Food Factories
OM Blog 3: October 30, 2009
By Ken Boyer, Fisher College of Business and Rohit Verma, Cornell University
Authors: Operations and Supply Chain Management for the 21st Century, 2009, Southwestern Cengage Publishing
Food Factories
What is involved in running a grocery store? A lot. Every day, managers must make thousands of decisions regarding inventory (what to buy and how much), job scheduling and assignment (i.e. how many employees in which departments and what jobs should be done and in what order), and quality (how to ensure good products are sold and good service is provided). Pretty daunting eh? And this is for just one store. Consider Kroger Co., headquartered in Cincinnati, Ohio, it operates over 2,400 supermarkets, with revenues of more than $70 billion and has over 300,000 employees. It is the second largest grocery retailer in the U.S. after Wal-Mart. Efficient and effective operations are one of its keys to excellence.
Yet, when we think of groceries it is usually in terms of services – after all, stores don’t make anything do they? Actually, they do. Kroger owns 40 different manufacturing plants (a competitor, Safeway, owns 32). These manufacturing plants make roughly 14,400 in-house (also known as generic) products, including 38,000 “party pails” of ice cream per day – which sell for $2.99 each, or approximately 30% of the cost for name brand ice cream such as Dreyer’s, Ben & Jerry’s or Graeter’s. Stores like making their own because they often can get a higher profit margin on in-house products than for name brand products – because they are controlling more of the process, hence are providing more value.
Kroger is selling 15% more in-house products by volume this year due to the down economy. Consumers often will trade a lower cost for that name brand. In fact, industry wide, sales of store-branded items increased nearly 10% over the past year. In-house products account for 35% of Kroger’s sales, up from 31 percent five years ago. In a down economy, this growth is resulting in increased hiring – Kroger created 400 new manufacturing jobs in the last year for a total of 7,400.
So, the next time you shop for groceries, give a thought to where those groceries came from – it might not be where you think.
Discussion questions:
- How do the practices described above relate to operations and supply chain strategy (chapter 1), process design and analysis (Chapter 4)? Capacity planning (chapter 10) and technology and integrated supply management (Chapter 13)?
- Describe the main challenges of running a food manufacturing plant. How are these similar to or different from running a grocery chain or store?
- Do you think that Kroger ships directly from the factories to its individual stores? Or does it ship products to an intermediate distribution center and from there to its stores?
- How should Kroger treat these facilities? Should they be exclusive to Kroger, or should they provide sales to other retailers? How does this effect capacity planning and forecasting? What are the advantages and disadvantages if Kroger uses the factories to produce products for other retailers?
Sources:
- Information for this story comes from the article “Food Factories”, by Dan Sewell, Columbus Dispatch, October 21, 2009 – to see the full story click here (http://www.dispatch.com/live/content/business/stories/2009/10/21/kroger_food.ART_ART_10-21-09_A12_H1FE63G.html?sid=101)
