Read the case study below and answer the given questions.

Case: Smith Smallgoods Sausages

Introduction

At 11am Paul Liddy, Operations Manager of Smith Smallgoods, sat down at his desk. He has been at work since 6am, checking that all the meat-processing lines are operating to schedule. He has talked to his supervisors, his main meat supplier and his largest customer, Safeway supermarket chain. Paul's thoughts turn to possible improvements since Smith's profit is too low.

Smith, a meat-processing company in Melbourne, Australia, has employed a series of continuous improvement techniques over the last eight years in an attempt to change from being production-driven to having a strong customer orientation. While this has improved the industrial relations environment and working conditions, it did not improve the return on assets employed until last year, 2021. A loss was made in 2020 as a result of having to recall smallgoods after a food poisoning outbreak, although it was later proved that Smith was not responsible for the food poisoning. The improvement in profit in 2021 was more due to a fall in pig meat prices than enhanced market or operations strategy.

Paul's main long-term objective is to streamline operations so that customer service levels will increase and costs will be reduced. At the top of his list of desirable improvements is: 'making sausages to order'. While studying last year, he was impressed by the concept of replacing inventory of perishable goods by manufacture to order. He knows that, typically, 22% of sausages are sold at a discount, because not enough orders are received for the many varieties in stock. It has been difficult to achieve change in the past, but Paul believes that the necessary changes could be made at Smith. How will his supplier, Apollo Meats, and his major customer, Safeway supermarkets, react to his proposal?

Background

Smith purchases boned pig meats and processes them into a range of cured, preserved and fresh meat products known as smallgoods. Formed in 1947, it is the subsidiary of a large food-processing company. Smith has an annual turnover of Aus$110 million from sales of 14,000 tonnes of product and employs 440 people. Although selling into national markets and having some exports, its sales are predominantly made in the state of Victoria. Smith sells to three market segments, 60% of its output going to supermarkets, 20% to delicatessen shops and 20% to other food manufacturers.

Management at Smith is in transition due to the appointment of a new General Manager at the end of 2019, and a new Operations Manager, Paul, in May 2020. The General Manager restructured Smith's senior management and totally reorganised the operations group under Paul Liddy.

Smith has been making fresh sausages from meat trimmings, grain and seasonings filled into a casing for almost 50 years. Originally the company made only one kind of sausage. Pork sausages were primarily sold through corner shops and delicatessens, delivered in refrigerated vans. Total weekly sales were very regular 20 tonnes per week. Given steady sales in one product, it made sense to make sausages in runs of five tonnes, loaded into 16-kilogram boxes for distribution.

More recently many other producers have started making sausages with very cheap ingredients, 'to throw on the BBQ'. These inferior sausages are sold in supermarket meat counters at $3.99 per kilogram. At the same time customers of the deli counter in a supermarket, where prices are up to $12.99 per kilo, want a variety of sausages such as bratwurst, pork, honey and soy, beef and tomato, and chicken. When Paul last counted there were 14 varieties on offer and Smith make nine varieties themselves.

The present supply chain

The supply chain starts on a piggery in northern Victoria where the pigs are grown to the appropriate age. Smith buys, say, 2,000 pigs which are dressed at an abattoir adjacent to the piggery. Their carcasses are delivered to western Melbourne where Smith employs Apollo Meats to bone them. Apollo's butchers separate the various cuts of meat and trim all meat from the bones. This meat is refrigerated and delivered twice a week to Smith, 10 kilometres away, in large plastic boxes. Smith buys various spices and other additives. It obtains packing from a local branch of Sealed Air Corporation. This comprises sausage casings and packs to receive the links of sausage.

Smith distributes sausages from its chilled store at the end of the production line. Distribution to Safewaycomprises mainly full pallets with some 16 kg boxes picked for the lower volume varieties, such as Halal sausage. Transport from Smith to Safeway's cold store is achieved by 'pans' (pantechnicons) pulled by a prime mover, carrying a load of 28 pallets weighing about one tonne each. Smith hires a transport company to deliver these pans to the cold store at the Safeway distribution centre in a narrow time slot.

Safeway is the largest supermarket chain in Australia, with 150 stores in Victoria. Its central meat buyers, working for Gwen Davies, the senior buyer, purchase sausages from Smith by the truckload on a two-day lead-time. Smith keeps pressing for a week's notice of requirements, but Safeway buyers prefer to order at 4pm on Monday for a Wednesday morning delivery. Faced by large swings in sales both through the week and according to the weather, their response is to postpone ordering until the last possible moment. Safeway's customers are the full range of people who use its many Victorian stores. Some of them buy sausages to keep in the freezer until needed. The majority buy sausages for a particular occasion, such as a barbeque.

Information flow

Safeway places orders for sausage varieties twice a week. It estimates its requirements a month in advance but without any commitment, so these estimates are very little use to Smith. Smith has a weekly requirement that Apollo processes a number of carcasses for delivery every two working days. This number is changed without notice when Smith so wishes, on the Friday before a working week.

Production scheduling is carried out at Smith using a stand-alone spreadsheet. The scheduler uses this sheet to plan production four weeks ahead, but there are daily changes to the schedule as customers' exact needs are obtained.

The only computer information Smith has on the stocks of sausages is the financial value of the pallet loads in its despatch store. To find out stocks of individual varieties, sales staff have to ask the store person. Safeway has detailed information about its sausage stocks at its cold store but does not share this with Smith. Delivery information is compiled from the loads assembled in despatch.

Delivery performance and profit

Mikhail, Smith's production supervisor, knows that getting meats in is not a problem, since the trimmings are a by-product of the thousands of carcasses processed each week. Schedules for production quantities of the nine varieties of sausage are drawn up by Chris, production scheduler, one month ahead and firmed up on the Friday before the week of manufacture. Typically, the two most popular sausages are made twice a week, three more varieties made every week, and the four others once every two weeks.

Table C2.1 shows a typical sausage production schedule. With use-by dates just eight days after manufacture, this requires some juggling and significant price reductions to clear stocks when orders do not match stock on hand.

Table C2.1 Scheduled production of sausage - produce to stock (tonnes)

(This case study is adapted from the book - Ian Sadler (2007) Logistics and Supply Chain Integration).