Supply Chain Management Assignment#1 27-09-2011 Q.

1) John Smith, being the Vice President of the company s supply chain management, was heading planning, production and distribution departments. He had to maintain the company s reputation of being the largest seed company in the world as the industry is changing rapidly, so it would be difficult to maintain the same performance level. For this purpose, his decisions were critical to mark the company as the reliable supplier of high quality genetically produced seeds. The company forecasted the production plan. It took data for the last four years and, on the basis of that, forecasted the demand for the next year. As the company was operating in highly competitive market, biotechnological breakthroughs would lead to a decrease in company s seed s demand because it depends largely on one Hybrid corn seed. And it took 7-10 years to develop a new hybrid seed along with a lengthy production cycle of the seed. The demand forecast was uncertain due to changing climatic/weather conditions. To account for emergency and shortage of seed availability due to severe weather, the company maintained 33% carry-over inventory cushion. Moreover, Robert Johnson-head of productionconsidered 33% carry-over inventory critical due to the reasons stated. But in case of favorable weather the carry-over level reached 83.8% in 1995 and it took twice as much warehouse space as 33% carryover, just offsetting the gains due to large stock inventory management. It increased the risk of product obsolescence and damage. John Smith was worried as he had to decide on the supply chain after considering all these problems. All these decisions were to directly affect the company s revenue, costs and customer satisfaction. If the customers (farmers) are dissatisfied, it would directly affect the overall company s production planning and leading to high inventory management cost.

At Pioneer, demand forecast was based on historical data. The production yield was affected by growing climate conditions, legislation, customer preferences and increasing market competition. Here, close contact with the customers and placement of safeguard inventory are important to account for the uncertainty of demand forecast. Since, demand forecast and production yield were contingent on the occurrence and non-occurrence of future events let s consider two scenarios to get the understanding of effects on supply chain management decisions: A) Low demand and planned production yield In this case, if demand decreases due to biotechnological breakthrough and legislation like Freedom to Farm bill, the surplus production yield will lead to increased inventory,

transportation and logistical costs. The product runs the risk of obsolescence and damage. It will ultimately affect revenue of the company. Here, buffer stock would be damaging instead of providing a safeguard against shortage of seed. Moreover, off-season production costs 25% more than domestic production costs which is a point to be worried about. B) High demand and low production yield In this case, the company will not be able to satisfy customer s needs. Even if it uses off season production then this will lead to a 25% increase in cost, and there are capacity limitations too in off season production. Q.2) The main factors are the uncertainty of production and demand because of the changing climate conditions. Because the industry is changing rapidly so past data becomes less predictive. So smith should work to reduce safety stock. For this, smith needs to look at the cost of storing inventory, obsolescence cost and transportation costs and weighing them against the cost of shortages. As shown in exhibit 1 that with a carryover rate of 20% Pioneer is safe even when yield drop to even 90% we have a carryover of 5%, of 868534 80k units. Exhibit two further shows that even a carryover rate of 13.5% would be enough to satisfy an 80% yield. So on this analysis the carryover rate is high. But we need to analyze past data as 80% is just the drop from the mean and as explained above. Also the fact the even reducing carryover from 33% to 13.5% (19.5% drop) is safe means that 33% is high Q.3) While deciding a relationship between production yield of the northern and southern hemisphere, it should be considered that there has to be an inverse relationship between the two production yields. Also the amount of safety stock would determine the production in the northern hemisphere, a higher safety stock should reduce the need for an in increase in the off-season production. The Company operates in highly competitive market with unpredictable weather conditions, increased biotechnological breakthroughs and shorter product-life cycles. Increased off-season production would diversify company s operations. It would experience greater geographic and climatic conditions. Since, growth rate is 5% save North America, the company can benefit from its expansion by meeting greater customer needs in the less amount of time. It can tap into more markets worldwide expanding its business and maintaining its worldwide leadership. For this purpose, it would have to establish more distribution centers, post-harvest production facilities and customer service centers to facilitate normal supply chain channels to get access to larger markets worldwide. Since, the company s foreign countries share is exceeding 22.5%, it would be a viable option to expand its operations worldwide.

Despite these potential benefits, increased off-season production would cost 25% more than domestic production. The company has worked hard to protect its patented products over the course of its business. In case of expansion, it would have to abide by the laws of the country it would be operating in which makes it difficult for the company to protect its proprietary assets. It would lead to increased distribution and production costs. Research and development cost is likely to increase to inspect the growing ability of the soil. Contractual agreements with new seed growers will be an added cost. Q.4) Advantages:

The main advantage of expanding international production for Pioneer is the lower risk that it faces in its seed production. By diversifying its seed fields, Pioneer has a less chance of facing issues in supply due to adverse weather conditions, governmental regulations, insects and crop diseases. Producing in different countries meant that Pioneer would always have different options with regards to its supply and it will not be entirely dependent on a region to produce most of its supply. Disadvantages: The production costs for Pioneer will increase up to 25% more if more production is done worldwide than in North America. Other major issues such as the acquisition of proprietary assets would arise, as Pioneer had patented most of its research and worked very hard to protect its intellectual property. The issues of the capacity of these overseas locations would arise, as so far these overseas sites have been mostly used for off- season production which is considerably low than summer production. John Smith should continue producing most of the seed corn within North America. This is mainly due to the fact that in 1997, 95% of Pioneers seed corn production capacity was in the USA and Canada. This capacity would easily account for the overseas demand of 22.5 %. The remaining demand could be overcome by the already producing international sites. By doing this, John Smith would avoid all the disadvantages of overseas production. Pioneer would be able to more strictly monitor its quality control procedures and it would benefit from the less cost (25% less) of producing in the Northern Hemisphere. The international sites would continue to be used for the off-season production.

Exhibit1

Total carry in from 1997 Total Discard Exports New Crop Production Off-Season Production Total Supply Utilization Total carry over % Carry over

Supply Chain Management 1998 (Plan) 1998 (80%) 1998 (90%) 8322855 8322855 8322855 1665041 1665041 1665041 100000 100000 100000 12422684 9938147.2 11180416 1000000 1250000 1000000 19980498 17745961 18738230 16650415 16877427 16650415 3330083 868534.2 2087814.6 20.00% 5.15% 12.54%

Assumption= Carry over rate = 20% Appendix: Effects of changes in carryover rate Exhibit2

Total carry in from 1997 Total Dicard Exports New Crop Production Off-Season Production Total Supply Utilization Total carry over % Carry over

Supply Chain Management 1998 (Plan) 1998 (80%) 1998 (90%) 8322855 8322855 8322855 1665041 1665041 1665041 100000 100000 100000 11340407 9072325.6 10206366 1000000 1250000 1000000 18898221 16880140 17764180 16650415 16877427 16650415 2247806.03 2712.62 1113765.3 13.50% 0.02% 6.69%

Assumption= Carry over rate = 13.5%