Case Study : EP 26.

963 FRESH, Parmalat Spa Via Oreste Grassi, 26 43044 - Collechio - Italy Alberto Cappello, project manager Fax : 39 0521 808242 Tel : 39 0521 808435
[email protected]

TXT Ingegneria Informatica Gianni Rizzetti, technical manager

"In order to remain in a globalized market, it is necessary to have a competitive dimension. The company's development is entrusted to a process of internationalization that is clearly defined by acquisition policies, both in Italy and abroad." 1. The Company Parmalat is a multinational Food manufacturer, among the world leaders in the Milk and Perishable Goods sector. It is the largest italian company in the dairy industry. Founded in 1961, the different product lines are : - Milk (50 % of Italian turnover), - Fresh products : yoghurt, cream, cheese, butter (21 % of Italian turnover), - "Vegetables" : juice fruits.. (15 % of Italian turnover), - Bakery : bread, pasta.. (10 % of Italian turnover), Parmalat has dramatically grown in the recent years through an extensive process of merge and acquisitions and has experienced a rapid growth in turnover over the last 4 years from 2145 millions Euros in 1995 to about 5000 millions Euros in 1998. It has a world-wide presence through 85 different owned or controlled companies world-wide. In 1997, Parmalat : - Owns 28 plants in Europe, employs about 5000 people and makes 38 % of its turnover, of which 75 % in Italy, - Owns 38 plants in south America, employs 12500 people and makes 37 % of its turnover, - Owns 37 plants in Noth America, employs 5200 people and makes 22 % of its turnover. In Italy, with 3200 employees, Parmalat is the national leader in milk UHT (36 % market share), cream (46 % m.s.), beschamel sauce (70 % m.s.), juices (33 % m.s.)

2. Organisation. Main product lines are organised by divisions which handle marketing, transportation, production planning. Plants are dedicated to certain lines of products. As an example the Collechio plant, near Parma, which happens to be also the place for the Parmalat headquarter, employs above one thousand persons and produces milk, cream, juice, yoghurt and tomato desserts. Other plants may be dedicated to just one product. 3. The Food industry - general trends. The economic importance of the Food industry in Europe is considerable ; in particular, the EU is the world leader in all subsectors of the dairy industry. With a value added of 11.310 millions Euros, it comprises a group of multinational entreprises, like Parmalat, which exist alongside numerous small and medium-sized firms with regional markets, mainly producing milk, cheese, yoghurt, butter, creams, etc.. Following changes in the cultural and socio-economic environment, the consumer demands for a greater variety of healthier, fresher, higher quality, more convenient foods. These markets forces are to-day placing the Diary industry and, more generally, the Fresh Food Industry in front of big challenges. The traditional ways of matching food demand and food supply is rapidly becoming outmoded, as consumer demand splinters into smaller niches and as food technologies evolve. Aiming the growing number of new food products at new customer niches takes more precision than the food market traditional structure can offer. Also, price pressure is increasingly eroding profits, thus demanding more cost-effectiveness in the logistics operations, which today account for average costs in the order of 10 % of the sales turnover. The Fresh food business, due to the perishable nature of the products, places specific constraints to the logistic processes and makes even more challenging than in other Food sectors, such as dry grocery, to achieve high costeffectiveness of the logistic operations and to reduce related costs. 4. The supply chain management process issue in the Parmalat Fresh products division. The characteristics of this sector, as presented in paragraph 3 above, generate a certain number of constraints which makes the supply chain management process difficult to handle : - The short shelf-life or perishable nature of products (25 to 90 days maximum) implies a rapid turnover of product along the supply chain. - The variability of demand, particularly for seasonal reasons, requires a high flexibility in the forecast of demand to order management matching process. - The complexity of the distribution chain induces high logistics costs. In the case of Parmalat in Italy, 85000 points of sales are served

through 180 wholesalers and 15 supermarket chains costing about 50 millions Ecus per year for the primary logistic chain management. Further the distribution systems present diversity from one country to another and changes in structure with the progressive reduction of the number of small retailers to the benefits of supermarket chains. The high number of items makes forecasting of demand, production planning and inventory management difficult. As an example, the Collechio plant manages 85 different items of milk, 129 items of juice vegetables, 105 items of yoghurt. Technology is changing fast and becomes a competitive weapon with the development of supply chain management concepts like ECR (efficient customer response), particularly in United States.

Others difficulties in managing the supply chain process arise from Parmalat itself : - The company has aknowledged a tremendous growth over the last 4 years multiplying the turnover per a factor 3. - Acquisition policy since 1992 has brougth within Parmalat a mix of production sites, warehouses and distribution networks which need to be reengineered : reallocation of products to plants, reorganisation of warehousing and distribution system. - The production diversification due to customer demand as well as acquisition has over amplified the forecasting of demand, production planning and inventory management issue. 5. Business process improvement in Parmalat. Parmalat feels today that a breakthrough of its logistics performance is an essential pre-requisite to continue growing at the same speed. For that reason, Parmalat has started a company-wide re-engineering process, which mainly affects the redesign of its production infrastructure (allocation of products and quantity to the existing production sites; closing some factories; enlarging other ones; etc.), the revision of the distribution infrastructure (how many wholesalers; their location; the product lines they manage; their target markets; etc.), the renewal of the IT systems (especially in terms of hardware infrastructure) and the development ot its human capital. These structural changes are already ongoing and in a fairly advanced stage, and it is now the rigth time for Parmalat to shift the attention to management issues related to the key business processes which are responsible for the cost-effective and efficient exploitation of the existing infrastructure. Among the areas which are more likely to bring enormous economic benefits and to enable a real breakthrough in performance, thus boosting

the parmalat growth in the next years, the management of the supply chain has been identified by the Parmalat top management as a priority. This is also the most challenging area, given the complex Parmalat context and requiring combined intervention at the organisational level (redesigning and implementing the key supply chain management processes to achieve an high degree of supply chain integration), at the IT level (designing and deploying a low-cost, modular, flexible and effective IT infrastructure supporting supply chain integration and management) and at the human resources level (educating the human capital at all levels, from management down to the field operators, to work according to an integrated and co-operative horizontal approach, rather than according to a vertical, functional one). 6. The FRESH project - scope. Given the broadness of the Parmalat environment and of the supply chain management problem, and considering the economic implications of intervention of various sub-domains within the overall Parmalat supply chain, it has been decided to focus the scope of a pilot project called FRESH to the following domain : - Country : The pilot project will focus on the Italian market (Parmalat is present in Italy with 21 of the 85 factories of the Group and serves about 85000 points of sales. - Product : requirements from all the Parmalat product portfolio will be considered, to facilitate FRESH exploitation, but the pilot implementation will focus on Diary (milk, cheese, yoghurt, creams, desserts..) and other perishable products (basically juices, sauces and other beverages, which share the same logistic and warehousing infrastructure); these products are referenced below as "fresh products". Fresh products in the context of FRESH are those products with a typical life of 25 to 90 days maximum. Fresh products accounts for a total of 90 % of Parmalat sales (about 77 % diary and about 13 % other perishable products) and are responsible for more than 90 % of Parmalat supply chain costs. - Actors in the supply chain : FRESH will focus, within the Parmalat supply chain, on the primary logistics. It encompasses from the production (15 factories in Italy producing Fresh products) to production warehouses and distribution centers (5 in Italy), wholesalers (180 in Italy, serving independent shops, networks of retailers and large supermarket chains) and large supermarket chains (15 in Italy, which will be in the future served more and more directly by Parmalat, rather than through wholesalers) - see figure 1 below. As stated before, in Italy, Parmalat logistic costs related to this portion of the supply chain exceed 50 Mecus/year.

Factory 1

Factory 2

Distr. Ce r 1 nte

Distr. Ce r M nte

Whole r 1 sale

Whole r K sale

Points of Sale

Larg Supe arke Chain e rm t Org anised Networks of Point of Sale s

Points of Sale

Figure 1 In the above domain, the FRESH strategic objective is to implement the supply chain integration concept across the Parmalat primary logistic chain. The following key processes of the current Parmalat organisation will be involved : - Customer order management. - Production planning. - Warehouse management (within a single warehouse). - Inventory management (across the whole logistic chain, from factory warehouse, through distribution centers, to wholesalers warehouse and large supermarket warehouse). - Transport management (for product delivery ). 7. The FRESH project - objectives. Specific business objectives, which will translate into more than 15 MECUS ROI in the first 3 years after the completion of the project, are : - To increase sales levels, thanks to the combined effect of more ontime deliveries, of reduced order fulfilment lead time and of

increased product freshness and shelf-life higher product freshness at points of sale and to longer shelf-life. To reduce stock levels along the primary logistics chain. To reduce total costs of the primary logistics of Parmalat.

8. The FRESH project - solution. FRESH will perform re-engineering exercice by defining and deploying a vertical supply chain intergration and management solution for the Fresh Food sector. Such solution comprises : - An organisational model for supply chain intergartion and management which leverages upon ECR - Efficient Customer Response - concepts and innovately adapts them to the Fresh Food sector and to the European market structure. Based on ECR, Parmalat will monitor the inventory levels at the wholesaler and supermarket central warehouses and trigger off the replenishment orders. From it, production planning in factories, management of inventories levels in the different warehouses, and management of shipments will be derived based on a FIFO basis. - An It infrastructure cost-effectively and efficiently supporting the integration across the actors in the supply cahin, consistently with the underlying ECR startegy, consisting of 3 integrated layers : - A workflow backbone layer supporting a continuous, timely and reliable flow of data and information along the supply cahin and allowing to all involved decisional responsabilities on-line access to all those information (administrative, operational, etc.) needed to support and to synchronise their key decisional processes. - A decision support layer made-up of a set of decision support systems which, integrated with the workflow layer, will exploit available data and information to provide active decision support to the key decision centres of the supply chain. - An executive decision system layer to allow on-line and timely access to both local and global measures of logistic performance. 9. The FRESH project - stages and planning. The project is structured in 4 phases : - Phase 1 deals with the specifications design. It lasted over 1998. - Phase 2 deals with the implementation in Collecchio. It is underway. - Phase 3 and 4 will see the extension to Italy and then worldwide from November 1999, year 2000 and over. The pilot in Collechio includes : - The Collechio plant, - the Collecchio warehouses, - 3 wholesalers, - 1 large supermarket chain.

Addditional information concerning the project may be found at the following addresses :
www.txt.it/fresh www.txt.it/english/fresh