Managing Risk: From the Extraordinary to the Everyday
In what I think was probably my favorite session of the day, Anna Ross from New Zealand’s Fonterra Cooperative Group Ltd. provided an excellent overview of her company’s operations and the many supply chain issues, challenges, and risks that Fonterra faces every day when competing in global markets.
True to the title of her presentation, Anna began with a quite extraordinary list of facts about her employer. Her first slide, and the subsequent statistics, made it quite clear that Fonterra is by no means a jack-of-all-trades kind of company. They are quite emphatically master of one trade: Dairy. Not only is Fonterra New Zealand’s largest company, they alone account for 20% of the country’s exports and 7% of New Zealand’s global GDP. They are responsible for over 1/3rd of all global dairy trade and are the world’s largest exporter.
Among the company’s suppliers are more than 4 million cows from 85 different New Zealand farms. Fonterra supplies over 5,000 customers and millions of consumers worldwide. Probably their most well-known brand is Anchor butter (which my mum’s been spreading on her toast since as long as I can remember, so it must be good stuff!)
I, for one, could not have imagined the insanely complex logistical issues that Fonterra must tackle every day to ensure that my mum can find her favorite brand of butter on the shelf at her local supermarket. Fortunately, Fonterra is an avid user of Logic Tools’ LogicNetPlus which has enabled them to capture and manage the complexity and risk inherent in their global operations.
To start with, it takes about 5-6 weeks for Fonterra to ship its products to their main target markets. Add to that the fact that many of Fonterra’s products have a limited shelf life, and that month-by-month production volumes can vary considerably depending on the season. The company has 24 plants, 130 warehouses, and roughly 535 million different combinations of parameters affecting their supply chain network.
Fortunately, LogicNetPlus is able to handle this kind of complexity on a day-to-day basis without even flinching. It provides Fonterra with a holistic view of their supply chain, and also serves as a tool for long range strategic supply chain planning decisions. For example, Fonterra uses LogicNetPlus to plan new warehouse development projects (where should it be located? How big should it be? What mix of products should we store there?)
LogicNetPlus also helps Fonterra with optimal product mix decisions in their production plants, and helps them reduce the cost of third party storage and distribution centers. And if that weren’t enough, Fonterra has also integrated their supplier’s own supply chains into their model, further increasing the potential for global cost savings.
Food miles is a key concept for Fonterra. Food miles can be used as a measure of carbon effectiveness by measuring how long it takes for the product to arrive at the customer. One of Fonterra’s main markets is England, where around 41% of consumers are apparently purchasing products based on how carbon efficient they are, so Fonterra is keen to appear as green and lean as possible.
Geopolitical risks can also affect Fonterra’s supply or demand which can cause huge storage bottlenecks if delivery is disrupted to certain key markets.
Fonterra also faces climate-related risks. Several years of drought in New Zealand have pushed up prices and competitive pressures to the point where other companies are prepared to “poach” some of Fonterra’s farmers, therefore affecting their milk supply.
When thinking of risk, many people think of major catastrophes such as a warehouse catching fire, ships sinking, and so on. However, Anna explained that a lot of the risk they must deal with on a daily basis, is actually internal - and in particular IT-related risk.
Fonterra uses an e-documentation system to process exports (they export 95% of what they produce). Since they are looking to upgrade this system, they used LogicNetPlus to simulate different scenarios and determine whether their network could cope if for some reason the migration failed and they were without access to their e-documentation system. It turns out that their local storage and distribution network probably couldn’t cope, so they were able to take the necessary steps to mitigate the risk and keep costs to an absolute minimum if things did go wrong.
Food miles is just one component of the entire supply chain, though. Just because Anchor butter has to be shipped frozen all the way from New Zealand doesn’t necessarily mean that it is less carbon efficient than locally-produced brands. Many UK farmers, for example, house their cows indoors and therefore require heating and lighting. In New Zealand, cows roam free in fields - which, unsurprisingly, generates far less CO2.
Fonterra is piloting an RFID tracking system for their shipments and gets data direct from their shipping partners so that they can track precisely where their deliveries are at any moment in time.
New Zealand has a reputation as a green and pleasant land and the PR and image value of green logistics is a vital factor that explains Fonterra’s obsession with green logistics issues.
Fonterra’s global supply chain model, which manages over 535 million parameters, takes about 10 hours to run. For the sake of efficiency, Fonterra breaks down this global model into several smaller models. For example, they distinguish between ambient and temperature-controlled stock, and also by region. Their ambient stock model, for example, takes about 2 hours to run. Their China model takes 1 hour, and their US model takes about 40 minutes.
Some companies use LogicNetPlus as a one-time process optimization tool, but Fonterra uses it on an ongoing month-by-month basis. They have found it invaluable in managing their day-to-day business, as well as planning both their short and long term strategies for growth.
Thanks Anna for introducing me to the thrills and spills of global supply chain management!
Tags: Anna Ross, Fonterra, Logic Tools, New Zealand, risk, supply chain
February 26th, 2008 at 2:25 pm
The session was indeed excellent, thanks to both Anna’s eloquence and the clarity and the appeal of the business case. Anna has worked in SCM for less than two years but she already brings a lot of depth to the field, thanks in particular to the context of this amazing global company. Her perspective is refreshing and also very encouraging from a sustainability point of view. And of course, it is great to see our products leveraged so successfully, both at the strategic and operational levels.
Thanks Anna, got milk!
Jean.