The constant appearance of new brands, as well as the exponential increase of the amount of products that are available in stores results in more complex supply chains.

With the growth of the complexity, is necessary to keep focus on having efficient chains that are able to meet customers demand and expectations. Along the chain there are several intervenients that impact the performance of the overall processes hence, it is necessary to monitor them and the way they can cause impact.

This project aims to map the processes since the product is ordered from the supplier until it is shipped from the warehouses to stores. By mapping these processes it will be possible to identify the most relevant indicators to measure the chain service level, throughout the different phases.

After identifying the most relevant indicators an analysis will be conducted in order to study the reasons for the under target values. Posteriorly, the causes are going to be ranked and two value trees will be constructed. The creation of this value trees will help to understand where the biggest improvement opportunities are located.

In the company where the project was developed, there were two types of product flows. The first one did not hold stock in the warehouse and the second one did, these differences impact the causes for low service levels so the flows were studied separately.

The flow that works without stock, is a type of cross docking, using this kind of technique it is possible to reduce inventory costs and improve the service level. When working in this flow the warehouse quantity service level is extremely dependent on the supplier service level and for this reason the best improvement opportunity is giving incentives to the supplier to improve performance.

When the products are operated in the flow that carries inventory the situation is different. As there is stock, the dependency on the supplier is lower. However, carrying stock represents higher costs for the company in terms of logistics, so the proper management of this resources is fundamental and still can be improved.

This analysis used statistical models in order to validate the results achieve. The regression models constructed showed with relatively high level of confidence that the identified causes are responsible for low performance. A tool in Excel was constructed in order to help monitoring the different service level indicators and to allow the intervinients in the chain to get to know if their performance is improving or not.

The development of this dissertation shows the importance of knowing the entire supply chain, especially when it is a large one, in order to better manage it. A more efficient supply chain will reflect in the improvement of the stores performance, which is the main goal of retail companies.

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Resumo

O retalho alimentar é um mercado cada vez mais competitivo, o aparecimento constante de novas marcas e novas cadeias, assim como o exponencial aumento de produtos disponíveis nas lojas, faz com que a cadeia de abastecimento deste tipo de industria seja extremamente complexa. Com o aumento da complexidade da cadeia é necessário existir um foco constante em manter a sua eficiência de modo a proporcional ao consumidor um serviço adequado às suas expectativas. Ao longo da cadeia existem vários intervenientes que tem impacto no nível de serviço, pelo que é necessário monitoriza-los. O projeto desenvolvido tem como objetivo mapear os níveis de serviço ao longo de toda a cadeia, identificar os indicadores mais relevantes para medir a perfor-mance ao longo do processo e, por fim, mapear as causas que poderão estar na origem de uma performance inferior ao esperado.

Após serem identificados os vários motivos que influenciam o nível de serviço, desde o fornece-dor, até que o produto é expedido para a loja, foram criadas duas arvores de valor que permitiram definir quais as oportunidades de melhoria que trariam maior proveitos se fossem aproveitadas.

Sendo que na empresa em estudo existem produtos que são geridos sem stock no armazém e outros que são geridos com stock, foi necessário estudar as diferenças entre os dois fluxos e adequar os motivos a cada um deles. O fluxo operado sem stock é um fluxo do tipo cross-docking, no qual os produtos são rececionados, preparados e expedidos, por norma no mesmo dia. Trata-se de um fluxo no qual a melhoria da performance do fornecedor Trata-será o fator que pode originar maiores ganhos.

Quando os produtos são operados num fluxo que tem stock no armazém, é nos processos de gestão de inventários que está o maior potencial de melhoria. Manter inventário nos centros de distribuição e nas lojas acarreta custos, que pesam bastante nos custos totais da logística, pelo que a correta gestão destes recursos é fundamental.

Foram utilizados modelos estatísticos com o objetivo de validar os resultados obtidos. Os modelos de regressão construídos demonstraram, com elevado nível de confiança, que as causas apuradas são responsáveis pela baixa performance. Foi construída uma ferramenta em Excel que permite monitorizar e avaliar melhorias nos indicadores considerados mais importantes nesta análise.

O desenvolvimento desta dissertação, demonstra que ter conhecimento e controlo sobre os níveis de serviço ao longo de toda a cadeia é fundamental para melhorar o desempenho da mesma e, consequentemente, melhorar os resultados das lojas, que é o principal objetivo deste tipo de empresas.

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Acknowledgements

First of all, I would like to thank Faculty of Engineering of University of Porto and Sonae MC for providing me this amazing opportunity. Doing my Master Dissertation at Sonae MC was an amazing experience that allowed me to grow as a person and professional.

I would like to thank my tutor at FEUP, Professor Gonçalo Figueira, thank you for all your advices and guidance during this months.

To Dr. Marcos Hespanhol and Dr. Pedro Corte-Real, my tutors at Sonae, for all the support and advices they gave me along the way. I also owe a lot to my team, Supply Chain Analytics and Planning, plus the "LTP boys". Thanks for all the great moments and all the help. Especially Rui Nogueira, Claudia Vieites and Paulo Pinho, you made my days at Sonae better.

To my friends, thanks for always being there for me and my natural stupidity. To Rita Fernan-des and Catarina MenFernan-des, thank you for these (almost) five years of friendship, all the late nights studying and the group projects. Thank you for your Friendship. To my "Chefinha", Rita Amorim, a huge hug and an even bigger thanks for getting me to smile everyday. You arrived late, but really strong.

To my shinning stars, Saudade.

To my parents, there are not enough words to express how thankful I am to you. Thanks Mom and Dad for always supporting me and being by my side during all this years. I would not be here without you.

To my little brother, you will always be my baby, but you have already thought me so much. I will always be here for you.

Finally, thank you Isaac. Thank you for all your support, for being there for me everyday, every step of the way. You are my safe harbour, my life is better and brighter with you. I hope I am up to the challenge during your PhD!

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‘What we know is a drop, what we don’t know is an ocean.”

SirIsaac Newton

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Acronyms

BU Business Unit

CD Commercial Direction

DGCA General Direction of Supply Chain

OOS Out Of Stock

PBS Picking By Store

PBL Picking By Line

SKU Stock Keeping Unit

SSL Supplier Service Level

WMS Warehouse Management System

WSL Warehouse Service Level

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List of Figures

1.1 Sonae Group Constituition . . . 2

2.1 Food Supply Chain Actors . . . 7

2.3 Retailers Analysis: [1] Internal Issues; [2] Drivers of Competitive Advantage . . 8

2.5 Out Of Stocks: [1] Consumer reaction to OOS; [2] OOS main causes . . . 10

2.7 Service Level Relation with Stock Quantity . . . 12

2.9 Safety Stock and Cycle Stock . . . 14

3.1 Sonae MC Marketing Structure . . . 17

3.2 Sonae MC Sales distribution through Commercial Directions and Business Units 18 3.3 Sonae MC Commercial Divisions and Business Units . . . 18

3.4 Sonae MC Supply Chain and Logistics Extension . . . 19

3.5 Picking by Store Flow . . . 20

3.6 Picking by Line Flow . . . 21

3.7 Boxes Dispatched from Warehouses yearly . . . 22

3.8 Relation between Warehouse Service Level and Supplier Service Level . . . 23

3.9 Supply Chain Costs . . . 25

3.10 Porter Value Chain . . . 26

4.1 Warehouse Quantity and Supplier Service Level . . . 30

4.2 SKU Classification . . . 33

4.3 OOS Rate in Fruit & Vegetables Business Unit and OOS Rate in Critical SKUs . 35 4.4 Service Level Impact throughout the Chain . . . 36

5.1 Charts from PBL Regression Model . . . 41

5.2 Ranked Causes for Low Service Levels in PBL . . . 43

5.3 Ranked Causes for Low Service Levels in PBS . . . 44

5.4 Value Tree for PBL . . . 45

5.5 Value Tree for PBS . . . 46

5.6 Dashboard, Page 1 . . . 47

5.7 Dashboard, Page 2 . . . 48

A.1 Distribution of Sales throughout the Months . . . 55

C.1 Sugar Pack Conversion . . . 59

D.1 Pareto Rule . . . 61

D.2 Pareto Rule applied to Sonae MC SKUs . . . 62

E.1 Results of PBL Regression Model . . . 63

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xiv LIST OF FIGURES

E.2 Outputs from PBL Regression . . . 64

E.3 Results of PBS Regression Model . . . 64

E.4 Outputs from PBS Regression . . . 65

E.5 Residual Plots from PBS Regression Model . . . 66

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List of Tables

4.1 Sonae MC Service Level Indicators . . . 29

4.2 Replenishment Method Parameters . . . 33

4.3 Estimation of Replenishment Parameters . . . 34

5.1 Regression Models Results . . . 40

B.1 Salt Grocery Marketing Structure . . . 57

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Chapter 1

Introduction

The food sector has changed rapidly in the past decade, forcing retailers to adapt to new consumer needs. The movement of people to meet work exigencies and migration movements led to a demand for food products from across the world that retailers have to meet (Dani,2015). Nowadays the retail competition is really intense, therefore the main focus needs to be on the customer. The quality of the service provided to the customer is highly dependent on the global supply chain service level. As the competition in the retail market gets stronger it becomes more important to control all the aspects of the chain, creating the need to keep track of upstream and downstream operations performance (Randall et al.,2011).

The Portuguese PIB in 2015 wase179.504m and, in the same year, Portuguese families spent e20.786m in food products. The money spent in the retail industry corresponds to 12% of the national PIB, which shows the importance of this market segment.

Traditional food retailers have faced fierce pressure from alternative channels including ware-house clubs, supercenters, drug stores, mass retailers and convenience stores, as well as online retailers and grocery delivery services. As consumers distance themselves from the traditional supermarket model, grocery retailers attempt to stay competitive by creating more intimate and innovative shopping experiences tailored to individual shoppers with an emphasis on fresh, or-ganic and prepared food options.

Since 2008 there have been significant improvements in on-time delivery rates and case fill rates. Despite the improvement in customer service, the customers are not satisfied yet (Butner,

2010). This project intends to identify the reasons that are behind the customer dissatisfaction. Having adequate service levels throughout the supply chain and consequently high customer service, is a way for retailers to achieve competitive advantage. This project arises from the constant increase of customer demands, which allied to the increasing market competitiveness, results in a much more tense business process. The project aims to understand how companies can improve their performance in terms of service in order to improve the overall results.

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2 Introduction

1.1 The Company

Sonae is a multinational company that manages a diversified portfolio of products and ser-vices in farraginous areas like food and specialized retail, financial serser-vices, technology, shopping centers and telecommunications (SONAE,2017a).

Sonae was founded in August 1959 as Sociedade Nacional de Estratificados. Being a company with almost sixty years of life it went through several mutations until becoming one of the largest Portuguese business groups. In 1985 Sonae opened the doors to the first hypermarket in Portugal, the Continente store in Matosinhos. Its mission has been since then, creating long-term economic and social value, taking the benefits of progress and innovation to an ever increasing number of people (SONAE,2017c).

Sonae culture is marked by constant reinvention and adaptation to diverse conjunctures. The company evolved through acquisitions, mergers and fusions, sometimes with businesses far away from the company core, and that allowed the firm to grow in knowledge and wisdom, and to penetrate in different and varied markets(SONAE,2017b).

In figure1.1it is possible to analyse the vast business portfolio that Sonae possesses, as well as, Sonae MC Brands. Sonae MC is 100% owned by Sonae and is leader in the Portuguese retail market. It counts with 41 hypermarkets (Continente), 130 supermarkets (Continente Modelo), 66 proximity supermarkets (Continente Bom Dia), 240 convenience stores, working as franchising stores (Meu Super), 186 health and wellness stores (Wells) and also adjacent businesses like Bagga and Note!.

Sonae Sierra and Sonae Sports and Fashion (SR) are also owned 100% by Sonae, the first one manages investment projects in real estate, mainly working in shopping centers. Sonae SR operates in the specialized retail market with brands like worten and sport zone.

Figure 1.1: Sonae Group Constituition

Source: Sonae Web Page

The Sonae MC unit, where this project was developed, is a food retailer that sells directly to the final customer through its physical stores and the on-line store. It is the national market leader in this sector, having been responsible for deep changes in Portuguese consume patterns. The project will be focused on the food distribution chain encompassing products like canned food, fresh fruit and vegetables, pet supplies and hygiene products. The food retail includes everything that can be found at a supermarket, and this diversity contributes for the chain complexity.

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1.2 Project Description and Goals 3

1.2 Project Description and Goals

In order to properly manage the supply chain of any kind of business, it is necessary to be aware of the service levels of different operations. At Sonae MC the chain has lots of players and different processes that need to be analysed in detail in order to understand which are the critical ones and how they can be improved.

The retailer is the final responsible in food chain before the product reaches store shelves and, consequently, the client. He is responsible for connecting the supply chain with the final consumer and creating value added products for consumption. The retailer is fundamental in the chain and the success of the supply chain depends upon whether the retailer is capable of selling its product to the consumer.

Food Supply Chain is extremely volatile. The quality of the food needs to be controlled and will depend on weather conditions and agriculture production, being influenced by governmental or non-governmental players and, above all, by the market and consumer tendencies that are con-stantly changing. The supply chain management needs to take into consideration these external factors. Nevertheless internal constrains regarding the products specifications and the operation needs, also have tremendous influence in the chain performance (Dani,2015).

Depending on the provided service, the customer will decide if he buys the products or not and if he comes back to the store. This project intends to identify the moments where the provided service is bellow target and the reasons that motivate this kind of behaviour.

With this project the intent is to map Sonae MC supply chain in order to analyse the service level during all the phases, as well as, identify the stakeholders along the process and, conse-quently, their impact on the company service level. The main goal is to understand which are the main causes for not having the desired service level.

Depending on the product sales and consequently its value for the company, it can be more or less important to have a high service level. After conducting an analysis to understand which are the critical products, an individual study will be developed in order to identify the most relevant causes for the under target values. Furthermore this study will result in a model that allows to understand the similarities and differences among the products with low service level.

1.3 Methodology

In order to achieve the proposed goals it was necessary to structure the process and define the milestones of the project. At Sonae MC there is a large volume of information and systems available and it was critical to understand which was the relevant data for this study, so the project was divided in four main phases.

Firstly there is an extended process of data collection and analysis. In order to be able to identify the critical products it is necessary to collect data for all SKUs that were active at Sonae MC for the period of analysis. The chosen period is from November, 2016 to January, 2017. For each SKU it is necessary to analyse:

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4 Introduction

• Environment - If the SKU was stored at room temperature or not; • Flow - If there is stock kept in the distribution center;

• Value - sales, price and cost;

• Order Quantity - orders to the supplier and the warehouse;

After having all the information required, a classification process was in order, the data re-trieved had to be divided according to flow, warehouse, commercial structure and business unit. Inside each division, each SKU needs to be classified accordingly to its sales and warehouse ser-vice level.

The third phase consisted on evaluating and testing the causes for low service level in the target products. After identifying the critical products, a panel with possible causes was formulated and each cause was tested in order to understand how it can be eliminated and how its effect can be reduced. It was also tested the possible relation between causes and similar products, as well as, the profiles of the critical products and suppliers.

The culmination of the project is a value tree that maps the supply chain processes and col-laborators along with their impact in the chain service level. This tree allows to identify among the ranked causes the ones that have more impact, having in mind the improvement of the chain service.

1.4 Document Structure

The present document is divided in five chapters. After this first introductory chapter, the theo-retical contextualization provides in Chapter 2 the frame of reference for the work to be developed. In order to have an accurate project the works previously developed in these areas were studied and are presented in this part of the document.

The third chapter describes in detail Sonae MC Supply Chain and its logistics processes. It is important to provide an accurate portrait of the warehouse operations and the process behind the reported service levels.

Chapter 4 presents the indicators that the company already uses and analyses in detail those more relevant to the project. The second part of this chapter describes the methodology followed in the realization of the study, from the data collection to the value tree construction. The fifth Chapter is composed by the results drawn from the models and analysis conducted enhancing the best way to attack this problem and improve the service level. Chapter 6 has the conclusions of the project and presents some guidelines for future work that could be developed.

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Chapter 2

Theoretical Framework

In the current chapter the state of the art in relevant topics for this project will be discussed. Firstly an overview of logistics and supply chain is going to be presented in order to show its versatility and magnitude. Posteriorly particularizing for the food retail market which is the focus of this study. The theory regarding service level and inventory management will then be laid out, setting a framework for this document.

2.1 Logistics and Supply Chain Management

Logistics is present in every day to day situation. Considering a consumer that is going to the supermarket and buying bananas does not reflect the real complexity of the process that allowed the fruit to be in this same supermarket in those conditions (hygiene, package and others), at that cost, in order to satisfy the consumer need in that moment.

Analysing the process to have the product in the store it may be likely to think about the farmer, eventually in agriculture techniques or even in transportation means. However, since the moment when fruit is collected in any place around the globe, it comes long way until reaching the selling point. Throughout this process, there are several stakeholders that are responsible for assuring the smoothness of the process and the simplicity that the regular consumer experiences in stores. Logistics encompasses this entire process (Moura,2006).

When the logistics concept emerged, it was associated with military strategies and operations, the transportation of soldiers, protections and ammunitions to the war front and the continuous supply of essential goods. Latter it evolved to industry and private companies, spreading around the world through producers that wanted more than just to deliver their products. Logistics can be as embracing as one wants it to be, and it may be applied to one single operation or an entire network (de Carvalho et al.,2010).

Nowadays, logistics is much more strategic and focused in the human capital than in material resources, and it can be seen from a more functional or structural point of view. Logistics can be regarded as a fountain of costs or a provenance of competitive advantage, not only facing the remaining players in the market, but also in relation to the customer.

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6 Theoretical Framework

Logistics is defined byRushton et al.,2011as the management of all activities which facilitate movement and the coordination of supply and demand in the creation of time and place utility. Logistics could also be defined as the capability of having the right product, in the right quantity and the right condition, at the right time and place, for the right customer, at the right price (Rutner and Langley Jr.,2000). The Council of Supply Chain Management Professionals defined logistic as "The part of the supply chain process that plans, implements, and controls the efficient and effective flow and storage of goods, services, and related information from the point-of-origin to the point-of-consumption in order to meet customers requirements." (Lambert et al.,1998)

Supply Chain is an extension of logistics. While one might say that logistics only includes the material management and distribution, supply chain is much more complete. Besides the opera-tions referred it comprehends the management of suppliers and customers (Rushton et al.,2011). Supply chain management is the integration of key business processes from end user through orig-inal suppliers that provide products, services, and information that add value for customers and other stakeholders (Lambert et al.,1998).

Supply chain Management is the management of relationships in order to achieve a more beneficial solution for all parts involved than the one that could be achieve by each part separately, therefore it can be defined as the management of upstream and downstream relationships with suppliers and customers in order to deliver superior customer value at less cost to the supply chain as a whole (Christopher,2011).

With economic globalization, increasing importation and exportation flows, internationaliza-tion processes, market tendencies constantly changing and consequent growth of different prod-ucts in the market, the pressure to improve service levels and the environmental constrains, the momentousness of supply chain management is increasing as never before. As the market com-plexity increases, an adequate management of the supply chain is compelling in order to achieve the business strategy, to keep and capture clients and markets, to efficiently manage operations and to increase companies profitability (de Carvalho et al.,2010).

The supply chain decisions of an organization affect its logistics costs, incurred in the move-ment of goods, its inventory costs, induced by inventory storage in distribution centers, warehouses and retail locations, and labour costs contracted in the handling of goods throughout the supply chain. These costs add up to a substantial fraction of the total value of a product sold by a firm. Besides, these decisions may also impact the revenue of the company if they influence the product availability or the speed of introduction of new products. (Gaur,2013).

2.2 Food Retail Supply Chain Management

Supply chain management is a reality in most businesses, the path to reach the customer has several intervinients and processes that need to be coordinated. It is necessary no manage the internal processes, the relationships with the partners, suppliers and customers and the network of interconnected businesses that are involved in the chain (Harland,1996).

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2.2 Food Retail Supply Chain Management 7

Food supply chain responds to a basic necessity. This factor to the perishability of the products results in one of the most strained chains on the market. These chains are a reality since the beginning of mankind. However its complexity has increased, the main goal is still the same, having food available at the right time, quality and quantity (Dani,2015).

Figure2.1presents the several participants in the food supply chain. They contribute to trans-form the raw material in the products that can be shopped in hypermarkets.

Figure 2.1: Food Supply Chain Actors

Source: (Dani,2015), Figure 1.1

The chain begins with the food producers that have to deal with the consumers expectations, the demand instability, the weather conditions and the legal restrictions that are getting more rigid. Then, the second participant is the food processor which is responsible for the transformation of raw materials into the products that customers want to buy. Distributors are the link between operators. They are responsible for moving the goods from the producer, to the processor and finally to the market.

Retailers are the final step in the chain, before the product reaching the consumer. The retailer presents goods to the consumer in physical markets and is the way that the retailer presents each product that will influence the customer to buy or not. Retailing industry is extremely competitive. The retailer needs to differentiate himself from the others and present merchandise that meets the customer expectations, besides he is also responsible for dealing with the food processors to define the terms and conditions of the contract. With proliferation of promotions, coupons and discount cards, this task got even harder. No only the retailers compete among them due to the product offer, they also compete in terms of promotions and space differentiation (Dani,2015).

A survey made to executives from retail supply chain management and from industries that support the sector showed that their main goal is the achievement of an agile process as well as competitive advantages. In order to achieve competitive advantage the retailers can adopt different strategies, as exhibited in the right chart from Figure2.3, being the most valued one, by almost fifty percent of the enquiries, the capacity to respond to market changes (Randall et al.,2011).

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Figure 2.3: Retailers Analysis: [1] Internal Issues; [2] Drivers of Competitive Advantage

Source: (Randall et al.,2011), Table V. and Table VIII.

With the growth of retail market and the shift of power from the producers to the retailers there is an increasing focus in improving the relation between the players in the supply chain, achieving reliable flows across the entire network. As can be seen in the left chart from Figure2.3. One of retailers main issue is to align this kind of objectives with the company global goals and strategy. As the second most voted issue, product availability (Figure2.3), which directly relates with the supply chain service level.

In the future the biggest challenge for retailers will be being able to find their space in the market together with on-line stores. As the time spent in hypermarket and supermarkets reduces and consumers choose more and more convenience stores and on-line shopping, it is necessary that retailers innovate their stores structure and activities in order to attract the customer. The main barrier is seducing the consumer to go to the physical store. Most people have to juggle between family and professional careers, and having in account the speed of nowadays life, it is impracticable to plan a trip to the supermarket and the culture change from monthly to convenience shopping affects the large commerce areas (Dani,2015).

Managing retail supply chains is extremely complex and requires coordination between the players along the chain. In order to achieve the desired competitive results, companies need to be focused on the client and in achieving operational efficiencies (Hübner et al.,2013).

At this moment, retailers not only need to differentiate themselves from other players in the market, they also need to be innovative and responsive to the market preferences in order to attract the modern consumers to their shops.

2.3 Service Level

Nowadays, the key to business success can be in logistics and its potential to reduce costs, response time to customer orders and improve the service to clients. In the current competitive

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2.3 Service Level 9

environment, the one who reaches the market first, who is more agile to deliver information, who serves and understands the consumer needs and expectations better, has more probability to win their preference and, consequently, get more orders (Moura,2006).

Service Level is directly related to customer service, and consequently, to customer satisfac-tion. However, customer satisfaction is a broader concept than customer service, it is influenced by more factors. Nevertheless it encompasses the service. The operations that take place throughout the chain have a direct impact in the chain service levels (Petridis et al.,2016).

In supply chain the service level is the probability of not having a stock out during the follow-ing replenishment cycle, and thus, it is also the probability of not losfollow-ing sales. The service level can also be defined as the probability of being able to service the customers demand. While a 100% service level might seem desirable, it is usually not a feasible option.

Customer service can be defined as a process which takes place between the buyer, seller and third party. The process results in a certain value added to the product or service exchanged. This value added in the exchange process might be short term as in a single transaction or longer term as in a contractual relationship. The value added is shared between the involved parties. It is expected that after the transaction the situation of the ones involved is better than before. Thus, in a process view: customer service is a process for providing significant value-added benefits to the supply chain in a cost effective way (Rutner and Langley Jr.,2000).

Presently competition in retail is fiercer than ever, so retailers need to search ways to improve performance. According toCorsten and Gruen, 2003retailers can increase their earnings up to 5% by reducing their out-of-stock issues. This study showed that on average the extent of OOS is 8,2%. This average was calculated having in account eight product categories - Feminine Hygiene, Diapers, Toothpaste, Shampoo/ Haircare, Laundry, Toilet Issue, Salted Snacks and Paper Towels -ranging from 3,9% to 11,1%.

The retailer wants to maintain as much customers as possible. Analysing the first chart of figure 2.5, it shows that in 31% of occurrences, the customer when facing an OOS goes to a different store to buy the product and, consequently, the retailer completely loses the sale. When the retailer has an OOS the consumer needs to make a choice, and that will depend upon the global satisfaction the retailer provides him.

The consequences of an OOS to the retailer may reflect on loosing customers, they go to another store and stop coming to the original retailer, or losing the sale, client does not buy the item at all or buys a cheaper one. This consequences also reflect on the manufacturer that supplies the retailer. The impact is not restricted to the first player. Worldwide the percentage of lost sales due to OOS is around 3,9% of retailer total sales. Nevertheless there are losses due to logistics and information inefficiencies in the supply chain.

There are several identified causes for out of stocks in retail environments. Within the scope of this project the most relevant ones relate with the distribution center and the retail HQ or man-ufacturer. The causes related with service levels add up to 24% of the causes for out of stock.

Currently, service levels in store, above 98% are very hard to achieve. Usually the target for service level is defined according to an ABC analysis. The products are classified into categories

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Figure 2.5: Out Of Stocks: [1] Consumer reaction to OOS; [2] OOS main causes

Source: [(Corsten and Gruen,2003)], Figure 2. and Figure 7.

according to its sales volume or the proffit they grant to the company. The top products, "A" products, have a target between 96% and 98%. The medium class products have a target between 91 and 95 percent. And the low class products have a target between 85% and 90% (Schalt and Vermorel, 2014). This kind of approach allows to keep the costs of out of stock and inventory management under control because it limits the targets according to product importance.

Service Level Indicators

In order to analyse service level and achieve performance improvements it is important to define what is being measured. Both in store and warehouse, the calculation of the service level might have in its base different factors and in order to understand the reasons for low performance it is necessary to analyse which factors are being considered.

Mainly service level can be calculated based on three factors:

• Percentage of Total Demand in Units - if there is a demand for ten units and there are only nine available, the service level will be 90%;

• Percentage of Total Demand in Orders - There are nine units available, the first order is for nine and is met, but the second order that is only for one unit is not met. Service level is 50%;

• Percentage of Time Spent without the Product - If a store is open during ten hours and the out of stock occurs one hour after the store opens, the service level is 10%.

Depending on what is being measured the results will differ. In this project the indicator that will be deeper analysed is related with the percentage of total demand in units.

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2.4 Inventory Management 11

2.4 Inventory Management

In order to achieve a desired service level it is necessary control all the processes that occur since the product is bought from the supplier until reaching the store. When working with SKUs that hold inventory in the warehouse, it is necessary to study the inventory policies.

When an SKU is working with stock it is necessary to have proper inventory management systems in order to avoid increasing costs and still having low service levels.

Despite the cost of maintaining inventory in the company warehouses and stores, firms keep a supply inventory in order to (Jacobs and Chase,2011):

• Maintain independence of operations - if there are several operations or lines in the produc-tion, having inventory reduces the need of waiting for the previous operation;

• Meet the variation on product demand - usually is not possible to predict exactly what the demand will be, so it is necessary to have stock to avoid stock-out and also to backup during sales peaks;

• Take advantage of economic purchase order size - if a product is know to have demand in the future it may be worth to buy in larger quantities to obtain discounts and stock the product; • Provide a safeguard for variation in deliveries - if the products are not perishable and the supplier does not have a steady service level the company might keep stock to prevent these occurrences

Working towards increasing product availability, retailers tend to flood the stores and ware-houses with stock. In retail markets where variations in demand can be very high, the peaks could be very difficult to respond without stockpiled products, however it is necessary to maintain a balanced relation between both, avoiding unnecessary costs.

Retailers and manufacturers try to satisfy as many customers as possible since it maximizes their sales. However, at the same time, maintaining the corresponding inventory is both costly and risky. Products are expensive to buy and produce, they need space to be housed, they expire and get obsolete.

Firms must combine inventory and service level decisions focusing on the global organization objective (Salam et al.,2016). If the company goal is to achieve high levels of service it needs to properly optimize the inventory. However, to increase service level it is not always necessary to increase the inventory. The result achieved with this strategy might not be the expected one.

Improve service level can not always be achieved by increasing stock quantity. The higher the service level, higher needs to be the reinforcement of stock quantity to achieve improvements. In figure2.7this relation is shown clearly. To improve service level from 95% to 97% it is necessary to increase inventory a lot more than when we want to improve the same percentage points but from 85% to 87%. As we increase inventory quantities we also increase inventory management costs.

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Figure 2.7: Service Level Relation with Stock Quantity

Source: (Schalt and Vermorel,2014)

Hence, the inventory management strategy needs to take into account three main factors ( Ghi-ani et al.,2004):

• Customer service - the inventory strategy needs to be aligned with the service level targets; • Inventory costs - Holding costs (storage facilities, handling, breakage, obsolescence, depre-ciation, among others), ordering costs and shortage costs, the cost of not having the product to meet demand;

• Operational performance - the operational activities can not be disrupted by inventory man-agement strategies.

There are four fundamental concepts regarding the types of inventory that need to be kept in mind (Ghiani et al.,2004):

• On-Hand inventory - stock at the warehouse or store;

• Committed inventory - this products can not be used for upcoming orders; • In Transit inventory - already ordered quantity;

• Inventory position - the quantity of product that is available, it is equal to On-Hand, plus In Transit, minus Committed inventory.

Carrying inventory adds costs to the supply chain so it is necessary to make a trade-off analysis between this cost and out off stock costs. Out of stocks in food retail have high costs, not only the retailer looses the sale because it is hard to postpone buying food, but he may also loose the customer loyalty, so the service level target is high.

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2.4 Inventory Management 13

In the case of perishable food it is necessary to take in account the acquisition and handling costs, but also the cost of potential losses due to expired products that can not be sold or sales with discounts when retailers are trying to sell-out more just before expiration.

Replenishment

Replenishing is one of the warehouse activities. It consists in making stock full again in order to avoid stock-out. Replenishment is typically initiated by a backorder that is placed to a supplier or to a manufacturer (Vermorel,2012).

In order to increase productivity most inventory management systems implement replenish-ment rules to automate part of the operation. Usually replenishreplenish-ment is triggered when the stock level hits the reorder point that is defined by the company or the system.

The most commond practises for stock management are models with periodic or continuous review. Continuous review means that the inventory status is monitored in a continuously and an order is placed to a certain quantity, previously defined. On the other hand, periodic review indicates that the inventory is monitored regularly, with periodic intervals known as R, and the reorder is made during the review period to increase inventory to a defined value (Jacobs and Chase,2011).

The order quantity should be defined for each SKU depending on its ordering cost, the lead time, the demand, the price, the handling cost and the ordering cost (Jacobs and Chase,2011).

In the Min/Max inventory model the Min represents the reorder point, the moment when an order should be placed. The Max represents the optimal quantity to have in stock. The ordered quantity is then the difference between the minimum and the maximum.

In the warehouse the replenishment cycle is often longer than in stores and the traded quantities are larger. Hence, there are more factors to analyse, the lead time might vary from one day to months and the order quantities are also distinct depending on the product.

At the store level, the orders are managed in a daily basis and in much smaller quantities. Usually in retail stores with centralized warehouses there are deliveries from the distribution center to the store every day, so the management of the inventory is in a short term perspective. Besides, stores often have space constraints which limits the stock they can carry.

Cycle Stock is the inventory that is estimated to be needed since an order is placed until it is received in the warehouse. The safety stock is the quantity that is kept in stock to prevent stock out. If the demand is higher than what was predicted or the supplier does not delivered in the estimated time the safety stock will cover the failures in most cases.

When using Min/Max replenishment methods, usually the minimum and maximum are calcu-lated based on the estimated cycle and safety stock.

If the goal is to achieve a 95% service level (Figure2.9), not all the stock outs will be avoided. Despite having safety stock, in 5% of the cases there will be out off stock products. However, in 50% of the cases the safety stock will remain intact and in the remaining 45% of the cases, the safety stock will be enough to cover the demand. If the desired service level is higher, the safety stock also needs to be higher (King,2011).

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Figure 2.9: Safety Stock and Cycle Stock

Source: (King,2011)

The safety stock calculation will depend on what is affecting service level the most, if it is demand variability, lead time variability or both. In big retail companies the suppliers undergo a thorough evaluation process to make sure they are able to meet the company requirements, so the biggest concern is the demand variability.

The safety stock to prevent against demand variability can be obtained by multiplying the stan-dard deviation of demand variability by the Z-score. The Z-score or stanstan-dard score is a statistical measure that is obtained through the normal distribution (King,2011). In cases where the demand periods do not equal the lead time, it is necessary to calculate the standard deviation of demand in periods equal to the lead time. Hence, the safety sock is calculated as follows in equation2.1

(King,2011).

Sa f etyStock= Z ×r T LT

T₁ × σD (2.1)

Where:

Z: Z-Score;

TLT: Total Lead Time;

T1: Time increment to calculate standard deviation of demand;

σD: Standard Deviation of Demand.

The total lead time includes the time needed to perform all functions until the order is received, including deciding what to order, communicating orders to the supplier, manufacturing and pro-cessing, delivery and storage, as well as the review period, the time since an order is received until the stock being monitored again and re-start the cycle.

When studying SKUs that are managed with stock it is fundamental to understand how they are stocked and the parameters defined for their replenishment. It will be possible to conclude that the replenishment method has high impact in the supply chain performance being, consequently, a relevant factor for this study.

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2.5 Statistic Analysis 15

2.5 Statistic Analysis

Statistics is a branch of mathematics that deals with the collection, compilation, analysis and interpretation of data. Statistics can be applied at several areas of knowledge.

Statistical methods can be divided in three main classes: predictive, descriptive and inference methods. Predictive statistic analysis is based on historical data in order to predict and prevent future occurrences.

Descriptive statistics intends to analyse information regarding past occurrences and represent it in a more comprehensive way, usually by using graphics and tables. Statistical inference is more ambitious than descriptive statistic, as it intends to classify a population by analysing a sample. Statistic inference uses more complex methods and techniques (Guimarães and Cabral,2011).

Regression is one of the most powerful and used statistical methods. This technique allows to study which factors impact the dependent variable and what is its contribution. Regression is a model that uses continuous independent variables in order to predict a continuous dependent variable. Multiple regression models can also use categorical variables (Walker,1989).

The linear regression modelsdescribe a relationship between a set of quantitative independent variables, Xj (j=1,2,..,J), and a quantitative dependent variable, Y (Equation2.2).

Yn= α + β1∗ (X1n− µ1) + .... + βJ∗ (XJn− µJ) + En (2.2)

The hypotheses underlying the model are (Guimarães and Cabral,2011): 1. The values XJnand µj are constants and do not have associated errors;

2. The errors Enare mutually independent, have a null expected value and constant variance,

this means that they are normally distributed.

In order to find the relevant factors - regressors - for the model the regressive method was applied. Initially all the variables were included in the model, and, posteriorly, the regressors that contribute least to explain a significant proportion of the total variance of the variable are removed from the model one by one (Guimarães and Cabral,2011).

Intending to evaluate the quality of the model the determination coefficient and he adjusted determination coefficient are used. The second one penalizes the number of regressors, which means that, if we are over fitting the function it will decrease. If the determination coefficient increases, but the adjusted one decreases, no more regressors should be added to the regression. The regression model not only indicates the significant relationships between dependent and inde-pendent variables, but also indicates the strength of impact of the multiple indeinde-pendent variables on a dependent variable.

This statistic analysis allows to validate the results that were obtained and to better understand in quantifying terms which causes have more impact and how they are related with the problem being studied.

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Chapter 3

SONAE MC Supply Chain

Leader of national retail market, Sonae MC, has a supply chain that is influenced by four main players: suppliers, warehouses, stores and customers. Currently there are four main distribution centers located in Maia, Azambuja, Carregado and Madeira. Maia, Azambuja and Madeira work with three different temperatures: room temperature, fresh and frozen. There are also the meat and fish production centers that work separately. In these warehouses there is a total of 22.467 active items. Together, the distribution centers are responsible for supplying 477 stores spread throughout the country (SONAE,2017d).

The present project will be focused in Maia and Azambuja warehouses due to the fact that they are the more relevant ones in terms of food distribution, besides supplying the stores in continental Portugal, they also supply Madeira distribution center that further ahead supplies the stores in the island.

Currently the company works with 4.300 suppliers that need to be aligned with the company strategy and service goals. In order to improve performance and meet the imposed requirements, the suppliers are analysed in detail prior to being chosen and the contracts contain strict penalties in case of failure to deliver. The large number of stores, the extended range of products and the amount of players are the biggest difficulties in supply chain management. They require proper in-frastructures and extremely different operations that are not always easy to coordinate. Achieving an efficient supply chain is one of Sonae MC main goals.

Sonae sales are distributed in five main commercial divisions - Food, Fresh, Food and Bakery, Home and Bazaar - these are later divided in Business Units, Class, Sub Class, Base Unit and finally SKUs (Figure3.1). These divisions constitute Sonae MC marketing structure.

Figure 3.1: Sonae MC Marketing Structure

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18 SONAE MC Supply Chain

In terms of sales, they are reasonably constant along the year, having their maximum during holidays season and also a relatively high increment during the summer, this reality is common in food sector. This pattern is typical in all the commercial directions, being more relevant in the food and fresh ones. In appendixAit is possible to analyse this information in detail, having historical data since December, 2014.

In the analysis, the main focus is in the grocery sector, so the commercial division bazaar was excluded. It represents a completely different logistics system. This operation occurs in Carregado warehouse and is processed separately. Also, this commercial division is not as relevant as the others in terms of sales volume.

The food commercial division is responsible for more than 50% of Sonae MC sales, followed by the Fresh unit, with around 30% of sales (Figure3.2).

Figure 3.2: Sonae MC Sales distribution through Commercial Directions and Business Units Sonae MC commercial divisions (CD) are divided in business units (BU), this is the character-istic that will be used to classify items, giving it more detail than using only commercial divisions and at the same time not being too specific. This analysis will include the main four commer-cial divisions and twenty business units (Figure3.3). AppendixBpresents the detailed marketing structure for Salt Grocery business unit, this BU was selected as an example of the structure since it is one of the most relevant ones.

Figure 3.3: Sonae MC Commercial Divisions and Business Units

3.1 Supply Chain Mapping

Sonae supply chain is very similar to all retailers. The collaborators need to be coordinated in order to assure clients satisfaction which is completely dependent on the performance of upstream chain, so it is fundamental to study all the steps of the product life until it reaches the customer.

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3.1 Supply Chain Mapping 19

The mission of Sonae MC Supply Chain Management team is to promote and lead innovative processes that aim for transversal improvements in the supply chain. Striving to achieve logistics continuous improvement, the General Direction of Supply Chain - DGCA - defines rules and pro-motes the provision of technical support and advice to those involved in the supply chain (internal and external) in addition to fostering a complete overview of the process.

This multidisciplinary team is responsible for identifying, implementing and following up the standards, as well as motivating new initiatives towards innovative ways of approaching logistics. This team is composed by three distinct areas: transportation of goods and its central storage, flows of merchandise to the store and planning and control, the last being the one where this project was developed (SONAE,2015).

As the differences between Supply Chain Management and Logistics Management were ex-plained above, Figure3.4intends to show that difference in the real process.

Figure 3.4: Sonae MC Supply Chain and Logistics Extension

The height of supply chain is much more embracing. In this project, the analysis will impact the entire supply chain, however the main focus will be the supplier and the warehouse, the stores will be seen as customers of the warehouse that need to be satisfied.

Warehouse Processes

The main activities in the warehouse are reception of products, inventory storage, picking and expedition. (Bartholdi and Hackman,2016) Receiving is the first activity that is carried out when an order from a supplier arrives at the warehouse. It includes unloading the products from the transporter, analyse if the received product matches the ordered one, if the quality standards are fulfilled and finally, if the transaction is accepted, update the stock quantities. Inventory storage consists in putting the received products in the designated positions, if the position assigned is not the picking position, the product will have to be moved again in the future.

Picking is the most time consuming operation in the warehouse, the operator is responsible for preparing the store order. He needs to go to the storage position, retrieve the product and update the stock quantity. Finally, expedition, when the product is shipped from the warehouse to stores, usually in pallets.

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Figure3.5and Figure3.6show the two different flows that can be found at Sonae MC ware-houses.

The Picking by Store (PBS) flow carries stock. When the warehouse stock reaches the mini-mum, defined in the replenishment method, an order to the supplier is automatically placed. The criteria to define the minimum stock includes the supplier service level. If the supplier is reliable, the minimum can be lower.

Figure 3.5: Picking by Store Flow

When the warehouse receives an order from the stores, the workers will go through the ware-house and pick all the products included in the store order. Each picker is allocated to a store order and is responsible for completing it. The ground floor is the preparation zone, where the picking is made, the stocking is done on the top floors of the racks.

At Sonae MC the most used replenishment method in the distribution center is Min/Max. In this kind of approach, two parameters are defined for each SKU:

• Minimum stock value - each time the stock reaches this value an order to the supplier is issue,

• Maximum value - value to which the orders are placed, it limits the order quantity.

These parameters are defined having into account the sales forecasting, the suppliers schedule - lead time and days of delivery - and the forecast of supplier service level.

In the Picking by Line (PBL) flow, there is no stock in the warehouse. An order from the store immediately triggers an order to the supplier and as soon as the product is received in the warehouse it is picked and shipped. For products in PBL the picking is done by assigning the picker to one specified pallet. He will be responsible for distributing all the products in the pallet for the different stores. This kind of product flow is one type of cross docking.

Cross docking flows imply that there is no storing of the products, the products are received, picked and shipped (Van Belle et al., 2012). This kind of flow is adequate when the product demand is stable and constant and the cost of out of stock is low.

At Sonae in the PBL there is very little preparation of the products and they are expedited in the same day in which they are received. At the end of the day the warehouse is empty and prepared to start receiving the products for the following day.

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Figure 3.6: Picking by Line Flow

In PBL the stores hold changeless positions in the warehouse and the pallet received from the suppliers is the one that moves around, whereas in PBS the pallets with the products have steady positions and the stores are the ones moving. Also, in PBS the pallets are mono product.

There is also the possibility of direct delivery from the supplier to the store, the supplier is responsible for preparing the product and delivering it directly to the stores, however it represents a very small percentage of the total number of transactions, around 2% of the total products the store receives.

Besides the division in product flows, there is also another very important classification in Sonae MC warehouses, the temperature based one. Due to their perishability, some products have to be conserved in specific temperatures.

At room temperature can be found products that are not perishable and have long shelf life, like canned food, beverages and hygiene products. In fresh temperature the warehouse is maintained at 5 degrees Celsius and keeps fruits, vegetables, yoghurt, delicatessen and cheeses. This temperature works mostly in a PBL flow, this kind of products are extremely perishable and sensitive so they need to be handled extremely carefully and can not stay in stock for long periods of time, the quality standards are extremely high in this process. Only some specific cases of imported products are kept in stock for more than one day.

There is also the frozen temperature warehouse. This operation works with minus 19 degrees Celsius and is very demanding for the workers. The labour policies are much more strict than in other operations. This operation works in PBS with mobile racks in order to make the most of the space. The halls are opened according to the position of the SKU that the operator is picking.

Both in Maia and Azambuja, there are the three temperatures. In Azambuja, the frozen ware-house is managed by an external operator, Frissul.

During 2016, 200 million boxes were prepared in Sonae MC warehouses and shipped to stores. In Figure3.7it is possible to observe the growth that was felt in Sonae MC from 2015 to 2016, there was an increase of 45 millions of expedited boxes. Until the end of May 2017 the number of boxes prepared corresponds to 45% of last years total. Being that the sales peaks have not passed yet, it is predictable that the growth will continue. The room temperature operations are,

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on average, responsible for more than 65% of the total preparations, they are also the ones with the highest productivity levels.

Figure 3.7: Boxes Dispatched from Warehouses yearly

Supplier Analysis

The supplier is the first player in supply chain. The supplier may be the manufacturer or just the distributor, although, he is always the dealer. The stock management teams will deal with the supplier and negotiate prices, quantities and delivery conditions. Normally the supplier negotiation is closed with a contract for a defined period of time that can be extended. This contract can also be terminated prior to the deadline in case of non-compliance. If the supplier fails, he will be penalized and the contract should stipulate that.

Currently Sonae MC works with 2.530 suppliers in the commercial divisions that are being analysed. There are main and secondary suppliers these ones are only used when the primary one is not able to meet the orders or there is an unexpected increase in the order quantity that forces the stock manager to go to this second supplier.

In order to be a Sonae MC supplier, it is necessary to meet the quality criteria defined and have capacity to deliver in the quantities and times that are needed. The retail supply chain is very strained, and the supplier need to comply with the expected performance.

In PBL the requirements made to the supplier are higher. It is an operation with no stock at the warehouse, which means that if the supplier fails, the downstream chain will also fail. Despite the possibility of having breakages, the warehouse service level will depend almost 10% of the supplier one, so clearly the level of demandingness needs to be higher. In figure3.8the relation between the supplier and the warehouse service level, according to flow, is clearly evidenced.

In PBS there are other factors impacting the service level and there is safety stock, so if the product is not perishable and the supplier service level is low, probably it will be placed in the PBS

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flow. Also, when the supplier has high lead times, especially foreigner suppliers, the product will be processed in PBS.

Figure 3.8: Relation between Warehouse Service Level and Supplier Service Level

As can be seen in figure 3.8 when analysing SKUs processed in PBL the relation between the supplier and the warehouse service level is linear, as the supplier service level increases, the warehouse one also increases. There are few outliers that can be explained due to losses is the warehouse.

In PBS this relation is not linear and the correlation is lower. In PBL the correlation coeffi-cient is 0.8, while in PBS it is 0.6. Analysing the data regarding the PBS SKUs there is clearly a concentration of the supplier service level in three moments, around 30%, 65% and 100%. In these moments is clear that even with a low supplier service level is possible to have great ware-house performance. The relation between the two indicators can be approximated by a polynomial function with four degrees of freedom.

Store and Consumer Management

At Sonae MC stores the operation works from 6a.m. until after the store closing. The hy-permarket stores open at 8a.m. and close at midnight which means that the operation works over eighteen hours a day.

The store receives products from the distribution centers and suppliers that make direct deliv-eries during the night, but it is past six a.m. that this flow gets more intense. The workers need to make sure that what was received during the night matches the ordered products and need to prepare the store for the opening.

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With the growth of promotional activities this preparation is much more intense. It is necessary to change the labels for all promotional items and change the disposition of the products in the store to match the centralized decisions.

Usually there is the weekly promotional brochure that begins every Tuesday and embraces all kinds of products. On Tuesdays each store changes over 3.000 price tags. Besides, there are also the special campaigns like, summer promotions, back to school season and campaigns alluding to the festivities.

Besides dealing with the promotions, the replenishment of the products on store shelves is fundamental. If a customer goes to a retailer at eight a.m. he expects to find the most fresh products and a full store, usually these are very loyal customers so it is of utmost importance that the store is full and organized at the opening.

Usually, stores have little warehousing space so in many cases the stock they have is the one on the shelves. If the store puts up an order for the next day and the distribution center fails to deliver, most likely the store will have out of stock products which will directly impact customer satisfaction.

With the current shopping tendencies the large commercial areas also need to adapt and Sonae MC is not exception. There are more service offers in the stores, there is a constant preoccupation in adapting the stores and having products that match customers needs and expectations.

Nowadays, the disposition of the products is more focused on the convenience than in per-suading the customer to buy more products than they are initially willing to. Customers have less and less time to spend in stores, so it is necessary that the companies adapt to this reality in order to keep the customers loyalty.

In order to achieve customer satisfaction, it is necessary no proper manage all the supply chain phases. Planning and executing these operations has costs, ans as the supply chain moves forward higher are the costs that are added to the products.

3.2 Supply Chain Costs

Analysing the supply chain since the product is produced, until being sold in supermarkets there are several costs that need to be considered. The total cost of ownership is an estimated cost of an item that includes all the costs related to the procurement and the use of the item, including the costs of disposing of the item when it is no longer useful. The stores are the chain selling points and their supply involves a set of procedures that carry costs to the company. The reception, the transportation of the goods and the placement of products up to sale in the store shelves are examples of that.

The heterogeneity of the products and their packages adds complexity to the process and have lots of influence in the works productivity, which increases the handling costs. Along the chain the costs add up to the product value (Figure3.9).

The costs can be classified in three main categories: acquisition cost, ownership costs and post-ownership costs. The acquisition costs are associated with the first phase of product life,

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3.2 Supply Chain Costs 25

Figure 3.9: Supply Chain Costs

production and buying costs. These are not long term costs. The ownership costs are the second phase costs, the maintenance and repair costs and the supply chain costs, including inventory costs, logistics costs, transportation costs and space management costs. Finally, the post-ownership costs correspond to the salvage value and disposal costs.

During the several steps of the chain there is inventory carried, and this inventory adds to huge part of supply chain costs. The efficiency of the supply chain can be measured accordingly to the inventory that is carried throughout the chain. The inventory investment is measured relative to the total cost of the goods that are provided through the supply chain.

Common measures to evaluate supply chain efficiency are inventory turnover and weeks of supply, being that one is the inverse of the other (Equation3.1and3.2).

InventoryTurnover= Costo f GoodsSold

AverageAggregateInventoryValue (3.1)

Weekso f Supply=AverageAggregateInventoryValue

Costo f GoodsSold × 52Weeks (3.2)

Companies that face diverse sourcing, production and distribution decisions need to weigh the costs associated with materials transportation, production, warehousing and distribution to de-velop a comprehensive network designed to minimize costs and preserve environments (Jacobs and Chase,2011).

One example of effective cost reduction in the supply chain is Costco, the third biggest grocery retailer in America. It manage a big cost reduction, and consequently profit increase with the elimination of product handling stages between supply and sales. Nowadays the chain purchases most of its merchandise direct from manufacturers (Bureau,2017).

The more steps the chain has, more costs will be accumulated and this kind of strategies that have their base in cooperation between retailers and suppliers contribute to improve the overall chain performance.

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Value Chain

Value Chain is a concept developed by the Harvard Busines School teacher, Michael Porter, that analyses the interrelated operating activities businesses perform during the process of convert-ing raw materials into finished products.

The main goal in analysing the supply chain as a value chain is to find the best way to add value to the product along the process at the minimum cost possible. By looking at the chain as a whole it is easier to find ways to improve the processes efficiency, the overall goal is to deliver the maximum value to the customer at the lowest possible cost in order to create competitive advantage (Cato,2011).

The model developed by Michael Porter is presented in figure3.10. It divides the production activities in five main categories. Inbound Logistics that includes inbound shipping, warehousing and inventory management. Outbound Logistics also warehousing, in this case of finished goods, maintaining inventory, fulfilling orders and shipping the products.

Figure 3.10: Porter Value Chain

All the activities that add direct value to the product are included in the operations division. Production, packaging and assembling are some of them. Marketing and Sales include all the activities which the goal is to convince the customer to buy the product. The Service activities are the final ones in the chain, they are directly related with the service provided to the customer, it includes pre-sale counselling services as well as after-sales services.

By splitting all the activities into this categories it makes it easier to find improvement oppor-tunities and consequently creating value at each one of the five product areas, so the value exceeds the cost associated with the product. All the five branches of activities are essential to create sus-tainable competitive advantage. Companies can increase their competitiveness by having highly efficient outbound logistics processes, for example.

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3.2 Supply Chain Costs 27

Achieving highly efficient chains allows the companies to collect higher profits, to invest in new and innovative products and services or to reduce their selling price, captivating more con-sumers.

The support activities are often seen as a fountain of costs, they are usually classified as over-head costs. However, increasing the effectiveness of these activities will increase the efficiency of at least one of the main activities, which will reflect on the overall company performance.

This analysis allows to understand the impact that all the activities have in the supply chain costs. At Sonae, the biggest contributor to the supply chain costs are the logistics activities, this includes the cost of receiving the goods, stocking them, picking them, expediting them and finally delivering them to stores.

Being the main contributors to the supply chain costs, these logistics activities need to be managed accurately in order to avoid unnecessary costs. Having low service levels does represents higher logistics costs to the company.

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Service Level Analysis in Food Retail Supply Chain