Supply Chain Management
Tutorial - 7
“FreshBrew Beverages Pvt. Ltd.” is a rapidly growing company in South Asia that produces
bottled iced tea and flavored drinks. Demand for its products has been increasing steadily,
especially in urban markets, while rural markets are just opening up.
Currently, FreshBrew has two large production facilities located near major metropolitan cities.
To meet growing demand and reduce costs, the management is debating whether to:
1. Expand existing facilities to increase production capacity,
2. Build new smaller facilities closer to rural and semi-urban markets, or
3. Outsource part of the production to third-party manufacturers.
The company also faces challenges in inventory storage, transportation lead times, and
responsiveness to local demand. Management wants to align its facility strategy with its overall
supply chain goals of cost efficiency, responsiveness, and service quality.
Case Study Questions
1. Impellers of Supply Chain
- Explain how facilities act as an impeller (driver) of supply chain performance in
FreshBrew’s case.
In FreshBrew’s case, facilities are a key driver of supply chain performance because
they directly determine the company’s production capacity, responsiveness, and
cost efficiency. With only two large facilities located near major cities, the company
is well-positioned to serve urban markets effectively but faces challenges in
reaching rural and semi-urban areas. Facilities influence how quickly products can
be manufactured, stored, and distributed, which is especially important for
beverages with high demand and short shelf lives. Expanding or decentralizing
facilities can improve responsiveness to local demand and reduce transportation
lead times, but the decision will also impact costs and operational complexity.
- Discuss the trade-offs between efficiency and responsiveness when deciding the
number and location of facilities.
The number and location of facilities reflect the classic trade-off between efficiency
and responsiveness. Centralized facilities, such as FreshBrew’s current setup, tend
to be more efficient because they allow economies of scale, lower operating costs,
and streamlined management. However, they reduce responsiveness to distant
markets, increasing transportation times and costs. In contrast, building multiple
smaller facilities closer to rural and semi-urban markets improves responsiveness
by reducing delivery times and adapting to local demand variations, but this comes
at the expense of higher fixed costs, duplication of resources, and greater
complexity in coordination. FreshBrew’s challenge lies in balancing these trade-
offs to support both cost efficiency and customer service quality.
2. Framework for Structuring Drivers
- Using the framework of supply chain drivers (facilities, inventory,
transportation, information, sourcing, and pricing), evaluate how FreshBrew’s
decision about facilities will influence the other drivers. Provide specific
examples.
Facilities
Facilities are the foundation of supply chain performance because they
determine where products are produced and stored. In FreshBrew’s case,
deciding between centralized or decentralized facilities will shape
efficiency and responsiveness. Centralized large facilities reduce production
costs through economies of scale, while decentralized plants near rural
markets can shorten lead times and improve service quality.
Inventory
Facility decisions directly affect inventory policies. Large centralized
plants often require higher safety stock at distribution hubs to cover longer
transport times. On the other hand, smaller decentralized facilities can
maintain smaller, more frequent inventories tailored to local demand. For
example, a rural facility could stock only the most popular iced tea flavors,
reducing storage costs and waste.
Transportation
Transportation efficiency is closely tied to facility location. Centralized
facilities may require long-distance shipping to reach rural markets, which
increases costs and delays. Decentralized facilities located closer to
customers reduce lead times and transport expenses but may require more
local delivery networks. For FreshBrew, building rural plants could cut
delivery times significantly, improving freshness and service reliability.
Information
Multiple facilities increase the need for accurate and timely information
flow. A decentralized strategy requires advanced information systems to
coordinate demand forecasting, production planning, and distribution across
different locations. For FreshBrew, adopting digital tools and real-time data
sharing between facilities, distributors, and retailers would ensure product
availability without stock imbalances.
Sourcing
Facility structure influences how raw materials are sourced. Centralized
facilities allow bulk procurement from a few large suppliers, reducing unit
costs. Decentralized plants may require regional sourcing, which increases
flexibility but could be costlier. For example, FreshBrew may need to
source sugar or tea leaves from local suppliers near rural plants, improving
responsiveness but raising procurement expenses.
Pricing
Facility strategy can also impact pricing flexibility. Centralized facilities
support lower prices in urban markets by keeping production costs low, while
decentralized plants may justify premium pricing in rural markets due to
faster delivery and higher service quality. For FreshBrew, this means
adopting differentiated pricing strategies—competitive pricing in cities
supported by scale efficiency, and slightly higher prices in rural areas where
responsiveness adds value.
3. Facilities
- If FreshBrew decides to build smaller, decentralized facilities near rural markets,
what are the potential advantages and disadvantages compared to centralizing
production in larger facilities?
Decentralized facilities closer to rural markets provide several advantages. They
enhance responsiveness by reducing transportation lead times, ensuring fresher
products, and allowing better adaptation to local demand. They also spread risk
by avoiding over-dependence on a few central plants, which could be vulnerable
to disruptions. Furthermore, decentralization can improve service quality by
ensuring timely delivery and stronger relationships with local distributors.
However, the disadvantages include higher fixed costs due to multiple facilities,
increased duplication of equipment and staff, and reduced economies of scale
compared to large centralized plants. Quality control may also become more
challenging when production is dispersed, requiring tighter information systems
and monitoring processes. Coordination complexity across multiple sites could
increase operational risks, making supply chain management more demanding.
- Propose the best facility strategy for FreshBrew, justifying your answer with
reference to supply chain goals.
The best facility strategy for FreshBrew would be a hybrid model that combines
the efficiency of centralized production with the responsiveness of smaller
satellite facilities. The company could maintain its large metropolitan plants for
bulk production and urban supply while adding a limited number of smaller,
strategically placed facilities in high-potential rural and semi-urban markets. This
approach balances economies of scale with the need for local responsiveness,
aligning with FreshBrew’s supply chain goals of cost efficiency, service quality,
and market expansion.
For example, decentralized plants can be focused on high-demand products and
quick replenishment, while large facilities handle bulk production and storage. This
hybrid strategy would allow FreshBrew to improve service reliability and market
reach without excessively increasing costs, ensuring both urban and rural
customers are served effectively.
MOHAMED HUSSAIN
