Case Study – Direct Food Supply (DFS)

Company background

DFS is a rapidly growing food distribution and wholesaling company located in the

North East of England. It was founded by Mr Abbas, who started the business from a

small storage room with only 3 employees back in 1985.

From the mid 80s to the late 90s, DFS experienced tremendous growth in business

volume (sales). In order to meet the increasing demand for its services, Mr Abbas

began an ambitious expansion plan in 1999. In order to fund this expansion, Mr

Abbas decided to join forces with three other major investors - Mr Jones, Mr Mehdi

and Mr Dimitry. As part of the plan, the company’s operations were relocated to a

bigger, dedicated site in an industrial estate near Gateshead.

DFS subsequently employed more staff, extended its existing production capacity to

include facilities such as industrial chill rooms (30 pallet* space), freezers (200 pallet

space with racking system) and a massive dry good storage area (480 pallet space

with racking system). Expansion work was completed towards the end of 2000, and

the “new” DFS became by far the largest food supply and distribution company in the

North East of England.

*pallet - a small, low, portable platform on which goods are placed for storage or moving

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Since 1999, the four significant owners have all remained as major shareholders.

Each holds the same proportion of ownership at 25%. Of the four of them, two (Mr

Abbas and Mr Jones) are involved in the day-to-day running of the company in their

official capacities as co-Managing Directors. Annual turnover was £5m in 2004.

Till today, DFS remains primarily involved in supplying raw materials and packaging

to an extensive range of fast food outlets mostly within the North East region.

The North East Fast Food Outlets Supply and Distribution Market

Traditionally, the fast food supply and distribution market within the region has been

dominated by DFS. Competitive pressure was relatively low as there were a limited

number of competitors (mostly general distributors) who supply raw materials and

packaging specifically to fast food outlets (i.e. local fish & chip shops, burger bars,

pizza outlets, Indian & Chinese takeaways). This was despite the steadily growing

number of fast food outlets in the North East of England. The few notable

competitors in the area were “QUICK Supply” and “Express Food Distribution”, both

rather well-established but with relatively smaller market share in the region

compared to DFS. All three organisations (DFS, QUICK and Express) operated quite

independently, each with their own “list” of fast food outlet customers (partly due to

the fact that the growing fast food industry being able to absorb their combined

expanding capacities).

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Since the mid 2000s, however, DFS’ two competitors are becoming more aggressive

in their expansion, especially in trying to capture market share from DFS. Even so, in

order to keep margins high, all three organisations are unwilling to become engaged

in an all out price war.

Another significant development that is of particular concern to DFS is the fact that

many new competitors have entered the market in recent years. This is hardly

surprising as supplying raw materials to numerous fast food outlets around the North

East is a highly lucrative business. This increasing market pressure on DFS both

from current and new competitors have persuaded the company’s four major

shareholders to respond by undertaking a bold restructuring of the business. This

mainly involved the creation of a sister trading company named Sopco.

Essentially, Sopco imports branded goods that are in high demand from suppliers

outside of the UK. By negotiating sole distribution rights to those goods/brands of

products within the UK, Mr Abbas and the other three major shareholders hope that

they will be able to limit the expansion of its competitors, especially in preventing

them from taking market share from DFS itself. This is because, with sole distribution

rights, all competitors would have to purchase these goods (that are demanded by

their customers - the fast food outlets) from Sopco. Therefore, the strategy is to

make use of Sopso to supply the entire supply and distribution market with such

goods, including its sister company DFS.

The positioning of both DFS and Sopco in the North East fast food outlets supply

and distribution market is depicted in the diagram below.

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Diagram 1: The North East Fast Food Outlets Supply and Distribution Market

Sopco itself is a small outfit consisting of only three employees and is managed by

the other two major shareholders (Mr Dimitry and Mr Mehdi). It has, however,

significant buying power from both inside and outside of the European Union. In

effect, buying in large quantities (bulk) allows them to offer their goods at the

cheapest prices. It is hoped that the combined market share and buying power of

both DFS and Sopco will prevent competitors from being able to purchase similar

substitutes/alternatives at lower prices without sacrificing considerable amounts of

quality.

It must be noted, however, that even though Sopco is a sister company, it has no

intention of selling any of its prized goods to DFS at a discount. This is to maintain its

selling power in the market by being able to cover as many food distributors and

wholesalers as possible. This will steadily increase Sopco’s cash flow, which is

highly attractive for all four major shareholders. Hence, Sopco’s operations mainly

involve taking orders from food distributors and wholesalers in the UK, ordering them

with the suppliers and manufacturers and facilitating direct deliveries to these

customers. Currently, Sopco supplies about 70% of DFS’ total food and packaging

products.

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Even with this seemingly good overall strategy adopted by DFS to keep its

competitors at bay, these rivals have also responded with a number of rather

aggressive strategies of their own, thus creating a highly competitive environment.

The Current Competitive Environment

In terms of the increasing competition within the fast food distribution market, the

number of competitors in the North East of England increased to nine in 2008.

One of the biggest newcomers was “Premier Foods”. This competitor has opted for a

highly aggressive market entry strategy. It is offering the lowest prices by pricing

their goods even lower than the break-even margins (i.e. at loss-making prices) so

that it is able to sign up new customers quickly. In fact, it did manage to wrestle

some of the shared customers away from DFS using this strategy of “underpricing”,

but the overall quality of their service remains poor, especially in terms of on-time

delivery and flexibility. DFS, on the other hand, has retained the strategy of

differentiating itself from competitors by being distinctive in quality of service.

Other new competitors (Joe’s Supply It, The Flying Singh, Get-It-Delivered), who

have only entered the market in the past two years, are much smaller in size and

have much simpler operations. These competitors typically operate from cheap shop

lots using manual-labour (often with members of their respective extended families

as workers). As they service only a small list of customers within a relatively small

area, they are able to respond to customer orders very quickly and are able to offer

frequent, as-and-when-needed delivery service. Conversely, with many hundreds of

customers to service across the region, DFS can only offer regular, fixed-time-of-the-

week delivery even with its bigger and more extensive fleet of trucks.

Even more worryingly, since the 2008 economic crisis, many more fast food outlets

are choosing and/or considering sourcing cheaper raw materials and packaging in

order to cut costs. This is because intense competition, frequent discounting and the

popularity of “set meal deals” have reduced most fast food outlets’ profit margins

considerably. In response, some newer competitors such as The Flying Singh have

begun directly sourcing low-quality but extremely cheap goods from Eastern

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European and Asian countries (and, in effect, bypassing Sopco). These low-quality

goods have proven to be very popular and are increasingly “acceptable” to many fast

food outlets, especially those who are struggling for survival. In hard economic times,

cost may be the sole consideration when sourcing raw materials even at the

expense of reputation and quality.

DFS, on the other hand, has very strong and long-standing relationships with its

high-quality and well-known branded suppliers. Even with its superior economies of

scale in operations as well as bulk buying power, the average costs of these high

quality goods are still considerably higher than the generic, low-quality materials

sourced by DFS’ new competitors in smaller quantities. The dilemma is that, if DFS

terminates such long-standing relationships, the discounts and good trading terms

developed over many years will be lost. Also, DFS has to consider its strong

reputation for high quality and dependability.

At the same time, DFS’ directors are fully aware of the fact that, as a business, it

needs to take into account the demands of an ever-growing list of customers for

more cost-effective raw materials and packaging. In fact, according to feedback from

DFS’ own delivery drivers, some of its customers have been buying more

types/amounts of products from cheaper suppliers such as The Flying Singh and

lesser from DFS lately.

This intense market pressure applied by new competitors has forced DFS to

establish another depot in Middlesbrough to expand its market geographically. A

purpose-built warehouse with state-of-the-art facilities was built on a piece of newly

purchased land (30 pallet space chill room, 200 pallet space freezer and 800 pallet

space dry goods, all with racking systems) in 2011 in order to realize its new strategy

and push its products and brands market further south. This strategy of expanding its

market to different regions is an ambitious one, especially as the threat of losing

further market share in its primary North East region still needs to be addressed.

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Supply Chain Management and Logistics

DFS orders goods mainly through Sopco. Essentially, Sopco processes DFS’s

orders to suppliers (manufacturers) through its own order-placing system. The

upstream manufacturers, on the other hand, deliver their goods directly to DFS but

issue invoices to Sopco to charge them for the deliveries. In turn, Sopco pays these

manufacturers and then invoices DFS. Therefore, both order information and money

“flows” from DFS to Sopco and then on to the various manufacturers.

Sopso employs two independent logistics companies to transport the goods from

various UK manufacturers or UK ports (for deliveries from other countries) to DFS.

“Falcon Transport” is the chosen independent contractor to deliver dry goods, whilst

“Speedy Arctic Transit” delivers all frozen and chilled goods. Both companies have

their own storage warehouses to store Sopco’s orders for a short period of time in

order to make sure they deliver according to schedule. Put simply, goods are stored

in their own warehouses after collection from UK manufacturers/ports and then

redelivered to DFS from such sites.

Falcon Transport and Speedy Arctic Transit could be considered as “consolidating”

hubs where most goods are accumulated. This is because DFS could order goods

from other manufacturers (who are not linked to both Falcon and Speedy in any way)

that could be sent to either Falcon’s or Speedy’s warehouse first before being

delivered together using the same transport.

The flow of material and information between manufacturers and DFS and the role of

the two logistics companies is depicted in the diagram below.

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Diagram 2: The “Upstream” Supply Chain for DFS

Within its depots in Gateshead and Middlesbrough, DFS uses an ordering, stocking

and Customer Relationship Management system called “Sage Line 50” where the re-

order levels, inventory, sold quantities and other useful information can be obtained.

The purchasing team places orders based on forecasting future demand and supply

and also the level of current inventory.

Sopco, as the sister company, can have access to a hard copy of the DFS stock

information and reports on request. DFS doesn’t keep any information from

manufacturers in its “Sage Line 50” software, while Sopco does not keep any

information relating to DFS’ customers. Sopco keeps all information from

manufacturers and suppliers and also information from two logistics companies in

their system.

As we can clearly see, the information management activities in DFS closely involve

Sopco and these two logistics companies. In fact, DFS only retains limited

information from its suppliers, such as purchase order and proof of delivery, which is

obtained when the goods are actually delivered to DFS’s doorstep. When they arrive,

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UK and Foreign Manufacturers

Sopco

DFS

Flow of Dry goods

Flow of Frozen and Chilled

Falcon Transport

Speedy Arctic Transit

Flow of information and money

Flow of information and money

ordered goods are off-loaded, cross-checked with documentation and then inspected

for quality purposes at the delivery point.

Under the current supply chain arrangements, even though products that are

supplied by both Falcon and Speedy have predictable delivery timeslots (as they do

keep high levels of stock in their respective warehouses), DFS is finding it difficult to

predict when their orders will actually arrive. This is because when they order goods

from other suppliers to be delivered to either Falcon or Speedy, so that all ordered

goods can be delivered at the same time to their Gateshead and/or Middlesbrough

sites, these other suppliers are often unable to provide a specific delivery time and

date (especially those that supply goods from foreign countries through UK ports).

This often results in Falcon and Speedy having to postpone delivery in order to wait

for the arrival of such goods to their respective warehouses.

DFS found that even when ordering direct with these other suppliers (bypassing

Falcon and Speedy), the outcome is still the same. There is much uncertainty as to

when such goods will actually arrive on their doorstep. As a consequence, DFS’

warehouse operations managers have complained that planning cannot be done

effectively due to such uncertainties. There are times when their employees are all at

work but there are few goods to be handled, while at other times, there are many

pallets of goods arriving but insufficient workers scheduled to be on duty at those

times.

The situation above is affecting DFS’ ability to deliver goods to its customers on a

more flexible and dependable basis. The alternative would be to keep consistently

high levels of inventory, which incurs significant storage and other overhead costs –

a situation which the accounting department and also DFS’ directors find

increasingly unacceptable.

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Accounting

Given the intense competition currently faced by DFS in the fast food outlets supply

and distribution market, Mr Abbas and Mr Jones (in their role as co-Managing

Directors) have expressed their concern regarding the company’s increasing

overhead costs. The typical approach to budgeting that the company has taken for

many years is to simply add a small increment to each department’s actual spending

for the previous financial year (to account for inflation), while making some

adjustments for any specific cost increases or reductions. Given the current

competitive environment, there is increasing concern about how to keep costs under

control.

At a recent board meeting, Mr Abbas said the directors should take a harder line with

their managers and supervisors if DFS is to become more competitive in terms of

cost. He suggested that for the next financial year, managers who exceed their

budgeted spending should be penalised in some way, including the possibility of

them losing their jobs. He commented, “We should stop listening to their excuses! If

they can’t do their jobs properly then they should go! We need to set the cost

budgets at the absolute minimum possible; don’t ask them what they think, they’ll

pad the budgets out.”

Mr Jones has also expressed concern about the management information pack that

is supplied to the directors at the board meeting. “While the updated accounts

information given such as the Profit and Loss account, Balance Sheet and other

budgetary information is useful, I think we need to a adopt a broader set of indicators

to judge the performance of the business particularly given all the plans we are

currently considering”.

Marketing

The Marketing Department provides the link between DFS and its customers. First

established in 1995, it was originally set up by Verity Thompson and Guy Smith.

Following DFS’s expansion a decade ago, a further two employees were recruited -

Rachel Hemming and Connor Brown. Both Rachel and Connor had experience of

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working in the food marketing industry and were given the task of developing the

company’s website. Nevertheless, after eight years of working for DFS in 2008,

Connor was appointed the new Marketing Manager for Premier Foods, reducing the

team to three. After three years of working with only three members of staff, in 2011

a further two employees (Joey Atherton and Emma Dunlop) were recruited with the

expansion of the Middlesbrough site. Information on their specific job roles is given

below:

Name Position Background Job roleLength of

service

Verity Thompson

Marketing Director

Verity worked as a marketing

manager before joining the DFS in

1995

To oversee all marketing and sales activities

within DFS

17 years

Guy SmithAssistant marketing Director

Guy worked in a number of junior marketing roles

after leaving university, before

joining DFS in 1995

To assist Verity to overseeing

marketing activities within

DFS

17 years

Rachel Hemming

Online and Sales manager

A graduate from Northumbria

University (BA Business Studies), Rachel worked in

the marketing department of a

food manufacturing

business as part of her placement and joined DFS in

2000

To work with Google and the web designers

to promote DFS and look after

their online interests

12 years

Joey AthertonMarketing and

sales coordinator

Joey met Rachel whilst at Chartered

Institute of Marketing (CIM) event and joined

DFS in 2011

Marketing and sales support

Less than 12 months

Emma DunlopPlacement

student

From business and/or marketing programmes at

Northumbria University and

joined DFS September 2011

Ad hoc research

projects and interim admin

support

Less than 12 months

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Despite the new appointments, the team have been struggling to keep on top of their

workload. Much of their time is spent answering the phone and dealing with incoming

calls from advertising agencies trying to sell them advertising space. This has

resulted in the team adopting a more reactive rather than proactive approach to

marketing. Furthermore, since November, Emma Dunlop has been absent on

sickness leave. This has had a major impact on the department as Emma had just

started some research with existing DFS customers exploring levels of satisfaction.

Emma’s absence has also impacted the number of electronic enquires, with many of

the incoming emails not being looked at or actioned since November 2011. To make

things worse, there has never been a systematic approach to recording incoming

enquires.

DFS is a well-established brand, with most of its business is based in the North-East

region. Since 1985, DFS has carried out B2B (Business-to-Business) advertising

with its customers; however, most of its business has come from word of mouth.

DFS has also benefited from strong links with the Chartered Institute of Marketing. In

fact, Verity and Guy have delivered a number of presentations to the Institute about

the importance of customer service. However, to date DFS has not conducted any

research into price and this remains an area of marketing that both Verity and Guy

have little experience in managing.

Verity Thompson has identified some key marketing challenges for DFS. Despite

traditionally having little competition, Premier Foods now poses a real threat to DFS’

current business. A list of the most prominent problems is as follows:

1. Lack of clear articulation between the business objectives and the marketing

objectives;

2. No systematic process for new product development;

3. Lack of a Marketing Information System, with ad hoc reports being

commissioned and no organised system for pooling and disseminating

information to decision makers;

4. Little awareness of satisfaction or dissatisfaction;

5. Limited KPI’s to benchmark the team’s performance against;

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6. No clear brand strategy for the NCF branded range;

7. Lack of an expansionary budget.

Human Resource Management

DFS has paid little attention to the development of a strategic approach to the

management of its human resources. In particular, there has been no significant

focus on a strategic and integrated approach to sustaining organisational success by

improving staff performance through development of staff capabilities.

In addition, as a result of the increased competitive pressures facing the business, it

has become apparent to the co-Managing Directors that the paybill for the company

is simply too high. Having considered the current pay bill and inadequate

arrangements for pay and performance that are currently in place, the directors have

invited a specialist HR consultancy to provide expert advice on ways forward to

address the following issues:

1. To significantly reduce the company’s overly high pay bill. Directors are looking for

a 10% reduction this year with any subsequent rises to be “rigorously based on

performance and only performance”.

2. There are no records of reasons for the awards of bonuses at senior levels.

Bonuses have been agreed at un-minuted meetings between employees and senior

staff. There is minimal accountability within the current organisation.

3. The co-Managing Directors cannot see how the objectives and performance of

different departments have been reflected in performance objectives and rewards.

The current numbers of employees within the business with their existing levels of

remuneration are as follows:

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Co-Managing Directors (2) £120,000 + bonuses of up to 50% of salary related to

operating profits of the company.

Other Directors (2) £80,000 + bonuses of up to 30% of salary related to operating

profits of the company.

Managers (5) £35000-£60000 with the actual salary being based on annual

performance review.

Supervisors (5) £20000-30000 with the actual salary being based on annual

performance review.

Operatives (50) £7-£8 per hour (for a 40-hour week).

In addition, all employees are members of the Company Pension Scheme, with DFS

currently contributing 10% of salary for each employee.

For the past ten years, the minimum and maximum figures for each pay grade have

been increased by the inflation rate (RPI) recorded in January. Most employees

above the operative level have become used to a performance review increase of

around 5% a year, but this arrangement is entirely informal and increases far in

excess of this have been offered in the past for particular successes.

Current salary levels within the business (for all roles) are considered to be higher

than the average market rate and, although the current numbers of staff are justified

in respect of current workload, it is considered that these numbers could be reduced

through both reorganisation and the introduction of more effective performance

management systems.

The business is not unionized and the operative jobs at DFS are highly sought after.

Employee turnover and levels of absenteeism are low throughout the company.

Workers and managers are said to value the “family atmosphere” at DFS and the

organisation has no difficulty in recruiting staff.

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