Supply Chain Automation at Imperial Tobacco Canada

Introduction and Description of the Organization

Imperial Tobacco Canada competes in a relatively flat Canadian domestic market for tobacco, with compound annual growth rates in the 4% range for the years 2003 through 2007 (Inness, Barling, Rogers, & Turner, 2008). Cigarettes account for 96% of the market's value, which was estimated at $12.3 billion in 2007. From 2007 through 2012, the market was expected to slow further to 2.1% growth over that five-year period, with only a slight increase in total market value to $13.6 billion by 2012 (Inness et al., 2008). The slowing growth rate can be attributed to increased global competition in Canada and initiatives to restrict under-age consumption of tobacco — the latter being most significant in terms of its long-term impact on operating costs, as it necessitates subsidies in the form of taxes on Imperial's products.

Imperial Tobacco Canada is comprised of several subsidiaries, including Channel 2, which specializes in merchandising activities, as well as additional brands including Imperial Brands Ltd., John Player & Sons, and Allan Ramsey & Company Ltd. On February 1, 2000, when Imperial Tobacco Limited became part of the British American Tobacco Group, it gained significant financial support for product line and distribution investment. A ratio analysis of British American Tobacco indicates that the group has been successful in integrating its acquisition of Imperial Tobacco Canada, as demonstrated specifically by growth in Return on Assets (ROA), Return on Investment (ROI), and an increase of one inventory turn over the years analyzed. While these results indicate a gradually improving supply chain, they do not yet reflect a high-performing one. Inventory turns above 7 are possible in this industry (Inness et al., 2008) and should become a strategic objective for the company, pursued in conjunction with driving up ROA and ROI figures.

Integral to Imperial Tobacco Canada's operations are processes that initiate, execute, track, and analyze the performance of tobacco products delivered globally. The company competes in the United States and Latin American countries, making supply chain performance tracking critical. Imperial Tobacco Canada relies on several distributed order management systems that initiate transactions, track them, measure order accuracy and velocity, fulfillment percentage of on-time and early versus late deliveries, and method of shipment. However, these distributed order management systems are not integrated with one another and are rarely synchronized from a supply chain management and demand planning standpoint. The company has yet to fully adopt Collaborative Planning, Forecasting and Replenishment (CPFR), which would give it a significant competitive advantage in managing inbound demand from its channels (Johnson, 2008).

Distributed order management systems specifically created for services companies share process commonalities with manufacturing-based Enterprise Resource Planning (ERP) and distributed order management processes (Stecke & Zhao, 2007). Imperial Tobacco Canada relies on a comparable make-to-stock process workflow that seeks to optimize the freshness of each product being produced (Stecke & Zhao, 2007). The theory of constraints, as it relates to defining and evaluating processes within manufacturing-based ERP systems, has even greater significance in the context of Imperial Tobacco Canada's four operating divisions, where accuracy and velocity are the catalysts of their unique value proposition and the foundation of trust with consumer and commercial customers (Williford & Chang, 1999, pp. 204–206).

Constraint modeling is used within Imperial Tobacco Canada to optimize logistics and global supply chain coordination with corporate accounts, including streamlining third-party logistics functions (Alghalith, 2007, pp. 297–303; Babcock, 2006). Combining distributed order management systems is the means by which Imperial Tobacco Canada can synchronize its time-based product deliveries while relying on an optimization engine to determine optimal routing, pricing, and potential delivery delays — providing the company with a unique competitive advantage (Nichols, 2003).

A second major aim of this research is to evaluate the effectiveness of global distributed order management systems in terms of increased accuracy and velocity within Imperial Tobacco Canada's operating divisions, and the resulting impact on KPIs. The ability to attain a high level of logistics and supply chain performance — quantified by the perfect order metric (Novack & Thomas, 2004) — is also an objective of this study. Imperial Tobacco Canada is a data-driven culture that relies heavily on analytics and business intelligence, including the use of dashboards and scorecards. The adoption of the KPIs described in this paper is therefore expected to achieve a relatively high rate of user adoption as a result.

Assumptions, Scope, and Objectives

The following are the key assumptions underlying this research into how distributed order management (DOM) systems, when integrated with each other, will deliver higher levels of performance at Imperial Tobacco Canada:

The scope of this report is global, reflecting Imperial Tobacco Canada's operations. The concentration is on how tight integration of distributed order management systems — and supply chain management systems in general — can increase transaction velocities across broad geographic regions.

The key objectives of this study are as follows:

Major Issues in Supply Chain Integration

The two most critical issues facing Imperial Tobacco Canada are, first, the adoption of the day-to-day process changes that will be required when the systems are integrated and go live, and second, the development of a platform that can be quickly deployed.

Regarding the first issue, there will be significant change required at both the process and interpersonal levels throughout the company. Systems that provide greater insights and more accurate control of the supply chain will force change into nearly every operations-based role. This resistance to change is a critical challenge that will require substantial effort to overcome. As a first step, a needs analysis is essential for understanding how the systems can be designed to deliver maximum value to those using them, thereby increasing the likelihood of acceptance both within Imperial Tobacco Canada and among its suppliers.

The second major issue is developing a platform that can be rapidly deployed. The use of a Service-Oriented Architecture (SOA) for better unifying the distributed order management systems is critical for the long term. This is particularly urgent given that the existing order management systems within the company are largely disparate and disconnected. The SOA concept envisions all systems synchronized with one another at the process level, enabling them to be focused on strategic objectives rather than numerous smaller, often tactical ones. Addressing this issue today is essential if Imperial Tobacco Canada is to transform its supply chain into a genuine competitive advantage.

Conclusion

From the research and analysis completed, the role of distributed order management systems within Imperial Tobacco Canada illustrates how critical system and process integration is for the company to attain its long-term strategic plans and objectives. The current lack of integration and the absence of order state engines make the existing systems incapable of delivering perfect order performance at the level required for a sustainable competitive advantage. Yet as demonstrated by the British American Tobacco ratio analysis, the ad hoc integration following the acquisition has produced limited but positive financial results. A more integrated and synchronized supply chain system can significantly increase inventory turns while also improving ROA and ROI performance.

Taking a phased approach to the issues presented here — beginning with the development of an order state engine — will be critical for Imperial Tobacco Canada to continually improve its global supply chain performance. Order state engines represent the most accessible source of competitive advantage and should be the initial phase of any new project. Subsequent phases concentrating on the development of a full SOA are also critical but require substantially more planning and implementation effort.

As for the limitations of this analysis, there is a significant need for longitudinal financial data at the division level to fully understand the impacts of a distributed order management system integration strategy. Additional limitations include a lack of benchmarking against other companies in the same industry and, most importantly, a limited examination of the impact of an acquisition on supply chain management and distributed order management processes. Ultimately, the development of supply chain performance metrics as recommended in the appendix is critical for the company to overcome its greatest risk: resistance to change. The integration of distributed order management systems is only a first step; sustained effort must be directed toward creating process-wide dashboards and scorecards that reflect supply chain performance in real time. Long-term, the adoption of an SOA architecture is a strategic investment that Imperial Tobacco Canada must make to sustain its competitive advantage.

References

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Nichols, E. L. (2003). Research centers at the University of Memphis: Center for Supply Chain Management, Fogelman College of Business and Economics. Business Perspectives, 15(2), 52–55.

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Appendix

Perfect Order: An order that is complete, accurate, on time, and in perfect condition.

Demand Forecast Accuracy (DFA): The difference between forecasted and actual demand.

Quote-to-Cash Cycle Time: The time between when a quote is accepted by a prospect and when their first invoice is paid.

Cash-to-Cash Cycle Time: The length of time between when a company spends cash to purchase raw materials and when cash flows back from customers. Includes the following sub-metrics:

Supply Chain Transparency and Performance: Integrating customer-facing systems with supply chain, ERP, fulfillment, and service systems gives manufacturers the ability to track progress toward a Perfect Order. These metrics include:

Supply Chain Management (SCM) Cost includes the following components: direct purchasing operating cost; manufacturing operating cost; transportation cost; warehouse/distribution center operating cost; inventory holding cost; and customer service operating cost.

Sources: Hofman (2004); Cecere, Hagerty, & Souza (2005).

The following profitability and operational ratios are drawn from British American Tobacco Plc (United Kingdom) annual reports for the period 2001–2007.

Profitability Ratios: ROA % (Net) increased from 5.77 (2002) to 11.67 (2007); ROE % (Net) moved from 20.34 (2002) to 30.9 (2007); ROI % (Operating) moved from 19.57 (2002) to 19.75 (2007); EBITDA Margin % reached 31.23 in 2007.

Liquidity Indicators: Current Ratio declined from 1.59 (2001–2002) to 1.18 (2007), reflecting greater deployment of liquid assets. Net Current Assets as a percentage of Total Assets improved from negative figures in earlier years to 4.34% in 2007.

Debt Management: Long-term Debt to Equity improved from 1.29 (2001) to 0.85 (2007); Total Debt to Equity fell from 1.29 to 0.98 over the same period.

Asset Management: Total Asset Turnover rose from 0.53–0.55 in recent years; Inventory Turnover improved steadily from 3.92 (2002) to 4.96 (2007), indicating gradual but consistent supply chain improvement. Receivables Turnover ranged between 5.19 and 6.22 over the period analyzed.