Managing Supply Chain
Complexity in a Tea
Manufacturing Company
Abstract
In this case we present issues facing supply chain management in a teay manufacturing
company. The company manages two types of products, ready-to-drink jasmine tea and
ready-to-drink fruity tea, each having different complexity issues in their supply chain
management processes. The case explains characteristics of the products, the supply
chain structures and the nature of demand. The case is expected to facilitate discussions
of various supply chain concepts such as the bullwhip effect, supply chain coordination
and vertical integration versus outsourcing.
The First Meeting
It was Friday, June 27, 2008. The coordination meeting between the marketing, distribution
and production departments was taking place. “Some stores have been out of
stock of some types of Fteh in the last few days,” the distribution manager of Tehindo,
a producer and distributor of tea products in Indonesia, informed the attendees. Fteh is
their brand name for ready-to-drink tea with a fruity flavor.
“We have too many product variants of fruity tea. Such a significant shortage has
never happened to our main product, Goteh. Why don’t we focus on Goteh? Its sales
volume is high and demand fluctuation is low,” the operations manager added.
The marketing manager responded after a brief of silence, “It is indeed true what the
operations manager mentioned. But, if we want to enter wider market segments, it is a
must for us to keep innovative products with more variants in the market. In the future,
there is no doubt that innovative products like Fteh with various flavors will hold a
strong market segment. Their contribution to revenue is increasing over time.”
“But too many variants of Fteh increase the difficulties in production and distribution
activities. Our performance looks bad because we often experience out of stock situations
for certain variants, but an excess of inventory for other Fteh products,” the distribution
manager continued.
1. I. Nyoman Pujawan and Mahendrawathi Er, Sepuluh Nopember Institute of Technology, Kampus ITS
Sukolilo, Surabaya 60111 Indonesia (pujawan@ie.its.ac.id) and (mahendra_w@its-sby.edu). This case was
prepared solely to provide material for classroom discussion. The authors do not intend to illustrate either
effective or ineffective handling of a managerial situation. The authors have disguised some names and
other identifying information to protect confidentiality. The views presented here are those of the case
authors. Copyright © 2009 by Operations and Supply Chain Management: An International Journal and
the authors. Used with permission.
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The marketing manager insisted that the increasing number of new variants of Fteh
has enabled the company to hold a strong segment of teenagers. The classic Goteh did
not really embrace the teenager segment of the market.
Company Background
Tehindo has a long history in the tea business. The company began as a small home
business in Indonesia in the 1940s. The owner started the tea business in Central Java,
but then moved to Jakarta in an attempt to capture larger markets after some 25 years.
The company opened its first factory in the mid-1970s in Jakarta, producing readyto-
drink bottles of tea. The opening of the factory created a significant increase in sales,
reflecting a healthy market for tea products.
Products
Today, Tehindo produces three types of tea products. The first is called Goteh, a jasmine
tea mostly packaged in glass bottles. A small percentage of this tea is also packaged
in tetra packs (a small carton box) or tetra wedge (a small carton in the shape of triangular
pyramid). The bottled jasmine tea is very popular in Indonesia and contributes the
majority of revenue to the company. The product is consumed by all market segments.
The second product type is called Fteh, a tea with a fruity flavor, packaged either in glass
bottles, tetra packs or cans. Fruity tea is more directed toward teenagers and the distribution
of products is through modern retail chains such as Sogo, Giant, Carrefour, Alfa,
Superindo, Torseba Yogya and Indomaret. The third product category is cteh, a dried,
chopped and ready-to-boil tea leaf, normally packaged in tea bags.
Among the three classifications, only the first and the second types are discussed in
this case. Unlike Goteh, which has very limited product variants, as shown in Table 1,
Fteh has a large number of variants based on the product flavors. Currently, the company
offers various flavors of Fteh including guava, strawberry, lemon, apple and black
currant.
In the soft drink industry in general, there are two types of products according to
their packaging. The first is called return glass bottle (RGB), where the empty packages
are returned to the factory and used to produce new products. The second category is
one-way product (OWP), where the packages will not be returned to the factory but
Table 1 Product variants for Goteh and Fteh
Product Group Packaging Size (ml) Number of flavors
Goteh (Ready-to-drink
jasmine tea)
Glass bottle
Tetra pack
Tetra pack
220
200
250
111
Fteh (Ready-to-drink
fruity tea)
Glass bottle
Tetra wedge
Can
Plastic bottle PET
235
200
318
500
8995
222 Part 5 Integration Issues
will be disposed of after the products have been consumed. In Tehindo, only the glass
bottles are classified as RGB, while the others are classified as OWP.
Managing RGB products is certainly more complicated than OWP. One of the challenges
would be to ensure a smooth flow of the products downstream as well as the
empty bottles upstream. High inventory levels at some supply chain players for various
reasons (including forward buying and forecast inaccuracy) would result in shortages of
empty bottles at the factories for a certain period of time. Tehindo has a policy of
announcing any price increase two weeks prior to the increase date. This is simply to
please the wholesalers and retailers as they usually feel uncomfortable with a sudden
price change. (Note that some other soft drink companies in Indonesia do not give
wholesalers and retailers the privilege of knowing price increases well in advance, as
this company does.) To avoid massive forward buying, the company requires the retailers
and wholesalers to exchange empty bottles for full bottles, if they order within the
two-week period from when the price increase is first announced until the date of the
actual increase. Obviously, this is not possible for the OWP.
Supply Chain Network
Currently, Tehindo has two main interrelated businesses: one is in manufacturing and
the other in the distribution of tea products. The manufacturing processes are based in
ten manufacturing plants spread across three islands in Indonesia: Sumatera, Java and
Bali. One of the factories (located in West Java) is dedicated to producing OWP and
supplies all the distribution centers. Other factories produce both RGB and OWP products.
The supply policies are generally based on geographical proximity. For example,
two factories in Sumatera supply the whole market area on Sumatera island, while the
factory in Bali supplies Bali and the Nusa Tenggara market area.
To produce ready-to-drink tea, only a couple of types of materials are needed. The
materials for producing jasmine tea are tea leaves, water and sugar. For fruity tea, the
fruit extract and other additional materials are also needed. The production process is
quite simple. The liquid sugar, tea extract and fruit extract as well as other materials
are mixed, sterilized and then packaged.
A vertical integration model is still very much practiced in this company. The tea
leaves are supplied by a company within the Tehindo corporate organization. It has a
total of over 1,500 hectares of tea plantations in different areas in West Java.
Downstream, the products are distributed through 11 regional sales centers located in
Sumatera, Java, Bali, Kalimantan and Sulawesi. Each regional sales center has a number
of sales offices and warehouses. Overall, there are about 150 sales offices all over
Indonesia. In East Java alone, for example, there are 17 sales offices. East Java is one of
the major market areas for Tehindo.
There are four different distribution channel configurations, as depicted in Figure 1.
From the figure, it is evident that some products are shipped directly to consumers. This
happens when there is a large order from an individual or an organization for such
events as parties or gatherings. The other possibility is to deliver the products from the
sales center to retailers who will then sell the products to the end customers. The retailers
here could be a supermarket, a shop, a restaurant or other parties selling the products
to the end customers. The other model is to deliver the products through the
wholesalers and retailers. Finally, the company has recently worked with a third-party
distributor to manage the distribution of the products. However, this outsourcing
Case 29 Managing Supply Chain Complexity in a Tea Manufacturing Company 223
practice is only for OWP products that are delivered through traditional rather than
modern retail chains.
It is interesting to note that the company does not use a third-party distributor
to handle the distribution of OWP products to modern retail chains. There are two reasons
behind this policy. First, the margin is relatively tiny for OWP products sold
through modern retail outlets, making it financially infeasible to use third-party distributors.
Second, modern retail outlets often initiate various marketing schemes such as
promotions and discounts, making it difficult for third-party distributors to have
customized deals.
Market Demand
Orders coming from wholesalers and retailers are affected by a number of factors.
First, price increases are set by the company. As mentioned above, the company
announces a price increase two weeks prior to the actual increase date. This enables the
wholesalers and retailers to carry out forward buying. Orders tend to be high within two
weeks prior to the price increase, and then drop for some time after the increase. Second,
orders tend to be quite high in anticipation of demand increases due to such events as
religious celebration days and New Year.
In reality, the price increases set by the company do not really affect final consumption.
Increased orders are not because of an increased demand from the consumers, but
only to respond to the price increases from the factory. Thus, the increase in orders from
wholesalers and retailers only happens temporarily and then will drop to a level below
average for some time after a price increase. As a consequence, the retailers and wholesalers
hold larger inventories temporarily. For New Year celebrations and other events,
there is normally a real increase in demand from the consumers.
Figure 1 Four Types of Distribution Channels for Tea Products Produced
by Tehindo
Sales center
Consumers
Sales center
Consumers
Retailers
Sales center
Consumers
Retailers
Wholesaler
Sales center
Consumers
Retailers
Wholesaler
Distributor
224 Part 5 Integration Issues
Unlike traditional market outlets such as small food sellers and groceries, promotional
activity is a norm for modern retail chains. Retailers like Carrefour, Giant and Alfa often
launch promotional events (such as buy two, get three; and prize drawings). Obviously,
such promotional activities can increase sales of tea products to the consumers. However,
the increase in demand would result in shortages if any member of the supply chain is
not ready to respond.
In terms of sales volume, Goteh by far outperforms Fteh. As mentioned above, Goteh
is mainly sold through the traditional market, while Fteh is mainly sold through modern
retail chains. Table 2 shows comparisons of sales of Fteh through the modern retailers
and the total for East Java. It is obvious from the table that the sales of Fteh through
modern market outlets account for a very large percentage of sales. As a consequence,
the dynamic of orders to sales centers and factories is very much affected by promotional
activities conducted by these modern outlets.
The Second Meeting
On August 15, 2008, the managers were engaged in another meeting. The issue of
product variety once again became a hot topic. The marketing manager showed sales
data of the two types of products, Goteh and Fteh. A newly appointed supply chain
manager attended the meeting. There was a discussion on whether or not the company
should reduce the product variants of the fruity tea.
Discussion Questions
1. Make a diagram showing the supply chain configuration of Tehindo as well as the
flow of products and information within the supply chain.
2. Compare the bottled Goteh and Fteh in terms of challenges in managing their supply
chain processes.
Table 2 Comparison of Fteh Sales in the East Java Region through Modern
Market Outlets vs. Total Sales for 2006
Fteh Flavors Annual sales through modern markets
Annual sales total for
East Java
APP 17,512 41,222
LMN 9,994 18,900
STR 11,525 30,085
GVA 15,404 35,425
ORG 8,764 26,125
BLC 13,612 33,852
FSN 8,915 37,405
BLS 7,007 35,240
XTR 10,685 41,436
Case 29 Managing Supply Chain Complexity in a Tea Manufacturing Company 225
3. Discuss the causes of temporary demand (and order) increases in this supply chain.
4. If you were the supply chain manager of this company, what would be your suggestions
in the second meeting?
5. How does information distortion happen in this supply chain, and what would be
your suggestions to reduce it?
6. Discuss the advantages and disadvantages of vertical integration and outsourcing for
Tehindo.
226 Part 5 Integration Issues