Operations Management of Fonterra: Capacity, Location, Layout, Improvement, Supply Chain, Inventory and Material Handling

This report analyses the operations management of Fonterra, a global nutrition company that produces dairy products. It covers capacity management, general locational factors, plant layout, continuous improvement, supply chain, inventory and material handling.

RUNNING HEAD: Operations Management
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Fonterra
Operations Management

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Executive summary
The operations management is the administration of business practices in order to create
higher efficiency within the organisation. In this report Fonterra is taken as manufacturing
company to explain operations management. Fonterra is a New Zealand company which
produces dairy products. It is a global nutrition company which is owned by the 10,000
farmers. Fonterra is one of the top six dairy companies in the world. This report includes the
capacity management, general locational factors, plant layout and the continuous
improvement of Fonterra. Further, the analysis of Fonterra is made by describing supply
chain, inventory and material handling.

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Contents
Executive summary...............................................................................................................................1
Introduction...........................................................................................................................................3
Analysis.................................................................................................................................................3
Capacity management........................................................................................................................3
General locational factors..................................................................................................................4
Plant layout........................................................................................................................................5
Continuous improvement...................................................................................................................7
Supply chain......................................................................................................................................7
Inventory...........................................................................................................................................9
Material handling.............................................................................................................................10
Conclusion...........................................................................................................................................12
References...........................................................................................................................................13

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Introduction
Fonterra is a dairy manufacturing company. It is owned cooperatively by 11,000 New
Zealand dairy farmers. Fonterra represents 30% of international dairy trade. It was
established in 2001 by the merger of two diaries, New Zealand dairy group and Kiwi
cooperative diaries. The vision of the Fonterra is to be the origin of dairy nutrition for all
young and old. The company offers the dairy products that meet the need of customers such
as health and wellness. The company carries the practice of goodness to generate customers
around the world. This report has made an analysis of Fonterra. The analysis is made in the
terms of capacity management, general locational factors, plant layout, continuous
improvement, supply chain, inventory and material handling.
Analysis
Capacity management
The capacity management is the procedure of planning resources which are required to meet
demands of the company. It comprises capacity planning, forecasting, monitoring and
performance analysis. The capacity management strategies enable the company to increase
and decrease capacity to meet demand. The capacity comprises the factors like labor and
equipment which can be scrambled to increase the output of a company. The capacity
management strategies adopted by Fonterra are:
Lead strategy: The lead strategy is the most aggressive strategy adopted by the Fonterra. As
per this strategy, the company increases it’s production capacity in advance to meet expected
increase in demand. It is also used to appeal to customers away from the competitors. This
capacity management strategy is more effective when the competitors are exposed to the
inventory shortages and the demand rises steeply. It is an upfront investment in the capacity
more than needed (Kazerooni, et. al. 2015).
Dynamic strategy: The dynamic strategy is the most effective strategy used by Fonterra. It
maintains the capacity of production based on the forecasts. It adds or reduces capacity as per
the demand of customers. It is the ability to assimilate and reconfigure internal and external
capabilities to address changing environment. The dynamic strategy concerns development
while maintaining capability standards to ensure competitive survival (Manzini, Bozer &

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Heragu, 2015). Whenever the demand increases, the managers need to makes the use of
existing resources for the future process change. According to the recent updates, Fonterra
has doubled it’s manufacturing capacity for the locally sourced anchor.
General locational factors
The location of factory determines a geographic site for it’s operations. The locational factors
comprise different characteristics such as tangible and non-tangible. The tangible factors
include wages and production costs and represents characteristics such as reliability,
availability, and security. The non-tangible reflects % of employees which are unionized and
can be measured as well. The plant location is categorized on the basis of nature of the
corporation which is general and specific locational factors.
The general locational factors embrace the controllable and uncontrollable factors for
Fonterra. The general location factors are discussed below:
Closeness to markets: Fonterra is anticipated to serve it’s customers by offering goods and
services at reasonable price and the time when it is required. The company chooses to locate
facilities close the market to keep in mind the concern of buyers. The location near to the
market is preferred because dairy products are delicate and prone to spoilage. The dairy
products are required to purchase almost on daily basis (Mio, Venturelli & Leopizzi, 2015).
The shelf of the product is also low which causes closeness to the market to ensure a regular
supply of products and reduction of cost of transportation.
Transportation facilities: The speedy transport facility ensures timely supply of raw material
to Fonterra and final products to the customers. The transportation facility is a criterion for
the location of the plant. There are 5 models of transportation such as road, air, train, water,
and pipeline. The preferred method of transport mainly depends upon the costs, convenience,
and appropriateness (Pavlovich, Sinha & Rodrigues, 2016).
Labor and wages: The adequate number of labor having specific skills is a significant
problem in the consideration of plant location. It is seen that importing labor is a costly
process and involves more administrative problems (Taleizadeh & Nematollahi, 2014). So

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the productivity of labor is an significant factor which should be deliberated. The current
wage pattern and cost of living should also be stressed.
Government policy: The state government and local government policies stress on the labor
laws, making codes, safety, and more demands attention. The government offers incentive
packages to entrepreneurs in order to promote the stable regional growth of industries. The
incentive packages can be in the form of exception from taxes and excise duties for a certain
period. The government also offers easy and soft loans which are easy to repay.
Supporting industries and services: Fonterra does not produce all the factors by itself. It
subcontracts to the other companies for the ingredients and as well as for the semi-final
products. So, the supply of sub-products is an important factor which influences the location
(Pang, 2017).
Plant layout
The plant layout is a plan for the optimum utilization of facilities for the manufacturing of
products. It includes the efficient and economical arrangement of machines, personnel,
material, storage and supportive services. The plant layout minimizes the material handling
and facilitates the progress of manufacturing by maintaining a balance (Verma, Dixit &
Bajpai, 2016).

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(Source, Dairy Technologist, 2016)
The relevant plant layout principles applied in Fonterra are:
The principle of space utilization: The available space should be effectively utilized that is
horizontally and vertically. The space used by the company causes extra costs to the company
as sometimes space is more than the required. As a result, it costs more to the company so
space should be utilized efficiently.
Integration of factors: Fonterra integrates all the essential resources such as men, machines,
and materials in order to optimize the level of production and maximum effectiveness. The
facilities and services should be incorporated fully into a single operating unit in order to
minimize the cost of production (Bromiley & Rau, 2016).

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Continuous improvement
The total quality management requires quality in all aspects of Fonterra. The elements of total
quality management are:
Total employee involvement: The company has 16,000 employees and one of the largest
successful dairy companies. The employees participate in Fonterra towards achieving
common goals. The company has been successful in achieving total employee commitment
after preventing fear from the workplace. The management has been successful in providing
the proper environment after the occurrence of empowerment (Mahdavi & Olsen, 2017). The
high-performance work systems incorporated continuous improvement efforts with the
operations of Fonterra. The self-managed teams of the organization are one of the forms of
empowerment. The shareholders permit the board and executive team of Fonterra to run the
company on their behalf.
Process-centered: Fonterra has redefined the milk industries of the country and became one
of the efficient dairy plants. The total quality management focuses on the process thinking.
The process is conducted by implementing steps that take inputs from suppliers and converts
into the outputs which are conveyed to the customers. The performance measures are
constantly monitored as a process to discover unexpected variation. Fonterra has optimized
efficiency with Schneider Eco structure plant. It meets the strictest requirements of safety and
quality (Gladisa & Susanty, 2018).
Customer focused: The customer is the king and regulates the level of quality. In order to
focus on customers, the company fosters quality improvement by training employees,
assimilating quality into the designing process and buying new measurement tools. Finally, it
is the customer who decides whether the efforts are worthwhile or not. The company has also
expanded it’s infrastructure to match larger milk processing site which is known as Darfield.
It is the first Greenfield site developed by the company. It is the first Greenfield site. It has
made functions compatible for the greater production capacity. It produces 30 tons of whole
milk powder per hour.
Supply chain
The concept of the supply chain has become a vital consideration of Fonterra. The concept of
the supply chain comprises considerations of distribution, transportation, customer
relationship, and marketing. The company needs to focus on the supply chain management

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due to market uncertainty, global procurement, technology and increased competition
(Abdelkafi & Pero, 2018). There are 3 main constituents of supply chain management:
Business processes: The business process states the activities and flow of information within
the Fonterra. For instance, order processing, customer service, distribution and more. It is
significant to gain an appreciative of the business process by directing business process
analysis. The supply chain empowers the process to be enhanced by streamlining, eradication
of redundant processes and cope up with enhanced processes. The standardization and
continuous improvement have helped the company to adopt an efficient business process.
Fonterra is using materials from ‘101 benefits of standardization’ to improve economy,
environment, and quality of life. The company also runs a continuous improvement
programme called operational excellence. It helps people to understand how things are done
by Fonterra. The programme ‘Plan, Do, Check, Adjust’ cycle has enabled the company to
carry process effectively (Amirjabbari & Bhuiyan, 2014).
Network structure: The network structure recognizes the partners who are collaborated in the
supply chain. They are also imperative business players. The relationships also take place in
the categories like strategic partners, manufacturing, operational and reserve list. The
logistics and shipping professionals of Damco work with Fonterra to as a beneficial and
evolving partnership. Such partnership has extended beyond transactional or operational
transportation solution. It is a deep strategic collaboration which has implemented beyond the
expectations. Such partnerships are regarded as a single business entity (Davidson, et. al.
2017). The company’s global manufacturing and local logistics are tied with the global
coverage and supply chain solutions.
Management components: This component comprises the philosophy of Fonterra for doing
business and the methods which are deployed in order to carry out business. It is vital for the
managers to embrace the culture of the company. The culture is clearly revealed to the
customers and the persons who work in the Fonterra. The focus on the supply chain is
necessary for the wellbeing of the company in the long term (Jacobs, Chase & Lummus,
2014). The proper understanding of supply chain risks is given importance by the
management of Fonterra as it has an effect on the reputation of the company. It is a value
creation process where the company requires raw material at reduced prices so that value can
be created for the final customers. The performance of suppliers and manufacturing can be
enhanced through the involvement and support of suppliers in the supply chain process

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(Ambriz, et. al. 2017). The management is responsible to correlate some factors which are
positively related with the manufacturing performance of company such as quality and
performance of products and involvement dimensions of suppliers.
(Source: Finance Twitter, 2018)
Inventory
The inventory is an sluggish resource. It is required to retain some inventory in the business
to indorse smooth and efficient running of the business. It allows flexibility of operations in
the business. The company produces as per the availability of inventory. The inventory
control system manages inventory, products, warehouse, and orders. The functions of
inventory are:
Inventory management
The inventory management considers the following
Product history: The ins and outs of inventory can be tracked in the movement report such as
adjustments, purchases, sales, return, and exchange.

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Damage adjustments: Often the inventory damages due to the short life cycle of dairy
products. Such adjustments should be tracked and labeled whenever happens.
Reorder feature: Fonterra should maintain stock in order to safeguard the rapid sale of
products. Fonterra focuses on inventory reordering to avoid going out of stock. Whenever the
items fall below the limit then the purchase orders are issued to the suppliers (Harvey,
Heineke, & Lewis, 2016).
Exchange and returns: A credit note should be attached to the invoice at the time of issue.
The inventory is resolved for exchange and returns.
Inventory report: The available and physical inventory should be tracked in the inventory
listing report.
Warehouse management
The warehouse management includes the following functions:
A detailed report of warehouses: The exact inventory of every product should be known.
There should be general inventory valuation of each product or warehouse.
Pick and pack list: The shipment should be picked individually to generate a list of pick and
pack.
Standard shipping labels: The standard shipping labels should be a stick. The information
required is displayed on the labels.
First in, first out: The products which enter the inventory should be sold first. The cost price
of each batch of products should be taken into consideration in the system and accurate
costing reports should be generated (Hitt, Carnes & Xu, 2016).
Exchange and returns: If the invoice has been dispensed for the product returns than the
company is able to spontaneously issue a credit note in order to match with an invoice.
Material handling
Material handling is the process of moving goods or materials within short spaces in a storage
area. It contains loading, unloading, palletizing and depalletizing should be known should be
known as palletizing. Fork-lift trucks are used in the material handling. The objective of

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material handling is to reduce the costs, increase capacity, improved working conditions and
improved customer service.
Standardisation principle: The standardization principle is applied by the Fonterra to
encourage standardization of handling methods, quality of products and equipment. This
principle is used to achieve the objective of overall performance (Jacobs, Chase & Lummus,
2014). The company faced lack of capacity at Crawford street facility as cargo was often
averted to expensive facilities.
The slow-moving stock kept units left sitting in the Crawford Street which is designed to
export container packing facility. Based on both scenarios, the warehouse management team
of Fonterra added a weekend shift and increased cross docking volume. These changes
resulted in exported over 3,000 TEU per month which was 1,000 TEU more per month
compared to the same period. The CLASS model helped the company to develop long-term
solutions. The company was able to modify it’s operations within a short period of time
(Chen, Zhang & Delaurentis, 2014). The packing issues were relieved at Crawford Street due
to seven days a week operations.
Environmental principle: The environmental impact and energy consumption is considered
in the material handling system. This principle eliminates the negative impact on the daily
actions on the environment. The intentional contamination of melamine in food was a major
topic of attention for Fonterra. The company notified the government about the
contamination of infant formulae with melamine. After this news, 22 Chinese companies
tested positive for melamine. As a result, Chinese made baby food was banned as
precautionary measures.
Fonterra produces and manufactures Stolle milk products in the Waikato region. The milk
was processed into three products, milk powder, milk protein and whey protein concentrates.
The products are made available to the customers in different forms like sachets, capsules,
chewable tablets and beverages. These products have a good impact on the environment as it
includes health claims such as immune support, joint health, muscle recovery and lower
blood pressure.

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Conclusion
 Fonterra is capable enough to maintain it’s capacity by making use of two strategies
such as lead strategy and dynamic strategy. These strategies are helpful in meeting
expected increase in demand and add or reduce capacity as per the demand forecasts.
 The locational factors decide the geographical location for it’s operations. The general
locational factors are both controllable and uncontrollable for the Fonterra. These
factors are proximity to markets, transportation facilities, labor and wages,
government policies and supporting industries and services. The plant layout of
Fonterra is a plan for the optimum utilization of facilities for the manufacturing of
products. The plant layout principles applied by the company are the principle of
space utilization and integration of factors.
 The total quality management requires quality in all aspects of Fonterra. The aspects
covered in the total quality management are total employee involvement,
centralization of the process and focus on customers. The supply chain of Fonterra
includes concerns of distribution, transportation, customer relationship, and
marketing. The components of the supply chain are a business process, network
structure, and management components. The company has two important inventory
functions such as inventory management and warehouse management. Fonterra has an
efficient material handling system comprises standardization and environmental
principle.

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References
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