Woolworths SA Something in the Yoghurt Mix v 17 PDF

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Case Study 02

Woolworths SA: Something in the Yoghurt Mix prepared by Broto Waseso, Muhyudi, Anindyka L.E.M., Victor Gunawan Logistic & Supply Chain Management Course – MBA Class Swiss German University

1. Case Synopsis Woolworths was founded in 1931 by Max Sonnenberg, with one store in Cape Town. By 2009, it had 408 stores (including 161 franchise stores)1, making it one of the largest retail chains in South Africa. Its main product ranges were food, clothing and homeware, targeting mostly people in LSMs 8-10. The company believed that the key to its success lay in providing customers with high-quality fresh produce and convenience foods, and clothing that had a reputation for being a cut above everything else in value and quality. Critical to Woolworths' success was the drive to build lifetime relationships with its customers. Woolworths’ Relationship with Suppliers Woolworths’ management team knew that its reputation hinged on the quality and integrity of the products it sold. Consequently, it had strict product specifications in place for every product on its shelves. The company worked closely with its supply chain to use natural resources as efficiently as possible. It bought primarily from selected suppliers only, who prepared products specifically for Woolworths. This ensured the establishment of long-term relationships with suppliers, which resulted in stable supplies, reduced costs, improved flexibility and reliability and the provision of high-quality products. Woolworths became very involved with its suppliers, providing them with training and investing in new product and process development Gelatin and Yoghurt Gelatin was a translucent, colorless, nearly tasteless, solid protein obtained from boiling animal tissues such as bones, skin and tendons. It was derived mainly from pork skins, pork and cattle bones and cattle hides. There were three groups of people for whom the inclusion of gelatin in a product was problematic or unacceptable: Moslem People, Jewish People, Vegetarians. As from 2003, in response to customer requests, Woolworths had stopped using gelatin as a stabilizer in its yoghurt range. Carstensen added: “There is a specific agreement with suppliers that gelatin will not be included in any of our yoghurts. Even 1

though sourcing alternatives to gelatin is more difficult, we feel that it is part of our customer promise Early in 2008, Woolworths reformulated its entire yoghurt range and, in February 2008, the company became the first retailer in South Africa to offer yoghurts made with only natural flavors and colors In May 2008, alerted by a primary dairy supplier that one of its raw material suppliers may be including gelatin in its products, Julian Novak, divisional director of food at Woolworths SA, tasked his team to investigate the issue. The allegations proved to be true. There was gelatin in Woolworths’ entire yoghurt range. When Woolworths discovered that one of its raw material suppliers was including gelatin in its yoghurt products, the company knew not to delay in taking a decision. The solution was not simple. A product recall could damage the company's reputation and profitability, and Carstensen and her colleagues knew that Woolworths could face a public relations disaster if the product recall was not managed well. Recalling a product involved several issues: determining the scope, nature and extent of the recall, identifying the affected products, etc. Carstensen knew that recovery involved not only removing the product from the market, but also reintroducing the product in a way that met the expectations of Woolworths' consumers and the media. 2. Problem Identifications: 1. There was gelatin in Woolworths’ entire yoghurt range from its raw material suppliers even though Woolworths became very involved with its suppliers, what happened to this problem? 2. What action the company should take for yoghurt product that have been circulating in the market, recall or quiet? 3. What are advantages and disadvantages for the actions taken by Woolworths? 4. What action the company should take against the supplier? 3. Related Theory 3.1 Supply Management A. Definition Based on Institute of Supply Management: Identification, acquisition, access, positioning and management of resources an organization needs or potentially needs in the attainment of its strategic objectives

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Activities have expanded beyond the basic purchasing function to include following key activities: a. Negotiations b. Logistics c. Contract development and administration d. Inventory control and management e. Supplier management, etc. B. The primary goals of purchasing are: a. Ensure uninterrupted flows of raw materials at the lowest total cost, b. Improve quality of the finished goods produced, and c. Maximize customer satisfaction. C. Purchasing contributes to these objectives by: a. Actively seeking better materials and reliable suppliers, b. Working closely with and exploiting the expertise of strategic suppliers to improve quality and materials c. Involving suppliers and purchasing personnel in new product, design and development efforts. 3.2 Purchasing Process A. Definition of Purchasing Key business function that is responsible for acquisition of the required materials, services and equipment. B. Process of Manual Purchasing a. Step 1 - Material Requisition/Purchase Requisition Stating product, quantity, and delivery date. May originate as a planned order release from the MRP system. Traveling requisition used for recurring orders. b. Step 2 - The Request for Quotation (RFQ) Buyer identifies suppliers & issues a request for quotation (RFQ) for routine items or a Request for Proposal (RFP) for highly technical products. Supplier Developmentis used to develop supplier capabilities. c. Step 3 - The Purchase Order (PO) Is the buyer’s offer & becomes a binding contract when accepted by supplier? When initiated by the supplier on their own terms, the document is a sales 3

order. The Uniform Commercial Code (UCC)governs transactions in the U.S., except Louisiana. C. Process of Electronic Purchasing (E-Proc) a. Step 1 - Material user enters a purchase request : Relevant information such as quantity and date needed. b. Step 2 - Purchase requisition approved and transmitted electronically to buyer : At purchasing department (hardcopy or electronically). c. Step 3 - Buyer reviews requisition, assigns qualified suppliers to bid (fo example if over $50,000) : Product description, closing date & conditions. d. Step 4-Buyer reviews closed bids & selects a supplier D. Advantage of e-procurement Time savings, Cost savings, Accuracy, Real-time Mobility, Trackability, Management, Benefits 3.3 Sourcing Decision A. Reasons for Buying or Outsourcing a. Cost advantage : Especially for components that are non-vital to the organization’s operations, suppliers may have economies of scale b. Insufficient capacity : A firm may be at or near capacity and subcontracting from a supplier may make better sense c. Lack of expertise : Firm may not have the necessary technology and expertise d. Quality : Supplier have better technology, Process, skilled labor, and the advantage of economy scale B. Reasons for Making a. Protect proprietary technology b. No competent supplier c. Better quality control d. Use existing idle capacity e. Control of lead-time, transportation, and warehousing costs f. Lower cost 3.4 Supplier Selection Supplier selection is important to domestic purchasing management, which is able to help enterprises save material cost, enhance competitive advantage, promote 4

customer satisfaction, and hence increase organization performance. In addtion, selecting appropriate supplier can help start ups establish a good foundation for developing products and services. A. Multiple Criteria Product and process technologies, Willingness to share technologies & information : Early supplier involvement (ESI), Quality, Reliability, Order system & cycle time, Cost : Total cost of ownership or acquisition, Capacity, Communication capability, Location, Service B. Control the supplier To be objective, when an enterprise receives goods, a department other than the purchasing department will take on the task of checking and inspecting the order confirm that every material on the list fits the purchase order. If the amount or quality is not right, the delivery might not be accepted 3.5 Product Recall A. Definition a. Product recall usually occurs when the product shows substandard quality or is usually the product potential danger. Pproducts recall begin with the discovery of defects by manufacturers, distributors, importers, retailer, or the user himself. (Pruitt and Peterson, 1986 in Chu et al., 2005) b. Product recall occurs when a product considered to pose a danger to consumers or violate regulations security (Chu, Lin & Prather, 2005) c. Defective product is a product that cannot fulfill its manufacturing goals, either because intentional or negligence in the production process or caused by things others that occur in circulation, or do not provide conditions security for humans or their property in their use, as people expect (Badan Pembinaan Hukum Nasional (BPHN) b. Impact of Product Recall a. Financials implication: absorbs the cost of replacing and fixing defective products, and for reimbursing affected consumers when necessary. In the worst case, the impact will make company bankruptcy due cannot manage well the product recall

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b. Reputation implication: it will make customers untrusty with the product in the future. They will not pay anymore to buy the product from the company until they feel that the product sold is secure and meet their expectation 4. Case Analysis Based on the explanation previous, we required to perform deep analysis about gelatin in Woolworths’ entire yoghurt range. Here is our brief analysis about our option Recall or Keep Quite on our product contain “a gelatin”. We analyzed advantage and disadvantage on both options below: Recall To obtain customer trust To maintain Corporate Image and Reputation Benefit To maintain Corporate culture and people engagement To obtain support and commitment from supplier for Recall To ensure business sustainability in the futures Has Consequences of damaging company's reputation and affect Company's profitability (short term) Damage public relationship, if the recall could not be managed well

Loss

Need extra efforts to Recall Strategy, Procedures & Operation (define strategy, reporting to Government, managing consumers and manage budget) Based on study released by Deloitte, 58% of consumers who heard about product safety and quality problems changed their buying habits. They did not purchase the product for an average 9 months, increasing the likelihood that the product will be discontinued

Kee p Quite No need to spend unnecessary cost to recall the product No need to spend a lot of efforts in recalling products Focus on Supplier claim and negotiation

Face litigation risk on the future, if any consumer file a lawsuit against Woolworth's It will also affect consumer's trust, because it against Woolworth's internal policy, which stated that "if a product does not meet Woolworth's stringent criteria, it is removed from the shelves." Possibility of information leaking, especially when the source of information was from other party (one of Woolworth's primary dairy supplier). The consequences will be enormous if it is not handled properly Bring harm than good on corporate culture, about integrity. Top management should be an example for corporate culture. This case is a like test on top management character and corporate culture

Table 1. Recall vs Keep Quite Analysis

Based on our Benefit & Loss analysis on both options, we preferred to perform recall policy than keep quite option. As critical thing to Woolworths success was the drive to build lifetime trustworthiness with its customer. Thus, Management constantly emphasizes that its reputation depends on the quality and integrity of the products it sold. The other hand, we should have deep analysis toward Supplier, whose supplied raw material contain with gelatin to Woolworths’. The competitive advantage of Woolworths’s is Superior Quality → believed that the quality of its suppliers is an integral part of its attempt to be South Africa’s largest retailers. Woolworths buys the materials from selected suppliers only, who prepared products specifically for Woolworths

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Termination of Partne rship Feared by our supplier

Downgrade Partne rship Status Support long term business, at certain time we can upgrade partnership status Speed-up quality improvement initiatives, as implication on current accident Secure Logistic and Supply Chain sustainabilitty, to ensure production cycle on the next year Easy to obtain support from Supplier for Recall Sharing Cost Scheme

full controll capability toward our supplier Be nefit Opportunity to obtain the better supplier

Loss

Distrust with supplier, difficult to obtain big supplier on our Loss opportunity to obtain better supplier with better service raw material and raw material quality Disrupt current supply chain and production cycle in certain Lack control capability toward current supplier period on the future, because of vendor selection Gambling our product quality (taste, color, form), with new supplier Difficult to obtain support for recall sharing cost scheme

Table 2. Action Analysis toward Supplier

Woolworths’ has various functions in management to monitor, control and measure it supply chain at every interval. It has a clear and defined product approval process including factory auditing (quality requirements), product testing and inspections. In cases of non-compliance with any aspect of hygiene and safety, corrective action was taken, and the company monitored the suppliers progress carefully thereafter. Considering the excellent practice of supplier management in Woolworths, it still fails to detect the existence of gelatin substance in its yoghurt product line because the ingredient was contained in raw materials supplied by Woolworths’ second-tier supplier. From purchasing process point of view, PO document is the buyer’s offer and becomes a legally binding contract when accepted by the supplier. Thus, it has become the supplier’s obligation to provide buyer with the specification of items ordered. The supplier must not change the specifications of the materials without buyer’s knowledge and approval. Even though there is some unavoidable reason for changes, such as the lack of raw material needed, suppliers need to communicate it first with their customer (in this case, Woolworths) and get Woolworths’ acknowledgement and approval before production. Finally, refer to previous explanation, Woolworths has the right to terminate the dairy product supplier or even sue the supplier as they have breached the agreement of the product quality.

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5. Conclusion & Recommendation 5.1 Conclusion Woolworths was founded in 1931 by Max Sonnenberg, with a shop in Cape Town. As of 2009, it had 408 stores (including 161 franchise stores), making it one of the largest retail chains in South Africa. The company believes that the key to its success lies in providing customers with fresh products and high-quality comfort food, and clothing that has a reputation for being a cut above all in terms of value and quality. Woolworths actively promotes its values as a point of sale to consumers, and the company positions yourself as socially and environmentally aware. The main problem in this case is that one of the suppliers of raw materials has ingredients that contain gelatin ingredients in their products. In 2003, the company agreed to ensure that the yogurt was free of gelatin (a product derived from meat sources), and therefore advertised it that way. Even though Woolworths has done a very good supply chain management from selecting suppliers, developing suppliers, managing and controlling all activities involved in sourcing and procurement, they are neglected in terms of quality control over suppliers. Woolworths also maintains good relations with its customers by always trying to provide the best quality products that are environmentally and socially aware. Woolworths must face the possibility of a negative reputation. 5.2 Recommendation We recommend companies to recall "Gelatin-yogurt" products from the market and take some action for suppliers. Although the costs of remembering products may be large, the risk of reputation when the problem leaks to the public and is not handled properly can be enormous. We also recommend several proposed scenarios for product recall • Mapping the products to be withdrawn based on the zoning of the number of distributions (Red = Most Amounts, Yellow = Medium Amounts, Green = Small Amounts) and determining the target time. • Report to the authorized institution (government) in mitigating the impact that will occur to the company • Utilize a Contact Center for customers who want to report a problem or return yogurt and ensure that it is followed-up to be treated.

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• Hold press releases with the media and charity events that donate remember yogurt to repeat to the public that despite the contents of gelatin, yogurt is very safe and nutritious. • Recover the yogurt brand image problem by contacting halal, Jewish, and vegetarian community organizations to make them aware of Recall and try to regain their trust in the company's commitment to ensure that future yogurt will be free of Gelatin. • Display a list of recalled products in the past 12 months on the Woolworths website and to keep them informed of any problems with the product which have resulted in withdrawals and withdrawals. • Maintain a close relationship with the media. We also propose several actions to be taken for suppliers: • Perform detailed root-cause analyzes of supplier performance problems. • Improved supplier performance. Prepare a meeting with problem suppliers to share and integrate action plans for performance improvement. Collaborate in action planning and improve performance as a result. Make a supplier corrective action form. • Review supplier contracts to see if the company has agreed on compensation that may be received from suppliers not meeting the SLA. This compensation will minimize total costs considering the product. • Finally, we downgrade partnership status, it will impact to volume and quality check process on those partnership statuses. Preventing quality failures in the future: • Evaluate Woolworths supplier management to ensure all entities in the supply chain share the same vision and principles in doing business. • Enter strict clauses regarding agreements regarding breach of contract and SLA. • Perform make-or-buy analysis to determine whether to do in-house production or outsourcing. • Look for new Gelatin-free suppliers or work with existing suppliers to produce non-Gelatin ingredients in the future. • Manage the supplier base to register suppliers that meet the criteria set by Woolworth. 9

• Continuous monitoring and additional routine check not only for harmful microorganisms and pathogens, but also for prohibited substances such as gelatin. Requires a second level supplier to do it. 6. Lesson Learned From the "Woolworths SA: Something in the Yogurt Mix" case study, the lessons learned are as follows: • Companies must prioritize customers, not only by providing the best quality products, but also to maintain lifelong relationships with consumers by giving promises. • Companies must prioritize quality control over each of their products, ranging from raw materials (suppliers), production processes, packaging, distribution and delivery to customers. • Managing supplier relationships involves selecting suppliers, maintaining a supplier base, conducting supplier evaluations and supplier development. While managing good customer relationships requires understanding customer behavior and value to be able to deliver products that meet their expectations. • Maintaining a supplier base to redu...