The company manages two types of products,

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29 M a n a g i n g S u p p l y Ch a i nC o m p l e x i t y i n a Te a1M a n u f a c t u r i n g Co m p a n yAbstractIn this case we present issues facing supply chain management in a teay manufacturingcompany. The company manages two types of products, ready-to-drink jasmine tea andready-to-drink fruity tea, each having different complexity issues in their supply chainmanagement processes. The case explains characteristics of the products, the supplychain structures and the nature of demand. The case is expected to facilitate discussionsof various supply chain concepts such as the bullwhip effect, supply chain coordinationand vertical integration versus outsourcing.The First MeetingIt was Friday, June 27, 2008. The coordination meeting between the marketing, distribution and production departments was taking place. œSome stores have been out ofstock 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 istheir brand name for ready-to-drink tea with a fruity flavor.œWe have too many product variants of fruity tea. Such a significant shortage hasnever happened to our main product, Goteh. Why dont we focus on Goteh? Its salesvolume is high and demand fluctuation is low, the operations manager added.The marketing manager responded after a brief of silence, œIt is indeed true what theoperations manager mentioned. But, if we want to enter wider market segments, it is amust 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 astrong market segment. Their contribution to revenue is increasing over time.œBut too many variants of Fteh increase the difficulties in production and distributionactivities. Our performance looks bad because we often experience out of stock situationsfor certain variants, but an excess of inventory for other Fteh products, the distributionmanager continued.1. I. Nyoman Pujawan and Mahendrawathi Er, Sepuluh Nopember Institute of Technology, Kampus ITSSukolilo, Surabaya 60111 Indonesia (pujawan@ie.its.ac.id) and (mahendra_w@its-sby.edu). This case wasprepared solely to provide material for classroom discussion. The authors do not intend to illustrate eithereffective or ineffective handling of a managerial situation. The authors have disguised some names andother identifying information to protect confidentiality. The views presented here are those of the caseauthors. Copyright © 2009 by Operations and Supply Chain Management: An International Journal andthe authors. Used with permission.221222Part 5Integration IssuesThe marketing manager insisted that the increasing number of new variants of Ftehhas enabled the company to hold a strong segment of teenagers. The classic Goteh didnot really embrace the teenager segment of the market.Company BackgroundTehindo has a long history in the tea business. The company began as a small homebusiness 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.ProductsToday, 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 packagedin 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 themajority 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 glassbottles, 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 inthis 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 blackcurrant.In the soft drink industry in general, there are two types of products according totheir packaging. The first is called return glass bottle (RGB), where the empty packagesare returned to the factory and used to produce new products. The second category isone-way product (OWP), where the packages will not be returned to the factory butTable 1Product variants for Goteh and FtehProduct GroupPackagingSize (ml)Number of flavorsGoteh (Ready-to-drinkjasmine tea)Glass bottleTetra packTetra pack220200250111Fteh (Ready-to-drinkfruity tea)Glass bottleTetra wedgeCanPlastic bottle PET2352003185008995Case 29Managing Supply Chain Complexity in a Tea Manufacturing Companywill be disposed of after the products have been consumed. In Tehindo, only the glassbottles 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 theempty bottles upstream. High inventory levels at some supply chain players for variousreasons (including forward buying and forecast inaccuracy) would result in shortages ofempty bottles at the factories for a certain period of time. Tehindo has a policy ofannouncing any price increase two weeks prior to the increase date. This is simply toplease the wholesalers and retailers as they usually feel uncomfortable with a suddenprice change. (Note that some other soft drink companies in Indonesia do not givewholesalers and retailers the privilege of knowing price increases well in advance, asthis 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 thetwo-week period from when the price increase is first announced until the date of theactual increase. Obviously, this is not possible for the OWP.Supply Chain NetworkCurrently, Tehindo has two main interrelated businesses: one is in manufacturing andthe other in the distribution of tea products. The manufacturing processes are based inten manufacturing plants spread across three islands in Indonesia: Sumatera, Java andBali. One of the factories (located in West Java) is dedicated to producing OWP andsupplies 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 thefactory 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. Thematerials for producing jasmine tea are tea leaves, water and sugar. For fruity tea, thefruit extract and other additional materials are also needed. The production process isquite simple. The liquid sugar, tea extract and fruit extract as well as other materialsare mixed, sterilized and then packaged.A vertical integration model is still very much practiced in this company. The tealeaves are supplied by a company within the Tehindo corporate organization. It has atotal 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 inSumatera, Java, Bali, Kalimantan and Sulawesi. Each regional sales center has a numberof sales offices and warehouses. Overall, there are about 150 sales offices all overIndonesia. In East Java alone, for example, there are 17 sales offices. East Java is one ofthe 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. Thishappens when there is a large order from an individual or an organization for suchevents as parties or gatherings. The other possibility is to deliver the products from thesales 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 thewholesalers and retailers. Finally, the company has recently worked with a third-partydistributor to manage the distribution of the products. However, this outsourcing223224Part 5Integration IssuesFigure 1Four Types of Distribution Channels for Tea Products Producedby TehindoSales centerSales centerSales centerSales centerDistributorWholesalerRetailersConsumersWholesalerRetailersRetailersConsumersConsumersConsumerspractice is only for OWP products that are delivered through traditional rather thanmodern retail chains.It is interesting to note that the company does not use a third-party distributorto 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 soldthrough modern retail outlets, making it financially infeasible to use third-party distributors. Second, modern retail outlets often initiate various marketing schemes such aspromotions and discounts, making it difficult for third-party distributors to havecustomized deals.Market DemandOrders coming from wholesalers and retailers are affected by a number of factors.First, price increases are set by the company. As mentioned above, the companyannounces a price increase two weeks prior to the actual increase date. This enables thewholesalers and retailers to carry out forward buying. Orders tend to be high within twoweeks 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 asreligious 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, butonly to respond to the price increases from the factory. Thus, the increase in orders fromwholesalers and retailers only happens temporarily and then will drop to a level belowaverage 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.Case 29225Managing Supply Chain Complexity in a Tea Manufacturing CompanyTable 2Comparison of Fteh Sales in the East Java Region through ModernMarket Outlets vs. Total Sales for 2006Annual sales through modern marketsAnnual sales total forEast JavaAPP17,51241,222LMN9,99418,900STR11,52530,085GVA15,40435,425ORG8,76426,125BLC13,61233,852FSN8,91537,405BLS7,00735,240XTR10,68541,436Fteh FlavorsUnlike traditional market outlets such as small food sellers and groceries, promotionalactivity is a norm for modern retail chains. Retailers like Carrefour, Giant and Alfa oftenlaunch 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 isnot ready to respond.In terms of sales volume, Goteh by far outperforms Fteh. As mentioned above, Gotehis mainly sold through the traditional market, while Fteh is mainly sold through modernretail chains. Table 2 shows comparisons of sales of Fteh through the modern retailersand the total for East Java. It is obvious from the table that the sales of Fteh throughmodern 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 promotionalactivities conducted by these modern outlets.The Second MeetingOn August 15, 2008, the managers were engaged in another meeting. The issue ofproduct variety once again became a hot topic. The marketing manager showed salesdata of the two types of products, Goteh and Fteh. A newly appointed supply chainmanager attended the meeting. There was a discussion on whether or not the companyshould reduce the product variants of the fruity tea.Discussion Questions1. Make a diagram showing the supply chain configuration of Tehindo as well as theflow of products and information within the supply chain.2. Compare the bottled Goteh and Fteh in terms of challenges in managing their supplychain processes.226Part 5Integration Issues3. 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 sugges-tions in the second meeting?5. How does information distortion happen in this supply chain, and what would beyour suggestions to reduce it?6. Discuss the advantages and disadvantages of vertical integration and outsourcing

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