Performance Evaluation Systems for Fresh Products Supply: a Case Study in the Food Retail

PERFORMANCE EVALUATION SYSTEMS FOR FRESH PRODUCTS SUPPLY: A CASE STUDY IN THE FOOD RETAIL

Renato Manzini Bonfim Zootechnician, Master in Production Engineering Federal University of São Carlos Rua Herculano de Freitas, 307 – apto 94. Bela Vista – São Paulo / SP 01308-020 Brazil Phone: 55-11-9967 77 23 e-mail: [email protected]

Hildo Meirelles de Souza Filho Professor of the Department of Production Engineering Federal University of São Carlos Rodovia Washington Luiz, km 235, Caixa Postal 676, 13565-905 São Carlos SP Brazil Phone 55-16-3351 82 36 r.226/237 Fax 55-16-3351 82 40 e-mail: [email protected]

Andrea Lago da Silva Professor of the Department of Production Engineering Federal University of São Carlos Rodovia Washington Luiz, km 235, Caixa Postal 676, 13565-905 São Carlos SP Brazil Phone 55-16-335182 36 r.274/237 Fax 55-16-3351 82 40 e-mail: [email protected]

Ana Elisa Bressan Smith Lourenzani Doctorate student of Production Engineering Federal University of São Carlos Rodovia Washington Luiz, km 235, Caixa Postal 676, 13565-905 São Carlos SP Brazil Phone 55-16-335182 36 r.226/237 Fax 55-16-3351 82 40 e-mail: [email protected]

Abstract: This study analyzes performance evaluation systems developed by a retail chain in Brazil. These systems aim to improve supply efficiency, enhance customer service level, and raise FFV profitability. These systems were known as Supplier Evaluation Systems (SES), and the Commercial Level of Service (CLS). The systems showed to be suited to the purpose for which they were developed. However, their scope was not broad enough and they did not include important indicators for improving process management, besides, technology department was not able to create systems capable of providing access to the data generated by these models.

Key words: fresh fruit and vegetable; Brazilian retail; performance indicators. PERFORMANCE EVALUATION SYSTEMS FOR FRESH PRODUCTS SUPPLY: A CASE STUDY IN THE FOOD RETAIL

1. INTRODUCTION The retail sector is of a great importance nowadays because of its role in the food distribution process. Food retailers achieve over R$70 billion on annual sales in Brazil. This value corresponded to 6.2% of Gross Domestic Product (GDP) in 2001. Remarkable changes in consumption patterns associated to the growth of supermarket chains led to the improvement of organizational, productive and commercial processes The companies have focused inefficiencies identification in order to be aligned to their strategic missions. The inefficiencies were related to internal processes and to commercial partners performance. As an internal change, supermarket chains have paid close attention to product and information flows. As an external change, companies have established closer relationship with their suppliers by eliminating intermediate agents and by using clear rules for commercial transactions. The main target of the sector has been to build an efficient chain from production to final consumer. It was observed that there are some imperfections related, specially, to suppliers’ alignment and performance measurement. The imperfections are related to the lack of continuous product flow in quantity, quality and variety desired, in the desired places, in order to guarantee the sales. The sub sector of fresh fruit and vegetable (FFV) has been considered of a great importance for the competitive strategies of supermarket chains. That is explained by the changes of Brazilian consumption habits, reflecting in the increasing consumption of fresh and healthy products. These changes are related to worries about body fitness and health. Aware of the increasing demand, some retail companies are driving special efforts to FFV category. The flow of FFV undergoes critical stages during the supply process. In order to overcome the problems, retail companies have adopted supply improvement programs as (1) supply guarantee through qualification and control of the entire supply chain, (2) internal processes improvement; (3) integrated supply chain management. Retail chains have adopted evaluation tools in order to improve supply components management. The adoption of the FFV performance evaluation systems, main objective of this paper, is a result of the importance of supply operation for retail performance. Supply management, supported by performance indicators applied to suppliers and to internal processes related to supply operations, might eliminate barriers and operational inefficiencies. The literature presents performance evaluation systems, however the adoption of such systems for fresh fruit and vegetable category is not found, what turns difficult retail actions. This paper analyzes the development and implementation of a performance evaluation system for FFV supply by a retail chain. The main contributions of this paper are knowledge generation about retail actions related to supply chain management, and internal and upstream restructure.

2. METODOLOGY The research presents an exploratory character. Theoretical basis about performance evaluation systems development was reviewed, and then a descriptive study of observation, registration, analysis and correlation was performed. Only one case study was performed because of non-restricted access to information of an important retail chain and to agents who were responsible for the centralization process of that company. Primary data were collected from the FFV business unit. Personal interviews with open question schedules were applied to the following agents: fresh product commercialization director; FFV commercialization director; logistics director; quality control manager; computer manager and FFV managers. The researchers accompanied the development and implementation process of the Supplier Performance Evaluation System (SPES) and of the Commercial Service Level (CSL). The name and data that could identify the company were omitted.

3. THEORETICAL REVIEW The service level is an impacting activity on clients’ satisfaction. It can be managed and its performance level can be measured (Lalonde and Zinszer, 1996; Bowersox and Closs, 2001). Logistics is considered a key-element in this process since it is responsible for planning, implementing and controlling products flow and storage and service and information from origin to consumption. Within an integrated logistics system, control shall encompass the strategic management and performance of the agents involved. Integration shall integrate clients and suppliers so that efficiency will be extended to the whole chain. These remarks lead to logistics concepts reformulation leading to higher processes integration and operational efficiency. That resulted in the concept of supply chain management (SCM) (Lambert et al., 1998). The retail sector has showed interest in integrating chain management. As the retail sector has increased control of some productive chains, it was able to build strategies, supported by agile alliances, especially with suppliers (Poirier and Reiter, 1996). Food retailers have adopted technology in order to reduce its operational inefficiencies. That implies in identifying core competences demanded for each function or operation of the retailers and their suppliers. Since it is necessary to select suppliers according to their desirable competences, there are problems related to costs and delivery reliability. In order to solve these problems, retail chains have developed procurement directly from growers. Besides there is a qualified small number of suppliers, operational efficiency and monitoring systems are required in order to evaluate supply performance evolution. A performance evaluation system is defined as a set of measures, which allows firms to manage their performance, according to strategic objectives (Martins, 1998). They are important for managing organizations and are, generally, related to increasing consumer satisfaction, reducing costs and improving capital use. Balanced Scorecard (BSC) was developed in order to associate financial and non- financial, social and environmental indicators (Kaplan and Norton, 1997). It associates financial, operational, learning and growing approaches. Cause and effect relations among objectives are considered. Their evaluation considers financial and operational metrics. Special attention shall be given to building and implementing the model (Neely and Bourne, 2000; HO and Mckay, 2002), and identifying a small number of indicators related to key-processes (Kaplan and Norton, 1997). Although large companies dispose of technological structure to support evaluation systems, Brazilian retailers have presented little advance in this direction, specially related to FFV. Companies’ actions are related to improving their internal operations and supply basis, however performance evaluation systems are not commonly applied to this processes (Gunasekaran et al., 2001). 4. RESEARCH RESULTS The retail chain analyzed in this paper is one of the biggest retail companies in Brazil. FFV sub sector has been target of constant process and product quality improvement. The development of FFV category has faced difficulties related to supply guarantee, leading to the development of a program named Excellence Program in FFV. One of the first actions was the reception centralization, which used to happen direct from suppliers to the stores. The centralization enabled higher control over quality and quantity delivered. Then, quality patterns and Supplier Performance Evaluation System (SPES) were defined. Supply evaluation and profitability increase were evaluated by a performance evaluation system named Commercial Service Level (CSL). The logistics area was responsible for operational improvements in the supply center and transportation process, while category management was responsible for store operations. This paper focuses on the description and analysis of the systems involved in supply performance evaluation: Supplier Performance Evaluation System (SPES) and Commercial Service Level (CSL).

4.1 Supplier Performance Evaluation System (SPES) The SPES was elaborated as a supplier scorecard, composed by measurable performance indicators. The indicators impact the supply process and are passive of corrective actions. The selected indicators were: (1) quality; (2) delivered quality; (3) reliability of delivery in a defined date; (4) punctuality of delivery on defined schedule; and (5) proper equipment (packing) for product transportation. The indicators (1), (2) and (3) received weight 2 while (4) and (5) received weight 1. A general score can be calculated by indicators ponder, considering its weight. The suppliers are scored from A (best performance) to E (worst performance). The criteria defined for supplier score calculus (or punctuation) aimed to present its global performance. Then, the numerical score was converted into a letter in order to clear the information (TABLE 1). Individual indicators for SPES allowed actions focused on critical points, turning its improvement feasible. TABLE 2 presents global performance calculus. A letter is related to the scores. Performance A or B were desired for the first year of SPES implementation.

SPES Development and Implementation Barriers SPES development and implementation process faced organizational and structural barriers since the company was going through a restructure process. Quality sector presented an insufficient information level at the time of the research. Besides, there was little participation of the information group in the Program. Within the main difficulties faced in SPES development and implementation process are: - Lack of a internal quality standard for FFV; - Low suppliers qualification; - Inexistence of a quality data collection process in the distribution center (DC); - Inefficient Quality Control (QC) information process; - Lack of a system for inserting information about delivered quality; - Errors about load measure in the distribution center (DC); - Incompatibility of time data sharing; - Lack of definition of packing patterns for each item of FFV; - Risk of packing contamination. 4.2 Commercial Service Level (CSL) The CSL is based on the Balanced Score Card model (BSC). In this model, focus on profitability was maintained and the objectives followed the four perspectives suggested for BSC. Sales increase and improvement of Commercial Performance Index (CPI), which evaluates the performance of commercial area during the transactions, would be necessary in order to improve profitability. Sales increase would be reached by breakdown reduction and price competitiveness. The improvement of store provisioning would also depend on the performance of suppliers in the SPES at operational level. Reduction of lack of products in the supply center would be necessary, searching an optimal equilibrium between quantities received and quantities demanded. A simple system was designed. The strategic map (TABLE 3) describes the performance objectives deployment defined by the commercial area in order to evaluate stores’ service level. The model follows the perspectives proposed by Kaplan and Norton (1997). The indicators described suggest that their function is adequate to their position inside the BSC model of the commercial area. Sales increase would bring financial gains increasing business profitability. Improvement of supply and price competitiveness would increase the perception of service level by the store staff and by the final consumers. SPES implementation, rupture control in the SC and use of information available in the transaction tools would improve efficiency of sales and supply operations. Training the teams involved in the process would develop specific skills.

Considerations about CLS The system presents a partial efficiency because of its simplicity and restricted scope, since it does not consider important stages involved in the supply operation. The following stages impact the company profitability considering BSC model. Process perspective includes store request, DC logistics, and sales price formation. The field research indicates that a process of automatic store request was being developed. Its main functions were: (1) reduce operation time; and (2) reduce request errors (lack or excess). It was observed that DC storage and transportation to the stores were conflicting between departments because of: (1) errors in selecting products; (2) errors in determining refrigerated amounts; and (3) the optimization of freight used to be conflicting with store capacity. Errors related to the definition of sales price could bring: (1) low consumer acceptance; (2) supplier dissatisfaction; and (3) decreasing company profitability. Learning perspective included store team training in order to increase efficiency in requesting and handling products.

5. RESULTS AND CONCLUSION It was verified that an important contribution of SPES is to elucidate the suppliers about the importance of product quality and process efficiency. SPES focus on the improvement of the process, since indicators and their influence in the global score are clearly described. The technical index and the SPES provide important information about consumer demand. However, some objectives that could be measured and contribute to suppliers qualification were left aside. The limited scope implicates on the supplier basis management. Besides, it is built only from performance indicators which explicit past facts. Until the moment of the research, premium price for performance was not practiced. The SPES has been developed in a database, which made difficult data insertion (input) and report extraction (output), slowing access to information. In CSL, a cause and effect relation of the strategic map shows the links among indicators and their perspectives, which is a subjective approach. However, the establishment of a relation among indicators tends to be an empirical process. This experience might bring more objective information and evidences, which could be the focus of future studies. The system presents scope inefficiencies since it neglects important stages of the supply process, reducing its contribution to the category profitability increase. The level of contribution of the system to the strategy success was not available at the time of the research. Different from SPES, CSL implementation has not faced difficulties, specially related to technological infrastructure. Finally, the results indicate that the systems present predominant characteristics: (1) they are based and refereed in the literature; (2) they explicit the demand of the company for quality of products and processes; (3) CSL contributes to explicit corporation strategy for FFV; and (4) they encompass a limited area, which can be a problem for their efficiency. The low agility of the information technology team involved in the project has contributed to its poor efficiency, generating delays in the project implementation and making difficult report extraction. Both SPES and CSL were under implementation at the time of the research so the evaluation of their efficiency and functionality related to other objectives of the program could not be performed. This is the main limitation of this research and it leads to the need of future complementary studies about the measurement of programs efficiency.

6. REFERENCES

Bowersox, D.J; Closs, D.J., 2001. Logística Empresarial – o processo de integração da cadeia de suprimentos. Editora Atlas, São Paulo, 594 pp. Gunasekaran, A. and Patel, C. and Tirtiroglu, E., 2001. Performance measures and metrics in a supply chain environment. Int. J. Ope. and Prod Man., 21, n.1/2, pp.71-87. Ho, S.K. and Mckay, R., mar. 2002. Balanced Scorecard: two perspectives. The CPA Journal, New York, v.72, n.3, pp.20-25. Kaplan, R.S. and Norton, D.P., 1997. A Estratégia em Ação – Balanced Scorecard. Editora Campus, Rio de Janeiro, 344 pp. Lalonde, B.J. and Zinszer, P.H., 1976. Costumer service: meaning and measurement. National Council of Physical Distribution Management, Chicago. Lambert, D.M. and Cooper, M.C. and PAGH, J.D., 1998. Supply Chain Management: implementation issues and research opportunities. The Int. J. of Logist. Man., v.9, n.2, pp.1-19. Martins, R.A. , 1998 Sistemas de medição de desempenho: um modelo para estruturação do uso. Tese (doutorado). Escola Politécnica, Universidade de São Paulo, São Paulo. Nelly, A. and Bourne, M., 2000. Why measurement initiatives fail. Quality Focus, Bradford, v.4, n.4, pp.3-6. Poirier, C.C. and Reiter, S.E., 1996. Otimizando sua rede de negócios – como desenvolver uma poderosa rede entre fornecedores, fabricantes, distribuidores e varejistas. Chicago. TABLE 1: Corresponding score for weight 1 and 2 indicators

Weight 1 indicator Weight 2 indicator A 0,00 a -0,20 A 0,00 a -0,40 B -0,21 a -0,40 B -0,41 a -0,80 C -0,41 a -0,60 C -0,81 a -1,20 D -1,61 a -0,80 D -1,21 a -1,60 E -1,81 a -1,00 E -1,61 a 2,00 Source: interviewed company

TABLE 2: SPES global calculus criteria

Supplier Performance Evaluation System (SPES) Supplier: Carlos Weber Ltda code: 1234 month:___01_/_02___ Volume/ Product 1 2 3 4 5 6 7 Weekly score request 1- Quality SCORE (-2) -0,91 -1,23 -0,95 -0,96 -1,54 -0,34 -0,20 -0,89 SCORE C D C C D A A C 2- Quantity SCORE (-2) -1,59 -1,10 -0,99 -0,72 0 -1,25 -0,87 SCORE D C C D A A C 3- Reliability of delivery SCORE (-2) 0 -0,35 -0,16 -0,57 0 -0,67 -1,53 -0,49 SCORE A A A B A B D B 4- Punctuality of delivery SCORE (-1) -0,53 -0,14 -1,00 1,00 -0,76 -0,86 -0,73 -0,62 SCORE C A E E D E D D 5- Adequate packing SCORE (-1) -0,50 -0,65 -0,21 -0,22 0 -0,1 -0,12 -0,32 SCORE C C B B A A A A GENERAL SCORE (-8) -3,53 -3,25 -1,16 -1,20 -2,30 -2,22 -3,53 -2,63 SCORE C C A A B B C B Source: interviewed company

TABLE 3: Detailed strategic map

Objectives Indicator Increase profitability Liquid percentage margin Increase sales Gross sales Improvement of Commercial Performance Index (CPI) CPI Stores’ supply Rupture index Price competitiveness FFV sales competitiveness graphic Supplier development SPES Reduce lack of products in DC Index of lack of products in the DC Reduce acquisition coasts FFV sales competitiveness graphic Trained employees index Transaction system Level of transaction tools adoption Source: Elaborated by the authors