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The use of Radio Frequency Identification (RFID) on individual chocolate packing is making it possible to know item-level inventory positions within the largest retailers for example including Wal-Mart, an early adopter of this technology (Zhou, 2009). The use of RFID is also excellent at managing traceability of specific lots or delivery portions of chocolate (Pacyniak, 2006). With the many quality management concerns within the industry as a result of the Chinese lapses on toys (The lead paint incident with Mattel) and the use of milk in chocolates produced in Japan, quality management is far and way the most critical process area that this industry is grappling with today. The use of technologies to mitigate the risk of bad quality products is the fastest growing area of strategic change in the industry.
The last supporting activity area of procurement has also seen radical change in this industry over the last decade, with strategic sourcing, supplier collaboration, and the use of CPFR-based technologies for creating more of an equal distribution of risk throughout the supply chain. There is also a stronger focus on pricing and revenue management as chocolate is by nature a process good that requires accrual accounting, and more complex approaches to managing cost allocations. All this translates into procurement being one of the more difficult areas of coordination in the industry today. All of these supporting factors are in turn coordinated to support the primary value drivers of the industry, which include Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales, and After-Sales Service. All of these factors and their relative efficiency by competitor have a direct impact on the profitability of the industry as well (Doherty, Tranchell, 2005).
The approaches used for support activities throughout this industry are also forcing it to become more oligopolistic in structure, as is shown in Figure 2, Global 2008 Market Share. The dominance of this industry by Cadbury plc, Mars, Ferrero and Nestle define in turn how vertical integration from a supply chain and sourcing standpoint is managed. As could be seen from the analysis of this industry's supply chain, it is fairly common to find market makers such as Cadbury attempt to own their entire supply chain from the field to the store floor. This is only possible given the process improvements and corresponding technologies that are becoming increasingly prevalent in this industry, significantly driving down costs and enabling greater supplier-buyer integration.
Figure 2: Global 2008 Market Shares
Sources: Based on analysis of (Delfosse, 2009) (Doherty, Tranchell, 2005) (Hildebrandt, 2009)
These process improvements are in turn making it possible for the market makers, or largest companies in this industry to become completely integrated vertically. As has been mentioned, the use of CPFR technologies for creating more shared risk has also significantly reduced the costs of vertical integration as well.
The aspect of stakeholders in this industry centers on the governance, risk and compliance frameworks (GRC) used for defining supply chain quality levels, sourcing and procurement practices, and the safeguards against cartel-oriented pricing and demand structure approaches. Internal stakeholders are more concerned with the ongoing profitability and long-term viability of generating a significant rate of return on their investments. Internal stakeholders, in this era of transparency and trust, are most concerned about creating and implementing exceptionally strong Corporate Social Responsibility (CSR) programs and the ability to integrate these into sustainability and green initiatives. The most strategic of areas that companies are grappling with in this industry today from an internal standpoint is the ability to stay focused on CSR initiatives and has them translate industry-wide into compliance and focus. External stakeholders, from the distribution channels, channel partners, and many members of the industry value chain, all are most concerned about the implications of the rising focus on CSR initiatives globally and how they potentially impact profits. The need for creating more of an alignment with external stakeholders in this industry is clear, given their focus on creating programs, some profit-driven such as CPFR for supply chain coordination, and some CSR-driven such as fair trade cocoa, into a comprehensive stakeholder framework which can scale globally over time and through turbulent economic environments.
Analysis of Significant Industry Issues
Quality management is the most critical issue from a strategic perspective influencing the chocolate industry today. The continued concerns over supply chains throughout China, including the tainted milk found in chocolates last year (Monotti, 2008) and the translation of the rigorous Toyota Production System (TPS) programs and initiatives from the auto industry into the chocolate industry (Mark, 2006), make quality management the most strategically important issue by a wide margin. In terms of analyzing the impact of quality management from a stakeholder perspective, the Stakeholder Issue Life Cycle is used as the framework for analyzing the importance of product and process quality in the chocolate industry. The Toyota Production System (TPS) is one of the most advanced supply chain and sourcing systems and set of processes in the world, with a strong focus on supplier qualification and the monitoring of supplier quality and coordination globally. The TPS framework of supplier qualification and continual improvement aligns with the concepts of the Stakeholder Issue Life Cycle from the standpoint of averting exceptionally disruptive issues from impacting a business.
In addressing the chocolate industry's evolution from being highly fragmented in terms of its focus on quality from stakeholder perspective to one where entire networks of suppliers created based on stringent quality standards, the chocolate industry is in effect using the Stakeholder Issue Life Cycle as a means to consolidate strategic processes impacting quality and making them more accountable, auditable and transparent. Beginning with T1, or the time period when both external stakeholders and internal stakeholders are cognizant of the issues of quality from only a strategic, not operational perspective, there is a level of trust that the market makers that are driving this industry have it under control. Yet in fact as the events in China (Monotti, 2008) become more significant over time, and both external stakeholders including national governments starting to see there is a growing issue in this industry regarding quality, internal stakeholders become involved in terms of responding to requests to compliance within the industry. Given the transparency and immediacy of data and information the Internet has made available, there was a corresponding groundswell (Bernoff, Li, 2008) of interest in the issues of quality that continue to gain news coverage throughout nations seeing problems with chocolate quality. Children getting sick, store-wide recalls, immediate impacts to channel partner inventory levels and the need for lot-based audits from manufacturers who had used the factories in China affected all lead to stage 3 (T3) of the Stakeholder Issue Life Cycle, which is the prominence of quality as an issue industry-wide. By this point in the escalation of quality as an issue in the industry, the market makers including Cadbury, Mars, Ferrero, and Nestle all must issue statements as to how they will alleviate the potential of their entire distribution networks coming to a grinding halt due to quality concerns. There are also the issues for the external stakeholders who are shareholders, and their expectat6ions of earnings which vary by season of the year, being either met or not based on the sales interruption due to quality. T3 is the stage in the Stakeholder Issue Life Cycle where quality's shortfalls and issues now begin to directly impact profitability value-chain wide. This serves to heighten the anxiety of every external stakeholder, from the most strategic including institutional investors in the equities and stocks issued by Cadbury, Mars, Ferrero, and Nestle to the government agencies of China, European Union, and the oversight agencies of each country that chocolate is distributed within. There is in effect an overarching advisory about chocolate quality due to the tainted milk in China setting off a groundswell of concern globally. At this level of the crisis there is now the need for the market maker companies globally to respond in unison with a plan for averting an all-out crisis that will drive the trust out of their products. Troubling to the market makers is the fact that Cadbury, Mars, Ferrero, and Nestle resellers are now beginning to not trust their products as well. Recalls and lot-level analysis using CPFR analytics tools are beginning to arrive back at each of the four dominant company's headquarters. Internal stakeholders, from the CEOs down to the store clerks, are all expressing doubt and a lack of trust in products coming from the specific region of China that had the outbreak of tainted milk.
With the crisis of confidence comes the escalation of both external stakeholder and internal stakeholder focus on how to avert a melt-down of their channels and the industry based on lack of trust in…[continue]
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