27 The Peanutty Food & Co. Supply Chain1 Company Background Peanutty Food & Co.,

Question

27 The Peanutty Food & Co. Supply Chain1

Company Background Peanutty Food & Co., a small Brazilian food sector company, has shown significant growth rates in the volume of its operations, obtained through a consistent and committed performance aligned with the needs of its customers. Their activities are based on business to business (B2B) relationships, supplying food ingredients to a few large customers. Peanutty’s business is concentrated in the processing and delivery of ingredients made from peanuts (mainly) and other nuts (secondarily). In this sense, the company has two strategic focuses: • First, as a manufacturer of ingredients for the food industry, which includes the processing (selection, roasting, granulation, finishing and preparation) of nuts purchased directly from producers. The outputs (roasted peanuts in parts, peanut fudge, crispy peanuts and flour, among others) are provided as inputs for food manufacturers. This activity is responsible for 65% of their total U.S. $12 million annual revenue. • Second, as a service provider, which includes the preparation of food items for large companies in the sector, such as fruit fillings, coated nuts, marshmallow syrup, dry mixes and other components, using inputs provided by various food manufacturers. Such activity requires the purchase of packaging, labels and other supplementary materials from third parties, as well as the management of the suppliers’ quality and the logistics flow. Peanutty’s Supply Chain Peanutty`s supply chain presents several challenges, both upstream and downstream. These are related to the concentration and size of Peanutty’s trading partners. Figure 1 below represents Peanutty’s supply chain. The first tiers in the chain are composed of farmers and cooperatives that are Peanutty`s providers. In Brazil, the peanut is characterized by a highly concentrated culture, both in terms of geography and, in particular, regarding the production ownership. Thus, about 90% of Brazilian peanuts are produced by a single cooperative of producers. Despite being an advantage in terms of logistics, for its geographical proximity, such concentration allows this cooperative to have a high bargaining power over its customers, which hinders the development of a more collaborative relationship withPeanutty. Negotiations occur in accordance with market prices, comparing the prices negotiated to those charged in the commodities spot market. The peanut culture in Brazil has attracted few new farmers because, after distinctive growth in the ’60s and ’70s, there was a sharp decline in peanut planting and, consequently, peanut production. The levels of production only started to grow again after 2004 (see Figure 2), and are still comparatively low. Such behavior is due, mainly, to three factors: • The replacement of eatable peanut oil by soybean oil, since new production technologies had eliminated the bad smell and toxins of soybeans; • The episode of aflatoxin poisoning of cattle in English farms because of infected cattle peanut foods imported from Brazil. This caused exports to dramatically decrease in Brazil; • Greater competition from other countries such as China, India, the U.S. and Argentina (see Figure 3). The Peanutty supply chain also has only a few customers. The customers are composed of big food manufacturers, some of which are multinationals. Some of thesecustomers also provide Peanutty raw materials for further processing as described earlier. In short, Peanutty has little bargaining power with either suppliers or customers, which severely limits its actions and influence over supply chain activities and value added, posing a potential threat to Peanutty’s operations. Other Issues The Peanutty organizational structure is essentially functional, being grouped in 4 departments: Research & Development, Production, Logistics and Management. The following Figure 4 summarizes the allocation of the activities undertaken by the organization. Peanutty is recognized as a successful nut product processor in the food sector (sweets, especially “nuts”), including its knowledge in the development of equipment for this type of operation. The company’s production lines are very simple and only marginally automated. Their busiest production line is the Roasting and Peanut Preparation line, which operates 12 hours per day, 6 days per week. Decision-making at Peanutty is very centralized. All operational decisions must be approved by Mr. Carmelo, director-president, who is essentially responsible for every final decision. Employees feel very disappointed and think that, despite being good workers at Peanutty, their responsibilities are not proportional to their efforts. Moreover, they all complain of not knowing the direction and goals of Peanutty. The production supervisor complains a lot that Peanutty’s production plans are frequently not met, since, in trying to meet the urgent demands of their customers (sometimes the testing and production of food item prototypes), production is redirected by Mr. Carmelo, damaging the effectiveness of the lines. The management and control of the costs and the supply chain operations are vital for maintaining the profitability of the products processed and supplied by Peanutty. The operations conducted by the company are somewhat complex because they include eventual imports and draw-back operations, processing of material from third parties,supply of seasonal raw materials (which must be protected and kept free from diseases and pests) with strategic repercussions in product availability, delivery fulfillment and processing costs. Despite this, the company does not have an integrated vision of their supply chain; that is, decisions are typically made only in response to emerging problems. The development and processing of new products to meet customer requirements (engineering to order) are directly under Mr. Carmelo’s responsibility. With a degree in Food Engineering, he has accumulated great experience in the area after working over twenty years professionally for several multinationals of the industry with headquarters in Brazil. Mr. Carmelo is assisted by a young food engineer named Mathew, who graduated three years ago, and since then, has been working at Peanutty. Despite being very interested, Mathew cannot contribute to most of Mr. Carmelo’s decisions, since he still does not have enough information and knowledge to properly interpret the needs and opportunities generated by customers. Mr. Carmelo believes that Mathew is still very inexperienced, and thus is afraid to share with him any confidential information about new products and services. The Production Department is led by an experienced manager who came from a competitor three years ago. The leadership of the Management Department is an accountant who has been with Mr. Carmelo for ten years. The Department of Logistics is managed by a young production engineer, who is responsible for conducting the transportation and storage of raw material imports and finished goods exports. He alsotakes care of internal transport and the flow of materials (i.e., packaging, labels and other) purchased for the services provision to third parties.

Discussion Questions

1. What actions can Peanutty’s managers take to ensure the supply of raw materials for its operations, while reducing the risk of stock-outs or high production costs?

2. What activities could be developed by Peanutty to reduce or manage the power of its suppliers and customers in order to minimize risks and maximize profitability?

3. In your opinion, what would be the best organizational structure to make the company more agile and competitive?

4. Given the four areas of the company (R&D, Production, Logistics and Management), choose some supply chain processes and suggest appropriate performance metrics.

Explanation / Answer

Answer-1 After reading the article about Peanutty Food and supply chain, I believe that there are a few actions Peanutty's managers can take to ensure raw materials for its operations, while reducing the risk of stock outs or high production costs. The first action I believe that Peanutty should take is the build trust with its supplier management. Building trust will enable Peanutty to gather important information and will also help them in the long run with other companies. Another action Peanutty can take is to have mutual benefits and needs with the supplier. If peanutty addressed the issue of partnership with the supplier they may be able to come to an agreement where both parties are happy. This would be like you scratch my back then ill scratch yours. Another action Peanutty can take into consideration is building a personal relationship.

Answer-2 There is a need for Peanutty to venture out and expand themselves on the market. More creative uses of peanuts would gain more customers to them. More customers are always desirable by the company. Reaching out to the suppliers and the customers would gain more market for them. Small businesses and customers would likely prove to be more beneficial, as opposed to big box food manufacturers whom are likely interested in the money. Partnering with smaller suppliers could cut costs, and allow Peanutty to maximize profitability on their products.

Answer-3
Matrix organizational structure would best benefit this company. This would make company more competitive. A matrix structure would mix management and staff together in specific project groups. This would allow for fast two-way communication between the executive levels of the company and line employees.

As of now, the company is having trouble meeting the demands of customers because of redirection of production by Mr. Carmelo. If the employees were able to operate within a matrix structure, they could work together with Mr. Carmelo to gain off of the business.

Answer-4

Here customer service management is very important. Making sure that the product is still selling to the customers; by having an understanding of what they like and what they demand is critical to the success of any business. Especially with the top level managers taking very little input from employees, it is more important to maintain a relationship with customers. It would be a good idea to send out customer surveys and offer incentives, to measure performance.

Product development and commercialization is important, as well. Keeping the customers on their toes is imperative in retaining their business. Introducing new innovative products will likely appeal new customers, as well as keep the current customers interested in the company. Introducing these products at the right time could assist in measuring increase in revenue, to see what the company could do to boost sales.

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