Morrisons – Supply Chain Analysis

Introduction

Branded and referred to as Morrisons, WM Morrison Supermarkets plc is a supermarket chain headquartered in Bradford, West Yorkshire, England which ranks fourth among the largest in the UK. It competes with Tesco, Asda, Sainsbury and Co-operative group with a market share of 12.2% as of February 2012 (Morrisons, 2012).

It has been tumultuous for Morrisons since its acquisition of Safeway and its drop in sales late in 2012 compared to a similar period in 2011 is evidence of the challenges that the company is facing. Its CEO attributes the fall in sales to the company’s lack of presence in the online market and lack of convenience stores, segments in which Morrisons trails behind its rivals (Rudick, 2013).

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These depressed sales figures underscore the need for crucial decisions on strategies that can shore up the company’s performance, enabling its growth in market share and sustenance. In addressing the causes for the drop in market share, Morrisons would have to make logistical changes which could include either the establishment of convenience stores, lowering of prices, or the development of an online market place.

Herein, we consider the logistical implications of the establishment of convenience stores, which is the most suitable, acceptable and feasible strategic choice and a significant cause of its loss of market share.

As of September 2009, Morrisons owned 455 superstores in the UK which have their core focus on home ware and groceries, with other items such as furnishings, clothing and electronics being fewer than what its rivals hold. However, its limited focus on the affluent London is a notable setback as it commands a paltry 6 percent, lower than its 12 percent stake in the whole of the UK (Ruddick, 2013).The company has, since 2005, acquired a number of distribution centres including: West London, to enhance its distribution capacity to stores in London and the South East; Swindon, a packing facility for fresh produce; Bridgewater; and its Rathbones bakeries operations through which it makes bread. Morrisons projects to open 70 stores in 2013 and towards this, it is engaged in continued acquisitions of stores (Morrisons, 2012).

With the decline in core stores, evident in 3-5 percent declines in sales within the industry (with regard to Tesco and Sainsbury), venture into the smaller convenience stores segment is essential to shore up declining growth. Convenience stores are beneficial in supplementing the larger stores. UK convenience stores generated a 4.6% increase in sales from 2011 to 2012, generating total sales of ?33.9 billion in the year (Morrisons, 2012). The segment now represents 20.8% of UK’s food and beverage retail market. This growth continues to be fuelled by structural changes in the retail industry which include smaller households, longer working hours and little time reducing loyalties, and the alteration of shopper habits with increasing preference on the “little and often” approach to grocery shopping which therefore drives convenience sales (Ruddick, 2013; Morrisons, 2012).

Morrisons, however, lags behind its rivals in the convenient store segment operating 12 convenient stores under the M Local brand (Ruddick, 2013; Morrisons, 2012). These stores are similar to those of its competitors though they have a wider range of ready-to-eat hot foods, fresh meat and fish, as well as items stocked from proximal superstores. Morrisons is however intent on correcting its lag in this segment and has initiated an expansion of the number of its convenience stores with a projection of 70 additional stores across the UK in 2013 (Morrisons, 2012).

Necessary logistical changes

Morrisons’ enhancement of its venture into the convenience segment requires that the company revamps its supply chain to meet the rising complexity of operations. A supply chain encompasses a network of relationships between organizations and/or business units that are involved in providing products and services to customers at the end of the chain. To enhance efficiency, which is essential for the survival and competitiveness of firms in the market, there is need to manage this network and constituent processes to ensure a smooth flow of goods and information back and forth from the raw materials through several intermediate entities to end-users (Ketchen and Giunipero, 2004).

The retailer operates a vertically-integrated business model with its supply chain consisting of the company’s farms, diverse suppliers, its distribution centres, large stores, and the rising number of convenience stores. To get fresh products, Morrisons has reached back through the chain to the farm cutting off middlemen and warehouses and has thereby significantly enhanced its efficiency, reduced its environmental impact. This focus has made fresh food its distinctive advantage With the company beating all its competitors in the preparation of food in-store. It owns slaughterhouses, bakeries, and food preparation sites (Morrisons, 2012).

The addition of convenience stores would benefit Morrison in its response to the structural changes challenging the retail sector, enhancing its adaptation to consumer trends and lifestyles at a local level, and thereby enhancing the company’s growth in market share. However, such ventures present challenges to distribution systems due to the increase in points to service and supply.

A significant challenge in the management of the supply chain, especially for a retailer such as Morrisons focused on groceries, is the balancing of supply and demand, which in essence necessitates the holding and keen management of inventories. The venture into the segment is also challenged by the costs attendant to additional logistical operations and the difficulty in achieving economies of scale given the size and capacity of stores (Tempelmeier, 2006). This necessitates an increase in price of stocked items to cover the increase in costs.

Given the small holding capacities for inventories and the low shelf-life of fresh farm produce, the additional convenience stores would require small, frequent shipments of replenishment stocks unlike the superstores which can take up more stock. There might, therefore, be need for smaller depots to enhance focus and to cater for the smaller and low capacity convenience stores, or, the convenience stores can be set up as satellites of the larger stores, receiving their supplies from them enabling enhanced efficiencies in inventory management.

With concerns over the level of waste in the agri-food business, enhanced collaboration among the entities in the entire value chain is required to enhance efficiency and enable the conduct and sharing of information from market intelligence on consumer preferences and trends (Hand?eld and Nichols, 2002). Hugely beneficial to Morrison is its vertically integrated business model in which farms, manufacturing and retail sales are integrated, and increasingly reliant on each other. This enables it to maintain a predictable and cost-efficient supply, taking costs off the system and giving consumers what they want (Frohlich and Westbrook, 2001; Hill, 2006).

Beer Game and Bullwhip effect

The Beer Game is a significantly useful concept for the analysis of the supply chain. It enables the appreciation of key principles and fundamental concepts of systems dynamics and thinking which therefore facilitate better management of the supply chain. The challenge identified in the simulation is that coordination in supply chain management is a significant challenge with various constituent entities having their own, incomplete understanding of the real demand (Frohlich and Westbrook, 2001).

Each group/entity has control over a single part of the chain even though their decisions and actions influence or affect the entire chain. This lack of coordination coupled with the ability to influence and be influenced by others is what is referred to as the Bullwhip effect, with various decisions affecting supply and causing shortages or overstocks. The Bullwhip effect is a phenomenon observed in distribution channels which are driven by forecasts in which there are trends of increasing swings in inventory further back the supply chain in response to changes in demand of a particular product.

Demand is never stable or constant and therefore business must always endeavour to make accurate forecasts so as to achieve the right balance between resources deployed and inventory positions (Hand?eld and Nichols, 2002). With the inaccuracies, companies carry buffer inventory which with the rise and fall in demand, results in variations being amplified upward in the chain. This challenge in coordination, however, does not only result from breakdowns in communication as delays in manufacturing and procurement can also wreak havoc. With increased orders from customers, a backlog builds up and can be easily confused with increased demand, thereby spurring overproduction (Cannella and Ciancimino, 2010).

These difficulties are further exacerbated by the tendency of entities within the chain (such as those constituting Morrisons vertically integrated model) towards their own best interest, far more than that of the entire organization and even the end user. This is often due to significant focus on balancing demand and supply at the individual level (Ketchen and Giunipero, 2004). There is therefore a tendency of the entities inherent in the chain, in the pursuit of stability in the chain, to focus on stock balances and on the next link in the chain which inevitably leads to the ignorance of customer satisfaction at the end of the chain. However, this is unsustainable as no profit can be realized without the customer who should be the primary focus in the management of the entire supply chain (Frohlich and Westbrook, 2001). Regardless of how an individual component/entity may function individually, unless there is an integration of all elements resulting in a harmonious and cohesive effort, the results obtained will not be optimal.

These concepts are essential for better management of the supply chain and coordination of activities. It is significant for Morrisons as it ventures into the convenience stores segment given the requirement to balance the frequent deliveries of small volumes of inventory to numerous points of sale. For success in this venture, the company should endeavour to minimize potential backlogs in its supply chain while also alleviating related costs. It can achieve this through the adjustment of orders of products to keenly follow customer demand, an extremely important and complex task which entails predicting and forecasting demand. This is especially relevant for Morrisons in this case as demand from the additional convenience stores, given customer characteristics, will most certainly differ from that of its larger stores which it probably has been able, through its years in the industry, to map out and determine.

To reduce the Bullwhip effect, focus on the customer at the end of the chain should be consistently maintained throughout the process which should also seek the enhancement of service to internal customers, the various components in the supply chain. Efficiency in the supply chain can be enhanced through the improvement of the flow of information along the chain, reduction in delays, reduction of order sizes (economic order quantities), and the maintenance of consistency in price. Also essential is the day-to-day observation of trends and prediction of outcomes towards the development of a forecasting system in concert with market fluctuations (Cannella and Ciancimino, 2010).

Environmental footprint

Initiatives such as the enhancement of delivery frequencies and reduction in order sizes would most certainly result in an increase in the company’s environmental footprint. Climate change is among the greatest challenges to the global community and is a major threat to food security (McKinnon, 2010). Tackling emissions reduction is therefore essential for sustainability and can be achieved through effective resource management and reduction of wastes. These measures are also fundamental to the management of the companies cost base, supporting the maintenance of competitiveness and price and ultimately benefiting customers (Hill, 2006; McKinnon, 2010; Aronsson and Huge, 2006).

As at 2011, retail and logistics took the largest share of Morrisons’ environmental footprint in terms of emissions of carbon dioxide per year at 80% and 13% respectively. For this, electricity was the single biggest source at 57%, followed by refrigeration at 19% (Morrisons, 2012). The venture into the convenience store segment for Morrison will certainly significantly increase the company’s environmental footprint given that the small compact stores would increase overall usage of electricity and refrigeration, with the small frequent deliveries also increasing emissions attendant to logistics. The small, frequent purchases by customers which is characteristic for convenience stores also increases usage of carrier bags which is an essential component of customer service. This is an area of significant environmental concern generating immense public interest.

The company in 2010 announced an ambitious target to reduce carbon emissions resulting from its operations by 30% by 2020 aligning with aims of government (Morrisons, 2012). However, with the pursuit of the convenience store segment to shore up the company’s competitiveness and strategic positioning, such an ambitious target would be difficult to attain.

Conclusion

Tumult in business and declines in sales have necessitated the development of strategies to shore up Morrisons’ performance and to enhance its market presence. The most suitable, acceptable and feasible avenue is the convenience store segment, which is however challenged by attendant costs due to increased logistics operations, small scale and capacity, as well as the increase in the company’s overall environmental footprint. This choice necessitates enhanced management of the supply chain, ensuring a balance in supply and demand given that the convenience stores can take up small quantities of stock at a time, and Morrisons’ focus on short shelf-life fresh farm produce. The management of its supply chain should therefore endeavour to reduce the bullwhip effect related to the management of the supply chain.

References
Aronsson, H., and B., Huge, 2006. “The environmental impact of changing logistics structures.” In: The International Journal of Logistics Management, Vol. 17, No. 3, pp. 394–415
Cannella S., and E., Ciancimino, 2010. “On the bullwhip avoidance phase: supply chain collaboration and order smoothing.” In: International Journal of Production Research, 48 (22), 6739-6776
Frohlich, M., and R., Westbrook, 2001. “Arcs of integration: an international study of supply chain strategies.” In: Journal of Operations Management, Vol. 19 No. 2, pp. 185-200.
Hand?eld, R., and E., Nichols, 2002. Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems. Financial Times. Prentice-Hall, Englewood Cliffs, NJ.
Hill, C., 2006. International Business: Competing in the Global Economy, (7th ed.) Maidenhead: McGraw-Hill
Ketchen, D., and L., Giunipero, 2004. “The intersection of strategic management and supply chain management.” In: Industrial Marketing Management, Vol. 33 No. 1, pp. 51-7.
McKinnon, A., (ed.), 2010. Green logistics. Improving the environmental sustainability of logistics. London: Kogan Page
Morrisons, 2012. Food with thought: Corporate responsibility review 2011/12. Wm Morrisons Supermarkets PLC.
Ruddick, G., 2013. ‘Morrisons’ online dilemma becomes clear after Christmas turkey,’ January 7, The Telegraph [Online]. Viewed from: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9786486/Morrisons-online-dilemma-becomes-clear-after-Christmas-turkey.html
Tempelmeier, H., 2006. Inventory Management in Supply Networks—Problems, Models, Solutions, Norderstedt: Books on Demand.

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