Case Study - Cargills ( Millers Ltd )

Case Study –Cargills Supply Chain

Ganeshan Anuruddha 101402T Janaka Bandara 101406J

Wimukthi Nelaka 101407M Suneth Dharmaparakrama 101413D Thushan Dharmawardana 101414G Kasun Priyantha 101437E Mohomed Roomy 101439L Gayashan Weerawansha 101449R Frank Perera 101457N Kanthasamy Kirubakaran 101464H

Submission Date : 3/18/2013


Supply Chain Management : TL 2050 Page 2

Historical Development

In 1844 “House of Cargills” was formed by William Miller and David Sime which ventured in to

import and wholesale business in Colombo Fort. Consequently it became a Public Liability

Company in 1946 just before the independence.

Cargills are the pioneers of introducing super markets to the Sri Lankan consumers as they

opened their first outlet in Staple Street in 1983. This obviously made a great leap in retail

industry resulting in more and more convenience for customers.

1999 is one of the most important years for its supply chain since the first collection center

established in Hanguranketha. Cargills always had innovative ideas which make them developed

over the years. One of the classic examples is their diversification strategy which started in 2002

by investing in dairy processing plant and benefiting dairy farmers in Sri Lanka. Cargills Magic

ice cream was the outcome of this endeavor. Also they diversified into agri-processing with

Cargills Kist which makes them one of the stable performers in the market.

Image 1



Facts and Figures

Since the commencement of Cargills (Ceylon) PLC group, retail has been the mainstay of

success and the profits generated by the sector has been increasing every year. The chairman’s

message in the annual report 2012 states “The retail performance remains robust despite the

challenging market conditions of spiralling fuel prices and increased electricity tariff. Your

Group remains committed to safeguarding the interest of the consumer while mitigating any

risks to margins through internal efficiencies”. Figure 1 shows the group revenue mix of Cargills

(Ceylon) PLC in 2012 and 2011.

Figure 1

It is a fact that over the past years, Cargills Supermarket Chain has shown a steady growth and in

2011/2012 the revenue and profits grew by over 24.6% and 29.3%.

Cargills retail has expended their outlets into every district in the country and currently Cargills

supermarket chain holds 194 Outlets island wide. The team has expected to reach its target 100

new outlets with the opening of 240th

Cargills FoodCity in 2013/2014. With the intention of

achieving the above mentioned target effectively, an investment of Rs. 1.2 Bn has been budgeted

for this expansion drive in the forthcoming quarter. The growth of the Cargills retail outlets are

shown in the Figure 2.



The supermarket chain has been highly profitable in the last few years. The revenues of the retail

sector have been rising constantly. In the year 2012 the revenue has reached over Rs. 39 million.

Figure 3 shows the financial achievements of the Cargills retail during the past 2 years.

Figure 2

Figure 3

Cargills retail has substantially increased its revenue over the past two years. Revenue growth in

year 2011/2012 is 24.56% relative to year 2010/2011 which is a significant amount. The earnings

before tax and interests display a higher growth of 55.26%. Figure 4 shows the steady growth of

revenue and the earnings before tax and interests over the past few years.

Year Outlets

2012-2011 194

2011-2010 163

2010-2009 142

2009-2008 136

2008-2007 116

2007-2006 110



Figure 4

Cargills Retail is the backbone of Cargills (Ceylon) PLC group’s success. Therefore the retail

sector holds a larger portion of the group’s profits. When considering the revenues and the

profits of the group, they have also increased simultaneously with the profit increase of the retail

sector. Comprehensive ratio analysis is used to measure performance related to liquidity,

profitability etc. Financial statement analysis helps to evaluate past and predict future financial

health of the company.

The Cargills group’s Price Earnings Ratio is measured over the past few years in the figure 5.

Market Ratios 2006 2007 2008 2009 2010

Price Earnings Ratio 20.70 36.73 91.48 19.58 50.00

Figure 5

Price earnings ratio compares the price of a share to the earnings per share. It relates to the price

of a share to the proportion of the company’s profits. When considering the figures, Cargills has

maintained a high Price Earnings Ratio throughout the past few years. This fact has been

immensely helpful in order to attract new investors towards the company. Thereby Cargills has

always been able to invest on CSR and expansion projects such as the 100 outlet project.



Geographical Distribution

Following table gives an idea about the number of outlets in each district and how those outlets

spread in each district.

District # of Cargills food

cities

# of Cargills express Total

Ampara 5 0 5

Anuradapura 2 0 2

Badulla 3 0 3

Baticaloa 4 0 4

Colombo 64 16 80

Galle 3 2 5

Gampaha 28 8 36

Hambanthota 3 2 5

Jafna 3 1 4

Kalutara 11 2 13

Kandy 8 2 10

Kegalle 2 2 4

Kilinochchi 1 0 1

Kurunegala 6 4 10

Mannar 0 0 0

Matale 3 1 4

Matara 3 1 4

Monaragala 1 0 1

Mullativu 0 0 0

Nuwara Eliya 2 0 2

Polonnaruwa 1 0 1

Puttalam 3 0 3

Rathnapura 5 1 6

Trincomalee 1 1 2

Vavuniya 1 0 1

Total 163 43 206



Cargills having over 163 food city outlets and 43 express outlets spread across the island

covering 25 districts. Cargills operates around 60 outlets within Colombo district. And in

districts where the population is limited they operate only few outlets. This method has taken a

competitive advantage for Cargills over their competitors. When their outlets are available in

many locations then it increases the accessibility to their customers. When they place an outlet

they mainly concern about some factors such as,

Population

Life styles

Income levels

They collect these data by doing surveys and finally they come with decisions by analyzing

survey data.

Cargills maintain warehouses and collecting centers also in different locations

across the country. They collect their own mostly through direct channels, and this has taken a

huge advantage for Cargills over competitors, Cargills could offer best prices for the farmers

which competitors cannot achieve and

Cargils offer their products for

customers at comparatively low prices

than their competitors. Their main

Distribution center is situated at

Mattakkuliya.

Mattakkuliya is situated near Colombo

area and it is easily accessible for their

mainly focused districts. Then they

can improve their logistics function

and take a best use of logistics

function in line with total supply chain

objectives.

Image 2



Supply Chain Strategies

Considering the other super market chains there are certain things that make them competitive

among others .Cargills super market chain has categorized the products into branded products

and perishable products and they have distinctive supply chain strategies for these two

categories.

Considering the branded products they use a centralized warehouse to distribute the products to

all the 206 super markets located all over Sri Lanka. They have graded the outlets based on the

demand they have. Altogether there are around 5 grades and for each grade delivery pattern is

discrete. Order processing is done automatically based on past information by an internally

developed information system. So according to the order processed deliveries are done by the

centralized warehouse depending on the grade of the outlet. A Cargills outlet never gets shorter

of products since they always maintain a minimum margin of products that should be kept in the

shelves of the outlet. There are certain strategies implemented by them to make sure all the

15000 SKU s are delivered with the lowest cost and time and wastage which are described under.

These strategies make them really competitive along with their impressive marketing strategies

implemented.

What makes the supply chain of Cargills unique is the strategy they’ve been using for perishable

products. These perishables can be categorized into four parts, vegetables, fruits, dairy products

and meat products. Of these vegetables and fruits is their main strength since they have a farmer

base of around 5000 spread all over the country. Cargills directly purchase the required amount

of vegetables directly from farmers by around 10 collection centers around Sri Lanka. Therefore

the middle man has been omitted from the process resulting in higher prices for farmers and low

prices for customers.



Image 3

By this unique model Cargills has been able to be one of the forerunners in the industry. In a

conventional supply chain there are many players who try to gain the maximum profit resulting

in higher operational costs. Around 30% of the market value is received by the middleman while

the process after harvesting is costing around 40 % of the market price therefore resulting in only

30 % final value accruing to the producer.



Figure 6

Other than this there are many problems involved with this normal model of supply chain.

Normally the consumer is consuming a product which has deteriorated endlessly moving from

one middle man to another. Since the farmers are not encouraged by the lower price generated in

this system the products that are been produced uses lower quality planting materials and

sometimes premature harvesting resulting in inferior products entering into markets.

Understanding the reality Cargills invested a lot to change this conventional model. Farmers

were given free seeds and also technical advices were given in order to improve their skills and

knowledge in producing a good quality product. They were assured of a price that is higher than

the competitive market price prevailing.

As the below figure shows farmers can receive a higher price as few intermediaries are involved

in the supply chain which also enables Cargills to lower the retail price and improve their

competitiveness considering other super market chains.



Figure 7

Therefore a strong base is there for Cargills which resulting in a constant supply of vegetables.

Since their collection centers are located all around the country somehow the demand will be

fulfilled using alternative sources in case of a sudden disaster or supply fluctuation.

As per an example the demand of the perishable products pre-determined for tomorrow will be

collected today morning from those centers. Then the products will reach vegetable processing

center at Wattala on that day itself which will make sure consumers are getting the fresh products

distributed to their closest Cargills outlet.

Cargills have implemented strategies to reduce

their wastage and is able to reduce their post

harvest wastage from around 40% to 3% mainly by

investing on plastic crates long before government

implemented the policy, which makes them the

best among others.



Concisely features in the supply chain can be highlighted which are making it one of the

exceptional supply chains in spite of the fierce competition of the other super market chains.

Effective governance- Quality supplies

Coordinated delivery of services- Increase production and improve quality

Vertical integration – Direct linkages between Cargills and suppliers

Information Flow – Suppliers getting state of art knowledge on producing the best

Trust – Minimum guaranteed price for farmers

Corporate Social Responsibility – Empowering farmers

Diversification - Improved product quality

Chain Efficiency – Reduced wastage

Inputs – Free seeds

Sustainability – Creating a win-win situation for both producers and buyers.



Miller Transport Miller Transport

Meat Factory Vegetable Collection Center Ice Cream & kothmale Factory

Kist Factory

FMGC DC

Miller Transport Miller Transport

Suppliers Suppliers Suppliers Suppliers Suppliers Suppliers

Suppliers

Suppliers

Suppliers

Suppliers

Supply chain of Cargills



Distribution system in Cargills

Cargill’s supply chain is totally different from the normal supply chain system because

they use their own distribution system. Millers ltd involve in their all distributions not as a third

party as an own distribution section. As shown in the supply chain their distributions also

separate from each other’s like vegetable section use different root plan system and branded

products distribute in other way etc... We can study that they have excellent root planning system

to deliver products.

Cargills have their own 10 collection centers for vegetables around Sri Lanka and around

5000 of suppliers and those collection centers act as distribution centers also. Usually vegetable

section makes one delivery for a day directly food cities and one truck cover few food cities to

get maximum truck utilization from the nearest collection centers. And also collection centers

exchange the vegetables that cannot collect them.

Some other factories like meat and sausage section, dairy and ice cream also make

separate deliveries once a week directly to the outlets. Here they need special cooled trucks

because those are perishables and each truck usually covers more than one outlet for maximum

truck utilization.

And also Cargills have some other their own products like soaps and FMCG items, KIST

and biscuits manufacturing at factories are sent to the main distribution center at Mattakkuliya.

After that all of branded items sent through the main distribution center. Cargills use different

distribution strategy at main distribution center which they send all the branded products to all

their food cities from there. Usually they make one delivery for one week for each branch with

fully loaded truck. This distribution system help them to manage all the food cities at one place

with their cooperate plan.

Information system in Cargills

Now Cargills use their own information system to manage their entire business. They

used AS400 system early and now it is out of use. Usually every sale on retail outlets are counted



by the information system and after analyze uses them to forecasting and decision making.

Accordingly to sales and some other factors they have graded their food cities and they analyze

everything about them. Earlier food city manager decides what the quantities they need and

made the order and now it decides by the system and sends the orders for each section separately.

As an example separate order send to meat section, vegetable section etc... Then those sections

can easily manage their route plan system to reduce the distribution cost.

Better information system at Cargills, centralize the all information to the main

controlling center and to the management and it makes easy to analyze all the chain and decision

making.

Inventory management at Cargills

Cargills have more than 15000 of stock keeping units and it is necessary to have a better

inventory management at Cargills stores. Therefore they have excellent store management

system with allocated slots for each categorized item. As they keep only one distribution center

for branded products at Mattakkuliya they manage larger size of stocks there. They use forklifts

to move pallets and boxes within the store and move to and from trucks and Lorries. They have

their own transportation sector, so they can maintain their inventory management their own way.

Because of that they can continue inventory management to the lowest cost.

As well as they calculate their inventories based on storage structure or enter inventories

directly from feeding management software. Other thing is their inventories include all diets used

on the farm. As examples regarding total daily usage and value, period usage and value,

beginning inventory and value, ending inventory and value, and the date that current inventory

will run out if used at the current daily usage rates. According to this scenario Cargills Inventory

Management can consolidate their future forecast and overall amount and value numbers.



Recommendations for future improvement

It’s true that Cargills has a better supply chain than most of the other players in the market but

will it be capable enough to survive in the long run. Cargills is using lucrative marketing

promotions which are so close to the hearts of the consumers but it was seen in the real scenario

they don’t put more interest on customer service. Cargills head office is the best example for

that. Yes they promote that they are paying a higher price for the farmers but they don’t ever buy

additional amounts more than their demand which is pre-determined. So in the peak harvest

period farmers can only sell about 60% of their production which makes the traditional farmers

integrated with Cargills to look for other alternatives. Even the price level they are keeping is

just only 50 cents or 1 Rupee higher than the normal price for one Kilo Gram which doesn’t

make it much difference to the social development scenario. Even the ethics integrated in the

supply chain is a bit problematic since it can be seen that alternative products are been made by

rotten vegetables fruits and meat and directly sell via there outlets. Therefore if they can develop

the supply chain involving more good aspects they can retain their name and fame in the coming

future.

References

Cargills Annual Report 2012/2011/2010/2009/2008/2007/2006

http://finacialsrilanka.blogspot.com/2012/10/analysis-of-annual-reports-of-cargills.html

http://www.cargillsceylon.com

“Production Resources in Lagging Regions”, World Bank Report: Case Study – Sri Lanka, June

2007.

http://finacialsrilanka.blogspot.com/2012/10/analysis-of-annual-reports-of-cargills.html

http://www.cargillsceylon.com/



Business

Case Study - Cargills ( Millers Ltd )