Supply Chain Mgmt Project

Group 5: Lyssette Salazar et. al. (The actual case can be downloaded from www.hbsp.harvard.edu/products/cases/index.html , Case No. 9-898-238)

Project: Pioneer Hi-Bred International, Inc.

Pioneer Hi-Bred International, Inc., founded in 1926, is the largest seed company in the world. The company produces and sells hybrid seeds of corn, sorghum, sunflower, and soybean, among others. Competition had steadily increased throughout the years in response to advances in biotechnology and the resulting shorter product lifecycles as well as because of expanded global competition. The seed industry certainly had changed, enough so that senior executive Dave Browning observed, “The seed industry has changed more in the last 4 years than it had in the previous 20,” this statement clearly reflects the dynamics involved and the need for a proportional amount of change. The following is a table of a SWOT analysis of Pioneer in 1997.

SWOT Analysis Strengths

Weaknesses

Opportunities

Threats

Quality R&D Established

Foreign Capacity Forecast Methods Distribution

Foreign Growth R&D Computerization

Competitors Innovations Variables

The following recommendations proposed in planning, production, and distribution are aimed towards making Pioneer more competitive in the industry based on those issues uncovered by the SWOT analysis.

Planning The decisions specific to the planning function of Pioneer consist of both strategic and operational issues. The geographic placement of sites for research, growing, production and distribution pertain to strategic decisions that affect the company long-term and take several years and much capital to implement and affect other operational decisions in terms of revenue, costs and product quality as well. Operational decisions typically involved in planning consisted of the scale of

production, product mix, growing and climatic conditions, taxes, duties and tariffs, distribution costs and capacity.

Problems easily identified were as follows:

Patterson’s forecasts (Exhibits 3 and 4) are flawed in making too many assumptions and not including enough information. Although demand can be accurately forecasted, climate and reorganizations in production and distribution are not properly accounted for and historical yields above the forecast are not taken into consideration for more accurate yield forecasting.

Foreign production needs to be reviewed and the 33% carryover rate needs to be analyzed. Strategic competencies need to be reviewed and capitalized on as well.

Recommendations:

Climate: Weather can be very unpredictable and this is very important considering the lengthy time of production. Efforts need to be made to combat the risks associated with this uncertainty. Currently, southern hemisphere production is used only as a supplement to normal field production on an as-needed basis. Efforts should be made to increase production in different regions outside the Northern Hemisphere to take advantage of the weather, not only to produce hybrids accustomed to different regions, but also as a counter measure against climate.

Reorganization:

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Production and Distribution

Reorganization in production and distribution is not taken into account. Although this may be fine for the upcoming forecast, in the long run, this will have to change with the addition of changes to production to better improve competitiveness.

Reorganization in production and distribution is necessary for Pioneer to stay competitive in this growing market. The seed market in North America has been growing at 3% while elsewhere this number has been 5%. Moreover, Pioneer’s market share in foreign countries has been increasing above 22.5%, while foreign plantings accounted for only 11%. Further, 59% of production of world commercial corn occurred outside the United States. To capitalize on this growing trend and to establish Pioneer as a world leader, reorganization is inevitable and increased foreign capacity highly recommended now before other companies claim their stakes. In depth analysis should be done on the demographics of potential sites before any locations are selected.

New facilities need to be strategically located in different areas around the world. An approach to location decisions would be based on market share. Placing facilities closer to demand provides a hand over the competition and will lead to cost reductions in distribution. Another factor to be considered is the locations’ infrastructure, culture, and social and political environment. Several methods of evaluating location alternatives exist such as the factor-rating method and locational break-even analysis.

Also, although it may cost 25% more to operate foreign facilities, I think an analysis is necessary to fully understand these costs. An accurate breakdown could reveal costs that can easily be reduced or eliminated simply by understanding them better. Further, more evaluation methods exist to try and minimize costs associated with transportation such as the center-of-gravity method and the transportation model. These methods should be used in addition to seek cost savings.

To address the issues of protection of patents and other proprietary assets, Pioneer needs to act local and think global. The first consideration is of course the social and political environment of a region. However some locations may be strategically necessary despite being notorious for not respecting such things (i.e. China). To counter these problems of guanxi (connections and cronyism) to steal customers and ideas, Pioneer

needs to show a local face. Hiring and training locals for production as well as hiring natives that possess the skills lacking to make real contributions to the company will not only address issues related to protectionism but may prove quite fruitful in terms of production and distribution by adding fresh, relevant talent with the local knowledge needed for longevity and success. Further, this can improve marketability in the host country with consumers as well as governments.

Yield Rates and Carryover:

According to historical data, yield rates can highly vary from year to year, as much as 20% from the mean and thus a 33% carryover rate has been used for years as a buffer stock against such highly unpredictable fluctuations. The 33% carryover rate is highly questionable and currently, yield in excess of forecast is not taken into account.

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Yield Rates

The current forecast method for yield rates is to use the 4 year moving average and adding 0.5 to account for biotech advances and provide worst-case scenarios at 80 and 90%. However, yields in excess of these forecasts are not taken into account because they would not produce a shortage. Because of this, I believe that the forecasting methods are flawed. The actual yield, excess or not, needs to be accounted for to produce more accurate information for planning as well as for the issue of carryover.

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Carryover

The current carryover rate of 33% is rather high and has been used for the past 70 years. However, as pointed out in the case, the industry has changed remarkably in the last 4 years than over the last 20. This is quite a statement indicating the market environment, and thus historical practices such as this needs to be reviewed and adjusted. No doubt,

carryover is needed given so many variables, but efforts can be made to try and reduce the number and or dependence on it and would reflect most if not all of the following:

1. Increase facilities – Counter against variables such as climate, regulations etc. 2. Account for actual yield – To more accurately forecast and provide better carryover percentages based on that information.

3. Rollover – Carryover in excess of the previous year’s set rate should be rolled over to current year productions and the current rate lowered based on the roll over amount. (Example: Set rate at 10%, last year’s actual carryover: 15%, set this year’s rate to 5%)

4. Improve R&D – Currently, R&D is concentrated on biotechnology. Some of this investment could be used towards better technological methods of production and harvesting that could increase yield efficiency resulting in less dependence on high carryover.

SWOT Analysis:

The current market is very competitive, especially in the area of biotechnological break-through. Pioneer has done a great job at keeping up, constantly investing 10% of revenue for research. Only so much can be invested and so, Pioneer should analyze itself and realize what its competencies are as well as those above competitors and capitalize on them as a supplement to R&D. A first step is to look into the current philosophy:

1. To produce the best products on the market. 2. To deal honestly and fairly with its employees, sales representatives, business associates, customers, and stockholders. 3. To advertise and sell its products vigorously, but without misrepresentation. 4. To help its customers make the greatest possible profit from their products.

Such integrity and dedication to quality and “added value” services to customers are what will put Pioneer above the rest. Expanding these services and increasing marketing on these core ideals emphasizing Pioneer’s dedication to quality is crucially important given the high competitiveness of the market.

The case also mentions that many production plants had become certified under the ISO program, we believe this should be a new company-wide requirement with a plan to do so within the next few years established to become more competitive, especially in European markets with the ever expanding EU countries. Doing so only illustrates and further emphasizes the dedication to quality and commitment to global operations.

Production The production decisions revolve around the following: where to grow and process hybrids, minimize production costs, and increase capacity outside the US.

Recommendations:

(1) Evaluate all current production facilities outside the US. The evaluation should focus on identifying the production facilities with the highest productivity (in terms of seed volume output) as well as the lowest production costs. The evaluation will help identify and allow the categorization of production facilities into the following:

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Facilities with high levels of production and low production costs. (Best)

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Facilities with high levels of production and high production costs.

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Facilities with low levels of production and low production costs.

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Facilities with low levels of production and high production costs. (Worst)

(2) Increase production capacity of facilities located outside the US. The case mentions that 59% of world commercial corn production occurs outside of the United States. When the numbers presented on Page 5 are broken down even further, production capacity is composed of the following:

Northern Hemisphere - 85%

USA and Canada - 80.75%

Elsewhere in Northern Hemisphere - 14.25%

Southern Hemisphere - 15%

There is no question that Pioneer must increase the production capacity in areas outside the US. The evaluation conducted above reveals that Pioneer should focus on the first two types of facilities because they have the highest productivity and less costly to work with on improvements, expansions, etc. and seek for ways to improve production at the third type. Production capacity can be increased by the following two methods or in combination:

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Open new production facilities

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Expand current production facilities

An analysis should be conducted to compare which of the two alternatives is best. For example, a cost - benefit analysis.

The higher levels of productivity show that these facilities are being utilized to their maximum potential and are operating at full capacity. Remember, that fixed costs are incurred regardless of whether the facility is producing anything or not. Therefore, through high levels of production, they are minimizing the impact that fixed costs have on every unit of output produced. This will result in a lower cost per unit. However, it is important not to overproduce and end up with a product that cannot be sold taking up space and money, further analysis needs to be involved to

take demand into great consideration. Perhaps some facilities could serve as back ups for corn seed production but their primary functions would be production of Pioneer's other products so that capacity is still not wasted.

(3) Lower production costs. An attempt should be made to lower variable costs. The case mentions that one of the major variable costs is detasseling.

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Detasseling. The company should look into the possible outsourcing of this function. An analysis should be conducted to determine whether this is a source of competitive advantage. If it turns out not to be, Pioneer can outsource to a company that specializes in this type of process as well as based on careful quality control considerations. In no way however should Pioneer let the evaluation and control be performed by others, this is still a very important and competitive function of the business and must be done by Pioneer, however, a highly accurate statistical model should be performed when doing so. Costs can be decreased in detasseling by not surveying an entire field, but rather by a sample method. This would take less time and presumably less people. A statistical analysis would need to be done and thoroughly tested to accurately calculate how many samples per field would yield the acceptable 99.5%.

Furthermore, the company should look into the possibility of closing the facilities with low levels of production and high costs. Clearly, they are not utilizing the facilities to their maximum potential and or are not placed in strategic locations. It could be argued that it is possible to turn them around, but it would certainly require a detailed analysis of those facilities and the factors associated with the poor results and only then could management make an informed decision.

Distribution Distribution related to inventory management, transportation and customer service and was mostly affected by the decision of Johnson in the production department.

Problems easily identified were as follows:

There was no real coordination in the supply chain with over 400 trucking companies utilized during any typical peak season. Inventory was high and in addition, highly variable.

Recommendations:

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Increase facilities

Strategically placed facilities will help lower transportations costs as well as decrease the need for safety stocks, thus reducing overall inventory costs. Further, more facilities increases the responsiveness of the company to consumers, resulting in increased customer service.

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Lower carryover rate

The carryover rate of 33% is outdated and is the cause of high transportation costs and many unnecessary departmental headaches. Efforts should be made to decrease this rate to a minimal factor.

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Distribution system management

Coordinating 400 different trucking companies is a tremendous feat that eventually results in higher costs and perhaps even decreased customer service. Efforts need to be made to dramatically reduce this number and allow more coordination through advanced technology.

1. “Select” suppliers – Current suppliers should be evaluated and chosen as preferred suppliers based on reliability, quality and cost. Inefficient suppliers need to be immediately eliminated. Closer ties equal more willingness to work together toward a common goal and more acceptances of company policies.

2. In-house – An analysis should be done of whether any cost savings could be realized by purchasing a fleet of distribution vehicles for domestic markets. We believe in foreign markets, it is best to leave this function as an outsourced capacity due to the fact that it is a specialized component of the system, especially in unfamiliar territory. 3. Technology based distribution – The need for a computerized system is apparent, and will become even more so as the company expands globally. Options in ERP or other forms of technology in distribution should be thoroughly explored and applied to increase reliability and customer service and decrease time and costs. Perhaps with closer carrier relations produced through the proposed decrease of trucking companies, Pioneer could even capitalize on the carrier’s existing technology.

4. Integration – Eventually, the company as a whole including providers should be involved in the distribution process through a system in which planning and production are integrated with other systems to support execution processes in transportation. Such support systems include warehouse management, to provide for better distribution and planning techniques.

All of the proposed changes will lead to a more competitive Pioneer, not only domestically, but will place the company as a serious competitor on a global scale. Changes need to be implemented to remain as the world’s biggest company and to keep up with the changing industry. Although there are many factors that cannot be controlled or predicted, the recommendations proposed herein serve as a combat-measure to these variables, allowing for the company to set realistic goals and provide for realistic means of accomplishing them.