Optimizing Supply Chain for Fonterra Company

The report explores the supply chain, material shipments, physical delivery, storage of products and business systems of Fonterra Company. It discusses the suitable supply chain for Fonterra, aspects of the SC that could be optimized and the way it will get affected by different environmental factors, proposed plan to implement the new supply chain, financial implications of this supply chain, and stock control policies.

Supply and Distribution system
10/30/2018
Fonterra Company

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Contents
Introduction......................................................................................................................................2
About Fonterra.................................................................................................................................3
The suitable supply chain for Fonterra............................................................................................3
Aspects of the SC that could be optimised and the way it will get affected by different
environmental factors..................................................................................................................6
Proposed plan to implement the new supply chain.........................................................................8
Financial implications of this supply chain...................................................................................10
Investments in plant and equipment..........................................................................................10
Sources of finance......................................................................................................................11
Measures of financial performance...........................................................................................11
Stock Control Policies...................................................................................................................12
Conclusion.....................................................................................................................................15
References......................................................................................................................................16

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Introduction
The aim of the report is to explore the supply chain, material shipments, physical delivery,
storage of products and business systems of the selected company. The company that has been
selected for this task is Fonterra, a well-known New Zealand multinational dairy. In the current
era, the supply chain contributes ineffective management of operations related to the company.
The report will include the design of an optimal supply chain for the products that are offered by
the company in the market to meet the strategies related to the organisation. Along with this,
there is discussion related to the aspects of the chain that are essential to be optimized and the
ways through which these actions of the company get affected by the various environmental
factors. In addition, a plan that talks about the implementation of the new supply chain by the
Fonterra Company have been discussed. This has been found that the implication of the supply
chain needs the financial investment which will make the implication successful for the company
in the market. Therefore, the report includes the analyses related to the financial impact related to
the supply chain options. In the end, there is discussion related to the inventory control policies
and processes which are utilized by the company to enhance the performance.

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About Fonterra
Fonterra Company is a multinational dairy co-operative that came into existence in the year
October 2001. The company is considered as the global dairy nutrition company that is owned by
more than 10,000 farmers with their families. Fonterra believes in creating the expertise on the
legacy of the thousand farmers who have contributed in making New Zealand as a world leader
in the dairy. The company is exporting their products across the world and well-known for their
innovation and quality (Fonterra, 2018). The products which are offered by the company are
good at nutrition with the farming and processing the operations in the four continents. The value
of the company works as the strength of the company which makes them stronger to take the step
towards the innovation (Fonterra Co-Operative Group, 2018).
The suitable supply chain for Fonterra
In order to find a suitable supply chain, it is essential that the company finds the best framework
that suits their business. This is because the supply chain framework justifies about the way in
which any supply chain would be implemented. It also suggests the aspects of business on which
this supply chain can be used. At the same time, it also tells about the problems that it might face
while implementing the supply chain. Since there is a lack of a universally accepted definition of
the supply chain hence different framework is used by the organisations. It depends on the
requirement of the company that which framework do they use (Chen, Zhang & Delaurentis,
2014). Fonterra is a milk product manufacturing company and requires the frameworks that are
related to the production, process and logistics. The framework that is suitable for the Fonterra is
Supply Chain Operations Reference (SCOR). It is a framework that tells about the standard set of

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processes and methodologies for modelling the business activities of the supply chain. It also
suggests the performance measurement indicators as well as best practices that solve the
problems found out at the time of stages of modelling and management processes. This
framework enables the process of integration by:
• Giving the provision of common processes.
• Implementing the standard indicators of performance measurement processes.
• Providing suitable practices that are applicable to large scale at an industrial level from
the accelerated advancement of the performance of business activities (Godsell,
Diefenbach, Clemmow, Towill & Christopher, 2011).
This framework suggests about 6 processes included in the management of Supply Chain. They
are:
• Plan: It aims to plan and process that makes a balance among supply and demand in
order to develop a course of action that best meets requirements related to sourcing,
manufacturing and delivery requirements (Das, 2011). Fonterra also needs to make the
balance among their demand and supply. They can do this by adding more farmers in
their pool so that they can get the fresh milk as raw materials. It also has to implement
new technologies in their operation so as to improve production quality. A perfect
balance among the resources available with the company and the requirement they have
is essential. It also aims to align their supply chain plans with their financial plans.
• Source: Fonterra needs to collect milk from farmers at local and international levels.
Since they have business in so many countries hence they can easily enlarge their
sourcing pool. This will help them in meeting the actual demands as per the requirement

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of the country (Fayezi & Zomorrodi, 2015). They must also schedule deliveries from all
farmers so as to ensure the continuous availability of the products.
• Make: They need to make advancements in their machinery and technologies so as to
make food products that are of high quality. Automation can help in understanding the
actual demand and accordingly process to fulfil these demands. Scheduling of the
production as well as evaluating the performance and quality becomes essential.
• Deliver: Since Fonterra has their business in almost all the regions of the world and in
many nations it does not have production units hence delivery becomes a very essential
aspect (Lynch, 2012). This includes a process such as order management, distribution
management and transportation management. It also involves process such as creating
channels, inventory deployment and products. Trains and milk vans could be beneficial
along with routing shipments. Warehouse of the company will have to be managed.
• Return: This involves the making changes in the process that will help the customers to
return products due to any reason (Dentoni & Peterson, 2011). Fonterra should extend
their support to the customers post-delivery. The use of online technology to register
complaints can be beneficial for both the company and customers. Four steps need to do
in this supply chain i.e. authorise returns, schedule returns, receive returns and issue
return credits respectively.
• Enable: Company should also extend their support to the processes for executing
operations in the supply chain.
Keeping this framework in mind, the supply chain model that can be used by Fonterra is
continuous replenishment. This model permits for making synchronisation in the supply chain so
that the balance among the sales and demand can be maintained. This will help in keeping track

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of the daily demands according to which sales can be managed especially in terms of location of
warehouse shipments. It reduces the cost as well as increases the inventory turnover. It also
enables the organisation to manage the inventory in an efficient manner. It also helps in
predicting the actual sale deviation from the projected sales. It assists the firms in a finding of the
time it will take to replenish the existing stock. It gives an advantage that all the processes can be
done with limited numbers of employees only. Since the company has to deal with a huge
amount of customers hence lowering the cost of the SC process at the lower levels can be
beneficial. It also allows productive partnership ensuring that purchase orders can be met
appropriately. It also permits the company to reduce the stock-out hence warehouse can be
efficiently used (Scott, Bowden & Rowarth, 2013). This model also gives the understanding of
the value to the trading partners as well so as to bring positive returns to the company.
Aspects of the SC that could be optimised and the way it will get affected by
different environmental factors
In supply chain communication plays a very essential role hence it is crucial Fonterra optimises
the communication for ensuring that efficient logistics are registered in between different
stakeholders (Monczka, Handfield, Giunipero & Patterson, 2015). The advantages of this
optimisation involve a reduction in cost and increasing efficiencies especially when the
communication system is accepted. In order to further optimise the communication more
advanced technologies can be implemented (Le Heron, 2016). Such type of communication is
required for ensuring that there is appropriate knowledge of the stock levels. This will be
beneficial in replenishing the warehouse in no time.
One of the ways in which this optimisation can be done is by making use of transportation
management system. This type of system makes a network between the trucks and other

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warehouses. This helps them in communicating easily and hence the track of all the shipments
can be made. It will enable the customers to know about their orders. Communication within
SCM is also essential because it gives the organisation like Fonterra to stock their products as per
the preference of the consumers (Mahdavi & Olsen, 2017). An additional advantage of it is that it
enhances the effectiveness of the inbound components by making sure that supply reaches the
stores within the given time frame. The use of optimisation tools and network analysis can be
used for this optimisation within the organisation.
Developing Multi-channel structure and proper distribution operations can be beneficial for
guarantying reliable communication to its retailers. Proper communication also allows the
company to ensure that everyone has knowledge about their roles. Fonterra also needs to make
sure that appropriate communication is used in managing the customers. This will help the firm
in doing business as per the customer's expectations and hence can enhance their experience
(Mahony, 2012). Communication will help in ensuring that they listen to each complaint of the
customers against any of their consumers.
Effective Communication is also essential for SCM as a way of assisting firm to enhance their
efficiencies as well as to reduce the costing and the resource that gets wasted in this process. It
also helps in improving the motivational level of the employees and the problems related to
managing public relations can also be enhanced (Christopher, 2016). Management needs to
understand the complications in the communication process and by consultative decision-making
process they can build a new appropriate communication channel within the organisation.
Proper communication channel with help in dealing with environmental factors such as a change
in the political environment. Any change in the political policies have an impact on the SCM

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hence in this situation rebuilding of the SC is necessary which cannot be completed without
effective utilisation of communication channels. The social changes in the market have called for
making changes in the SCM system as per the customer's requirements. The communication
system will help the firm in removing the confusions that might be created in different steps of
the supply chain ensuring the flow of information is smooth. Economic changes in the
environment can also be handled by communicating the goals and objectives of the company in
an appropriate manner. Communication also plays a critical role in vendor consolidation,
product optimisation, material standardisation and limiting the obsolescence of inventory within
the store (Carney, 2014). It also helps the organisation in giving appropriate training to the staffs
regarding the changes in terms of technology that will be changed as per the requirements.
Similarly, it will help in tackling the challenges that are caused a due change in the legal
environment within the country.
Proposed plan to implement the new supply chain
In order to implement the new supply chain, it is crucial that the company make changes in their
internal resources. The organisation will seek to change internal staff so as to increase the
participation of all the stakeholders in this new SCM. Wide consultation and establishing a new
system of communication along with planning is very much essential (Le Heron, 2013). To
determine the requirement of each team and functionality wide consensus is very much essential.
Every staff must be given appropriate roles as per their capabilities and then teams needed to be
formed. Different stakeholders need to be consulted where the feedbacks from them needs to be
collected. This will help in improving the quality of the decisions that are made within the
organisation.

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The environment at the early stages of the project has to be positive. Advantages of planning are
crucial in terms of avoiding any frustration. The implementation of a new supply chain model
must be done with a schedule. This schedule must be realistic and must allocate an ample
amount of time for each step. The implementation of SCM must be done by checking all the risk
mitigation measures and hence the speed of implementation should also be checked. Continuous
and timely milestones need to be set so that evaluation of its success. This is a type of
performance evaluation which is very much essential in the process (Samuel, Shah & Sahay,
2012). It will give time to the organisation to reflect on the measures on which it is lagging. It
builds a positive momentum which helps in setting the goals in a timely manner.
In the new SCM, the company needs to focus on the SC systems that will be required in the
implementation process. A subscription and cloud system can be beneficial in this regards which
might change as per the changes in the requirements of Fonterra. IT technology use will raise the
standards of the SC by increasing the connectivity of the firm. Technology integration must be
done checking the available resources with the firm and the resources that are lagging must be
bought. Suppliers must be involved in the process of implementation so that their concerns
regarding technology use can also be heard (Carney, 2014). The investment in the technology
will help the organisation to ensure that security is given to the whole supply chain. Adding more
vendors and partners could help in strengthening the investment. The financial implication of the
supply chain will be long terms hence goals and objectives of the supply chain must be
communicated appropriately. In the implementation process, each step must be evaluated on the
basis of the gap that is present in the actually obtained results and the results that they have
estimated beforehand.

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Financial implications of this supply chain
The implication of the effective supply chain includes the amount that the Fonterra need to spend
to make the supply chain effective which leads to success. The financial implication is required
for doing the investment in the plant and equipment, sources of finance and the measures of
financial performance of the company.
Investments in plant and equipment
Investment in the plant and equipment is one of the effective investments which are done by the
Fonterra to attain the effective implementation of the supply chain. In the supply chain, there will
be the use of the effective equipment's which include maintenance supplies, spare parts, and
consumables, oils, lubricants, gloves, safety equipment and cleaning products (Laitinen, 2018).
Fonterra Company needs some or the other plant and equipment’s which is used by them to
produce a product (Fonterra, 2018). Along with this, the company’s majorly product includes
milk and related products that contain milk. Considering the same, the company need the
equipment for getting it packed and placed so that it remains the same.
Fonterra needs to bring the rise in the investment that they are planning to do as they need to
inbuilt the software that will help in managing the operations. Along with this, the supply chain
will become successful when all the equipment will be available which need huge investment.
Along with this, the investment in the technology is also required that will support the Fonterra
to extend their reach to the suppliers, distributor and to the targeted customers which are possible
with the high amount of investment. It totally depends on the company that they want to invest
the amount in lease or purchase of plant and equipment. Along with this, the investment should
be done considering the use of the same for the benefit of Fonterra at every location.

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Sources of finance
The financial investment will be possible from the company side when they will be able to
source the amount effectively. The company need to source for making use of the effective new
supply chain system. The sources of finance include both short terms sources and long-term
sources. Fonterra will make use of both the long-term sourcing and short-term sourcing. In the
short-term sourcing, the Fonterra company make use of their retain earning (Pilbeam, 2018). The
retained profits or earning is the portion of the amount that is kept by the company for using it
again in their investments. On the other hand, Fonterra also selects the long-term profits in which
the loan will be taken by the company from the bank.
Measures of financial performance
The measures of the financial performance that will be used to evaluate the success of the supply
chain include solvency, liquidity, profitability and the payment capacity of the company.
Fonterra makes use of the ratio analysis for measuring the financial performance which is
discussed below: -
 Liquidity: - Liquidity is used to analyse the ability of the company to pay off the
obligation of the supply chain department on time or not. Fonterra will check the liquidity
with the help of Current assets ratio whose rule of thumb is 2:1 in which the current
assets need to be double than the current liabilities (Trotman & Carson, 2018).
 Solvency: - This ratio reflects the ability to repay the borrowed capital. Fonterra
Company will measure the ability of the company to repay the borrowed capital that was
taken by the company for the effective management of the supply chain.
 Profitability: - The ratio of profitability always helps the company is measuring the
ability to earn profits. Fonterra Company will make use of the profitability ratio to

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measure the profit earned by them with the implementation of the new supply chain that
helps in meeting the objectives of the company (Gitman, Juchau & Flanagan, 2015).
 Repayment capacity: - The repayment capacity includes the ability of the company to
repay the amount that is borrowed by them. Fonterra Company will measure the ability to
repay the long and short-term loans that are taken by the company. This repayment
capacity directly depends on the new supply chain of the company because the repayment
will be done by the company when they will be able to attain the profit.
Stock Control Policies
Stock control is referred to as the monitoring a managing the amount of the stock which include
either on selling floor or in storage at given point of time. This is the fact that it is essential for
the company because stock or inventory is considered as the single largest asset of the store
(Mangan, Lalwani and Lalwani, 2016).

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(Source: JSW, 2018)
The effective stock control policies of the company help them in assessing the performance of
products, monitoring and limiting the shrinkage, maintain the security of the stock and others.
Fonterra will receive the major benefit in terms of understanding customer preference by
evaluating the sales of the products. This will enhance the operations of the company with this
the company will be able to maintain the stock in good condition.
Fonterra needs to put the system in place to monitor the level of stocks and the accounting
department should know the same. The accounting department of the company makes use of the
stock control software which will help the Fonterra Company to record the sales from time to
time. The stock control software also records the sales which will help the company in analysing
the flow of products. Fonterra should include the policy for the storage area and equipment
which majorly include the safety and the maintenance of the storage area. It includes the safety
from breakage, damage, theft of product, deliveries left out on the floor.
The policy of making the use of the software will support the company in analysing the slow-
moving stock and excess moving stock which further contribute to the effective management of
the production of products by Fonterra. A policy will be formed by the company which include
the recording and movement of stocks so that they get safe from fraud and theft. The motive of
the stock control policy is to ensure that is clearly identified and the company is able to organise
for effective supply.
Along with this, another policy which is required to be followed by the company deals with the
controls the accounting department as it involves the purchasing department negotiating deals
with the suppliers (Fonterra, 2017). The policy contributes in maintaining the cash flow and

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ensuring that the store is able to maintain the correct volumes of stock. Fonterra company will
form a policy that needs the purchasing process need to be accompanied by purchasing of the
order that offers the management to the procurement of procuring goods. Fonterra Company
ensures that they consider the FIFO policy for their stock. In this stock policy, they include first
in and first out the concept of the products. The accounting department of the Fonterra ensures
that are able to manage the physical controls which include the effective management of the
warehouses by keeping the proper security guard as this will reduce the risk related to the risk
and theft.
Conclusion
In the end, it can be concluded that Fonterra Company is effectively performing it business
operations in the market. Though, this has been found that there are some supply chain issues
which affected the working of the company. Considering the issues, a new supply chain model
has been recommended to the company which will help them in managing the issues. The supply
chain framework that is used to identify the model that will help the Fonterra to resolve their
issues is SCOR (Supply chain operations reference). The model that has been identified after
making use of the framework is continuous replenishment that will help the company in
synchronization of supply chain model by ensuring that there is compatibility among the
physical sales and the supplies demanded. In addition to this, the evaluation of the actions has
been done which directly affect the various environmental factors. Moreover, this has been found
that the financial implication affects the supply chain. Therefore, the discussion related to the
financial elements has been done which include the investment in equipment’s and plants,

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sources of finance and the financial performance of measures. Moreover, the stock control
policies are discussed keeping the operations of Fonterra in mind.

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