How to Make Promotions Work in a Cost-efficient Context - A Case Study at Lantmännen

Abstract

Problem -­‐‑ Promotions are the main reason for a majority of stock out situations and increases the amount of waste for perishable items, and strong competition within grocery retail has led to a significant increase in frequency and depth of promotions since the late 20th century. Lantmännen Cerealia has identified problems with low customer service levels (CSL) during promotions and lack of long term planning in general. This has thus lead to the conclusion of the need for looking further into the problem regarding how Cerealia can handle promotions better.

Purpose -­‐‑ The purpose is to help Lantmännen Cerealia achieve and secure a better match between demand and supply for promotions through increased understanding for promotional causes and effects as well as better planning processes.

Research Questions
1. What are the causes within Cerealia for low CSL during promotions?
2. What can Cerealia do, and how can the Sales and Supply Planning units work together, to improve the promotion planning process?

Method -­‐‑ This study is based on a single case study with the unit of analysis being promotions. Further, the method for gathering information to the Frame of Reference and Empirics chapters are mainly qualitative, with occasional quantifications, further implying a more inductive approach. Trustworthiness and credibility is mainly ensured through gathering information from many different sources, both within written theory and qualitative interviews, implying a high construct validity. The project execution follows the two research questions:
1. Understand causes for low CSL during promotions in Cerealia
a. Identify root causes through Five Why and Ishikawa analyses
b. Choose a path to pursue
2. How to improve the promotion planning process ‑ Gap Analysis
a. Identify current state of promotional planning process
b. Derive an optimal future state from theory and empirics
i. Develop a tool for collaborative promotion planning
ii. Develop process routines and procedures for the use of this tool
and to ensure better planning of promotions
c. Develop a road‑map to reach the future state

Conclusion -­‐‑ To summarize the findings of this study, the main issue with Cerealia today, in the context of their promotion planning, is their lack of cross‑functional integration as a result of unclear strategies and lack of optimal supply chain configuration. To combat this issue, the analysis yielded four general steps to follow:
1. Remove functional strategies and communicate firm category strategies throughout the organization.
2. Decide on promotion strategy within each category and set up supply chains accordingly.
3. Secure a long term promotion planning process by including capacity constraints for promotion volume planning and long term promotion information in the S&OP process.
4. Facilitate mix planning on the MS level with the help of a promotion planning tool and appurtenant process routines
In other words, this study concludes that promotional products, with a lower contribution margin, should be separated from the baseline products, with a higher contribution margin and cost‑efficient supply chain, through a market responsive supply chain. This study aims to enhance the challenges with promotions in general, and the necessity of a clear supply chain strategy, as well as the many hardships of providing to the Swedish grocery retail market.

Keywords -­‐‑ Promotions, Promotion Planning, Cross‑functional Processes, Supply Chain Configuration, Strategy Alignment, Customer Service Level (CSL), Key Performance Indicators (KPI), Sales and Operations Planning (S&OP), Master Scheduling (MS), Cost-­efficiency, Market Responsiveness

Popular Abstract

Previous theory on supply chain configuration and promotions has been clear on the fact that cost- efficient companies should not participate in promotions. However, on the Swedish grocery retail market, where the retailers use promotions to e.g. lure people into the store, and have a large dominance over their suppliers, the suppliers simply must participate. So how should they cope with this if they have a cost-efficient strategy?

Lantmännen Cerealia, a supplier to the Swedish grocery retail market, has identified problems with low customer service levels during promotions. This thesis aims to first identify why this is, and then present a solution to one of the causes found. The study concludes that the problem with low customer service levels mainly derives from unaligned strategies within the organization, which have implied contradictory ways of working, as well as a low level of understanding between the different units.

The strategy of Cerealia’s Supply Chain function is to be cost-efficient, whereas the Sales function strives towards selling as much as possible and are awarded more if they sell more. In addition to this, product category strategies have increased the complexity of the organization and what to work towards in each function. Since promotions are hard to forecast and yield irregular demand patterns it is important to have a clear strategy for all to work towards and a supply chain configured for this.

The recommendation is thus to remove functional strategies and choose one category strategy to align throughout the units. After this is in place, a decision regarding promotions can be made in addition to the chosen strategy. If promotions are chosen, the supply chain for promotion products should be more agile/responsive, and separated from products not sold on promotion. This would help Cerealia meet their customers’ demand of a quicker response better, and as a result increase their customer service levels.

Since these two long-term recommendations are not possible to implement today, two direct recommendations to the promotion planning process of today are proposed. These are divided by volume and mix planning process routines. The promotion volume planning must have a more long-term perspective and thus needs more constraints on the volume planning to be within the capacity, and so over time. This can be calculated by subtracting baseline sales and a safety margin from the total capacity. The mix can later on be decided on with help of a lead time tool, developed by the authors, that the Sales function can use in order to make more sound decisions regarding what products are possible to produce to a promotion, with regards to the time it takes to acquire the material needed. These two short-term recommendations are expected to bring the Sales and Supply Chain units closer through increased understanding and transparency.

The situation for suppliers to the Swedish grocery retail market is tough and the amount of promotions is increasing and therefore it is important to have correct strategies and sufficient internal processes to handle promotions. The recommendation regarding separate supply chains would aid a company like Cerealia to easier meet customers’ demand during promotions. Also, the capacity constraints in combination with the tool and its processes can yield a more long term planning, which is desired in order to cope with customers’ demands, as well as increased understanding between the functions.

For further reading, see the master thesis How to Make Promotions Work in a Cost-efficient Context - A Case Study at Lantmännen Cerealia written by Caroline Vitasp and Helena Nyman at Faculty of Engineering, Lund University.

• author: Vitasp, Caroline and Nyman, Helena
• supervisor: Jan Olhager
• organization: Engineering Logistics
• course: MTT820 20161
• year: 2016
• type: H3 - Professional qualifications (4 Years - )
• subject: Technology and Engineering
• keywords: Promotions, Promotion Planning, Cross‑functional Processes, Supply Chain Configuration, Strategy Alignment, Customer Service Level (CSL), Key Performance Indicators (KPI), Sales and Operations Planning (S&OP), Master Scheduling (MS), Cost‑efficiency, Market Responsiveness
• report number: 5808
• language: English
• id: 8880205
• date added to LUP: 2016-06-14 13:15:48
• date last changed: 2016-06-14 13:15:48