Rising to the Challenge

With relatively short notice when it comes to winning customers and meeting their demand, it’s been a matter of ensuring consistency of supply, operational effectiveness and low cost for the 2007 Mercury Awards winner in the Best Manufacturer category, Bega Cheese.

When Grattan Smith joined the company in 1997, it was moving through a number of changes, partly to pre-empt deregulation of the liquid milk market in 2000, when prices being paid for the proportion of milk going in to the liquid milk market dropped by 50 per cent.

As a farmer-owned dairy co-operative, Bega Cheese needed to sustain both its farmer shareholders and the dairy industry in the Bega Valley.

In addition, Bega Cheese wished to participate effectively in the consolidation of Australia’s dairy industry and the rationalisation of manufacturing plants.

In 1992, prior to Smith’s appointment, Bega Cheese essentially produced one product: cheddar cheese in a 20 kilogram format. Milk was procured from Bega Valley farmers, with a high proportion sold into the liquid milk market.

“In that period, the company was dependent on push manufacturing, or how much milk was available and how much had been committed to the liquid milk market, with the balance put through the manufacturing facility,” Smith explains.

“As our farmers became more efficient and increased their milk production, Bega Cheese started installing equipment to more effectively process that milk.”

In 1998, the introduction of a state-of-the-art cheese cutting, packaging and processing plant brought the previous third-party manufacture and retail distribution of the Bega brand under direct control of the company, involving the manufacture and distribution of an additional 10,000 tonnes per annum over the first two years of operation.

“Establishing a manufacturing facility and taking back the packaging and distribution of the Bega brand enabled the company to strengthen its position in the domestic market and further develop export strategies,” Grattan Smith says.

“The completion of the manufacturing facility at Bega meant that Bega Cheese was now in the business of forecasting demand, dealing with retailers and packing the product – a very different model.”

“It was at this point that I came on board and we changed the focus of the business to demand based production.”

With 25 years of experience in logistics, including a strong background in retail, Grattan Smith sees his role at Bega Cheese as working to support the company’s production and sales mission to achieve the overall goals of the organization.

Fascinated by the way the physical movement of goods impacts the effectiveness of retail, Smith formulated the basis of his approach to supply chain management during his time at Big W under the guidance of general manager Warehousing and Distribution Al Rusa.

“Al Rusa had a big effect on me,” he says.

“I particularly remember his approach to negotiations with transport companies, which was direct and straight down the line. Al refused to bargain.”

“Suppliers learned that if they didn’t give him their best price by the due date, the next chance to come back with a better offer would be the following year.”

Although an Enterprise Resource Planning (ERP) solution was introduced at Bega Cheese in 1998 to replace a plethora of manual and PC-based systems, Smith says it became apparent that more than integration of information was required.

“The challenge was to establish planning and decision tools based on this data and to leverage technology, finance and strategy,” he says.

“Visibility of information translates into logistics value. Therefore, we introduced track and trace systems from vendor to receipt through storage and production to dispatch with real-time visibility of stock movement.”

With cheese maturation cycles of up to 24 months required, it was imperative that forecasting and demand planning were accurate and responsive to market requirements.

“Gradually we acquired a greater capability to systematise the process of balancing and synchronising retail replenishment requirements with production and shipping requirements,” Smith says.

“Demand and supply planning must not only support effective product supply, inventory management and customer satisfaction, but also economic and efficient production operations.”

With a four-fold increase in volume over three years, including the need to almost constantly introduce new products while maintaining supply and retail shelf presence, a focus on effectiveness rather than necessarily achieving the lowest cost outcomes was paramount.

The volume growth also impacted storage capacities with inventory levels increasing exponentially in line with SKU growth.

A 15 per cent reduction in pallet (weight) utilisation over four years added to the situation.

“Additionally, recruitment and training of labour from the relatively small pool in Bega, with a township population of 4,500 and less than 20,000 regionally was challenging, particularly with the need for speed to meet transitional deadlines,” Grattan Smith says.

Bega is located approximately 450 km and 600 km respectively from Sydney and Melbourne. The transport infrastructure is road-freight dependent with a lack of multi-lane highways within the first three hundred kilometers both north and south, compounded by restrictions on B-double access.

As the volume of business grew, the distance to market also impacted the supply of raw materials as increasingly they became sourced from other regions, particularly Victoria. This was exacerbated by recent drought conditions across Australia.

“Recent rising fuel prices have also had an impact on supply chain cost efficiency, particularly in conjunction with reduced pallet utilisation,” Smith says.

Rising to the challenges, the Bega Cheese team set about the development of flexible and adaptive manufacturing practices, reducing change-over times and introducing multi-skilled staffing and partnering with suppliers and third party logistics providers.

Accurate, responsive data-capture was implemented to improve decision making and customer service whilst reducing total cost.

“As our retail replenishment practices changed, demand planning and management was impacted,” Smith says. “So our initial focus was to get our forecasts right in order to produce the product that’s required in the market.”

As a contract manufacturer, Smith says Bega Cheese adopted the philosophy of separating the processes that create demand from those that fulfil it by identifying how much inventory was needed at different locations in the supply chain rather than trying to forecast consumer demand.

“We find this system, which follows Kanban principles, works reasonably well for us. We also found that we needed to get closer to our customers and communicate with them so that our sales people would have a better sense of what they wanted before they ordered it. We engaged with them and ended up working together,” he says.

“JIT inventory systems and manufacturing support systems, including a recently installed Advanced Scheduling tool to optimise production line efficiency and manage plant-wide constraints, has contributed to this improvement.”

Bega Cheese entered into a licensing agreement with Fonterra during 2001 to market and distribute the Bega portfolio of products in the domestic market.

“Partnering with Fonterra and other marketing and distribution organisations has enabled growth without further capital investment in warehousing,” Smith says.

“I believe Bega Cheese has always managed relationships well, whether with so called competitors within the industry or our customers and suppliers. This is one of our major success factors.”

“The Bega Cheese brand, its strategic relationship
with Fonterra and other key Australian contract manufacturers, and a growing export business, has delivered to the manufacturing plant approximately 60,000 tonnes of business per annum.”

The introduction of robotic palletising and conveyor systems reduced the extent of manual tasks and the number of low-skilled roles required to be filled.

Likewise, Maxipacker shuttle pallet-racking systems and laser guided vehicles reduced the number of forklifts required.

Training, including Certificate III in Transport & Distribution qualifications, has enhanced the skill level and produced year-on-year labour cost reductions.

Efficient and effective utilisation of sub-contract transport incorporating round-trips has achieved an average of 98 per cent weight and 85 per cent cubic utilisation per vehicle, including approximately 50 per cent B-doubles.

“This, and targeted use of 3PL warehousing, has consistently reduced this large component of supply chain cost and maintained support of our JIT inventory for manufacturing,” Smith enthuses.

“The achievement of improved DIFOT to our customers and year-on-year cost reductions has seen total volume and revenue increase by 25 per cent over the previous three years,” Smith says.

“This includes a 40 per cent increase in export volumes, with a focus on middle eastern countries and Asia.”

“Bega Cheese exports around 30 per cent of its total output. It’s an important aspect of the business because the domestic cheese market is fairly static, although we are seeing an approximate growth of 4-6 per cent per annum as people turn back to dairy products for nutrition and calcium. But the potential within the international market is much greater.”

According to Grattan Smith, a focus on metrics and KPIs against the desired outcomes of the organisation has achieved superior customer service and reduced total cost-to-serve.

“The total logistics cost per average pallet distributed has fallen 20 per cent over the previous three years, including labour by 10 per cent and freight by 12 per cent,” he says.

“Flexible production scheduling to respond to market needs is achieved while balancing efficient production and maintaining lower inventory levels. During this time EBITDA and EBIT have risen in excess of 30 per cent.”

Smith says stock accuracy through real-time transactional systems has eliminated annual stocktakes and reduced safety stocks in conjunction with collaborative planning with suppliers.

“Increased velocity of inventory and stock turns, up to 50 times pa for some product groups, has supported volume growth without investment in warehousing infrastructure,” he notes.

Bega Cheese’s new found strength has recently enabled the acquisition of a 70 per cent stake in Tatura Milk Industries, which Grattan Smith believes will provide the company with further competitive advantage through diversification into a broader range of products, and increased raw milk sourcing.

Despite the company’s rapid and profitable progress, Smith points to the independence of the Bega Cheese Cooperative as the major achievement.

“Most small to medium sized dairy companies within Australia have been merged into the operations of larger companies both domestically and internationally,” he says.

“We’re proud that we’ve been able to maintain our co-operative structure while enabling our 100 farmer owners to secure their future, as well as contributing to the growth and success of our area.”

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