Supply Chain Management: Improvement Project

pigsabusiveElectronics - Devices

Nov 29, 2013 (3 years and 8 months ago)

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Supply C
hain Management: Improvement Project


MGT 420

Instructor:

Dr. B. Hartman

Students:

Ed For
d, Tim Gerritsen, Brett Lowers,
Samir

Mirani








I. Mission and
Objective

Company Overview:

Pyramid Breweries, Inc. is

a craft brewer of specialty beers and sodas.

It

has

more than 20 English
-
style ales and German
-
style wheat beers
which
are marketed under
the Pyramid Ales and Thom
as Kemper Brewing Company brands
.

In addition, the
company produces a line of four special
ty sodas under the Thomas Kemper Soda
Company name.

Pyramid brews its beers at two
major
breweries

located

in Seattle,
Wash
ington and Berkeley, California.

B
oth
major

breweries
include attached alehouses

along

with
family styled
restaurants.

The company

also sells its beverages through a
network of independent distributors in more than 30 states.


The majority of sales,
however, c
ome from the California, Oregon, and Washington (COW) states.

Problem statement:



How to improve the current tracking of
the
di
fferent

types of beer kegs used by
Pyramid.

II. Industry overview

Acc
ording to various sources the United States

beer, wine and spirits industry is
comprised of roughly 5000 companies that have revenue of around $100 billion. The
beer
industry is very
fragmented. T
he top fifty companies pull in nearly thirty percent of
the industry
’s total

revenue.



In order for a brewery to still be considered a microbrewery it cannot produce
more than 15,000 barrels (18,000 hecto
litres/ 475,000 gallons) a year. The

requirements,

however
,

do tend to

vary

by region and local authorities.

Th
e Association of Brewers
reported

that in 2007 there were 1,406 regional craft breweries, microbreweries and
brewpubs in
the United States.

According to the 2009 Brewers A
lmanac there are 305 breweries active in
California
and 105 in Oregon. Overall the industry grew by 0.4% in 2008 compared to
1.4
% in 2007.


2008



2009


CALIFORNIA

19.8

19.9

OREGON

23.7

23.1

Per Capita consumption of beer in gallons


Pyramid however
due to its current scale
is not considered a microbrewery
anymore as it has surpassed the generally accepted norm
to be

one.

Why track the beer keg?

One of the most v
aluable assets for a brewery are

its beer kegs.
Approximately
4
00,000
kegs were stolen at

a loss of $65 million in 2008
, estimates the Washington
-
based Beer Institute. Approximately 10% of the 625 million gallons of beer annually sold
in the USA is in kegs, which are owned by brewers.

A good example of kegs lost by an individual brewer is the

numbers for Sierra
Nevada. Their numbers can be compared to Pyramid as they operate on similar scales. In
Sierra Nevada’s case they had a loss of 3
-
4% a couple of years ago, the rate now has
nearly doubled. Sierra Nevada, as a brewer owns approximately 18
0,000 kegs.

It is important to know that currently in the US there is only one manufacturer of
stainless steel kegs. “Franke Beverage containers
” produces

approximately 300,000 keg
s
per year, based on the fact that annually over 400,000 kegs are stolen th
ere is a 100,000
shortage in keg production.

The efficiency and effective control of kegs can be a leading factor in the success
and profitability of a smaller brewery
,

such as Pyramid
,

where kegs are a large part of
overhead.

In the current situation Py
ramid Breweries still us
es

a manual barcode
scanning process in order to fo
llow inbound and outbound kegs as well as inbound
materials such as hops.

The life cycle of a keg:

The
general
life cycle of a beer keg generally consists of four phases:
Acquisiti
on
,
Tracking
, Management,
and Disposal
.

These phases involve every as
pect of the asset,
which include: labor
, administration/maintenance, equipment and inventory.


Due to the fact that the price of Aluminum his gone up considerably as noted by a
Reuters t
rade report recently
"Aluminum is becoming like gold
-

it's sitting in vaults, you
can't use

it but its got perceived value,

“ the value of kegs, and
subsequencely their
replacement cost
s

for lo
s
t
, stolen, or broken

ones is becoming greater.


Total keg in
ventory is referred to as the “f
loat” in the beer industry. For every
single keg on tap there are 8 others in the supply chain
needed to keep that single tap
supplied consistently with beer.



The reason for this large ratio is that for every keg currentl
y “tapped,” there is a
need for any empty kegs to get refilled, then there are the full kegs awaiting shipment in
cold storage at either
the brewery or the distributor next are any kegs already

in transit,
and finally,
the
kegs
awaiting hookup at the servi
ng location
.
Since brewers like pyramid
can easily have several different types of beers



light beers, flavored beers, etc.


the
size of the float necessary to support a beer company’s non
-
store sales
exceeds anything
it might have used to be.

Proposed

solution:


Based on our visit to the Pyramid brewery in
Berk
e
ley we have
formulated

a
long
-
term

solution, that once implemented, will
reduce cost
s, allow for more effective
collection and analysis of statistical usage data, and
enhance
the visibility of t
heir supply
-
chain
, in real time, while either in
-
transit and in house
.

Our long
-
term solution is based
on the full implementation of
Radio Frequency Identification (
RFID
)

tagging through out
their supply
-
chain
. This is

to include
key
vendors and supplier
s,

with a particular focus
on kegs.

The kegs will have an active RFID tag built into it, allowing for
complete
information collection and management for Pyramid Breweries.

An over view of a
keg
life cycle including an RFID system

be seen in picture 1 in t
he appendix.
As can be seen
in the picture the entire life cycle of the keg can be followed.


Benefits of RFID in the supply chain:


With the implementation of RFID valuable information about the kegs can be
collected.


Pyramid will be able to follow individual kegs and track when they are being
filled and with which one of the
seven

beers.
They will also
be able to track usage of
kegs
(fill
-
to
-
fill rates), shelf time of kegs at smaller distributers and the return rates

from
them.


Sierra Nevada currently uses
laser engraving on their kegs, which is eventually
read, in the warehouse. This system does offer localized tracking but nothing comparable
to the scale benefits of RFID thus giving Pyramid another competitive adv
antage over
similar breweries.

Pyramid Matrix


In order to give a quantitative over view of the keg
-
cycle and tagging of Pyramids
beer kegs we constructed a matrix that addresses the following areas:

Price to Reuse Keg (Disinfenct)

$3.00

Price of a New
Keg with RFID

$90.00

Average Price to ship Keg Back to Factory

$32.00

Recycle of Keg Cost (including adding RFID)

$40.00

Decomission Rebate (selling the keg allumuim)

$6.00

Annual Inventory Holding Cost (as a fraction of product
cost)

10.00%

RFID
Program Fixed Cost

$204,512.00

Keg Reuseabe Rate

45.00%

Keg Recycle Rate

40.00%

Keg Shrink Rate

20.00%

Keg Obsolence Rate

15.00%

Average New Keg Lead Time (years)

0.1

Cycle Service Level

97.00%

Fixed Reorder Cost

6000

Z
-
Score

1.880793608

Holding
Cost Per Year

9

Total Cost:

92,933,660.48


The way the matrix is set up
we are able to

customize the above input variables
in order
to calculate pyramids total shipping cost,
holding cost, cleaning cost and recycling cost.
Furthermore it calculates the amount of new kegs needed based on demand forecasts vs.
the recycling rates. This is then able to run the solver function in excel in order to
minimize total cost per quarter.


As can be seen in the matrix we are also given an overview of the keg inventory
and relevant factors such as
our keg losses due to
shrinkage, which

is one of the main
reasons we recommend implementing a RFID system. Forecasts for reduced cost based
on a re
duction in shrink rate and changes in
float (labeled as external inventory) are then
easily performed.

Conclusion


As shown the reasons for instituting RFID tracking on kegs are numerous. The
implementation of active RFID
tags has an initial capital cost
, but the benefits far
outweigh the costs. The ease of tracking an active RFID
specially designed and
outfitted
keg, will help with the shrinkage

greatly discouraging the theft
of kegs along with

justifying

the raising of keg
deposits
. It will help track

keg circulation
, keep track of
current inventories of kegs in the “float”,
and
allow breweries to better see the inventory
of the beer itself flow out of the keg.






Picture 1.