Case Study Cargills

Supply Chain
Ganeshan Anuruddha
Janaka Bandara
Wimukthi Nelaka
Suneth Dharmaparakrama
Thushan Dharmawardana
Kasun Priyantha
Mohomed Roomy
Gayashan Weerawansha
Frank Perera
Kanthasamy Kirubakaran

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Submission Date : 3/18/2013

Case Study Cargills Supply Chain

Historical Development
In 1844 House of Cargills was formed by William Miller and David Sime which ventured in to
import and wholesale business in Colombo Fort. Consequently it became a Public Liability
Company in 1946 just before the independence.
Cargills are the pioneers of introducing super markets to the Sri Lankan consumers as they
opened their first outlet in Staple Street in 1983. This obviously made a great leap in retail
industry resulting in more and more convenience for customers.
1999 is one of the most important years for its supply chain since the first collection center
established in Hanguranketha. Cargills always had innovative ideas which make them developed
over the years. One of the classic examples is their diversification strategy which started in 2002
by investing in dairy processing plant and benefiting dairy farmers in Sri Lanka. Cargills Magic
ice cream was the outcome of this endeavor. Also they diversified into agri-processing with
Cargills Kist which makes them one of the stable performers in the market.

Image 1

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Case Study Cargills Supply Chain

Facts and Figures
Since the commencement of Cargills (Ceylon) PLC group, retail has been the mainstay of
success and the profits generated by the sector has been increasing every year. The chairmans
message in the annual report 2012 states The retail performance remains robust despite the
challenging market conditions of spiralling fuel prices and increased electricity tariff. Your
Group remains committed to safeguarding the interest of the consumer while mitigating any
risks to margins through internal efficiencies. Figure 1 shows the group revenue mix of Cargills
(Ceylon) PLC in 2012 and 2011.

Figure 1

It is a fact that over the past years, Cargills Supermarket Chain has shown a steady growth and in
2011/2012 the revenue and profits grew by over 24.6% and 29.3%.
Cargills retail has expended their outlets into every district in the country and currently Cargills
supermarket chain holds 194 Outlets island wide. The team has expected to reach its target 100
new outlets with the opening of 240th Cargills FoodCity in 2013/2014. With the intention of
achieving the above mentioned target effectively, an investment of Rs. 1.2 Bn has been budgeted
for this expansion drive in the forthcoming quarter. The growth of the Cargills retail outlets are
shown in the Figure 2.

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Case Study Cargills Supply Chain

The supermarket chain has been highly profitable in the last few years. The revenues of the retail
sector have been rising constantly. In the year 2012 the revenue has reached over Rs. 39 million.
Figure 3 shows the financial achievements of the Cargills retail during the past 2 years.

Year

Outlets

2012-2011

194

2011-2010

163

2010-2009

142

2009-2008

136

2008-2007

116

2007-2006

110

Figure 2

Figure 3

Cargills retail has substantially increased its revenue over the past two years. Revenue growth in
year 2011/2012 is 24.56% relative to year 2010/2011 which is a significant amount. The earnings
before tax and interests display a higher growth of 55.26%. Figure 4 shows the steady growth of
revenue and the earnings before tax and interests over the past few years.

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Case Study Cargills Supply Chain

Figure 4

Cargills Retail is the backbone of Cargills (Ceylon) PLC groups success. Therefore the retail
sector holds a larger portion of the groups profits. When considering the revenues and the
profits of the group, they have also increased simultaneously with the profit increase of the retail
sector. Comprehensive ratio analysis is used to measure performance related to liquidity,
profitability etc. Financial statement analysis helps to evaluate past and predict future financial
health of the company.
The Cargills groups Price Earnings Ratio is measured over the past few years in the figure 5.
Market Ratios

2006

Price Earnings Ratio

20.70

2007

36.73

2008

91.48

2009

19.58

2010

50.00

Figure 5

Price earnings ratio compares the price of a share to the earnings per share. It relates to the price
of a share to the proportion of the companys profits. When considering the figures, Cargills has
maintained a high Price Earnings Ratio throughout the past few years. This fact has been
immensely helpful in order to attract new investors towards the company. Thereby Cargills has
always been able to invest on CSR and expansion projects such as the 100 outlet project.

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Geographical Distribution
Following table gives an idea about the number of outlets in each district and how those outlets
spread in each district.
District
Ampara
Anuradapura
Badulla
Baticaloa
Colombo
Galle
Gampaha
Hambanthota
Jafna
Kalutara
Kandy
Kegalle
Kilinochchi
Kurunegala
Mannar
Matale
Matara
Monaragala
Mullativu
Nuwara Eliya
Polonnaruwa
Puttalam
Rathnapura
Trincomalee
Vavuniya
Total

# of Cargills food
cities
5
2
3
4
64
3
28
3
3
11
8
2
1
6
0
3
3
1
0
2
1
3
5
1
1
163

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# of Cargills express

Total

0
0
0
0
16
2
8
2
1
2
2
2
0
4
0
1
1
0
0
0
0
0
1
1
0
43

5
2
3
4
80
5
36
5
4
13
10
4
1
10
0
4
4
1
0
2
1
3
6
2
1
206

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Cargills having over 163 food city outlets and 43 express outlets spread across the island
covering 25 districts. Cargills operates around 60 outlets within Colombo district. And in
districts where the population is limited they operate only few outlets. This method has taken a
competitive advantage for Cargills over their competitors. When their outlets are available in
many locations then it increases the accessibility to their customers. When they place an outlet
they mainly concern about some factors such as,

Population

Life styles

Income levels

They collect these data by doing surveys and finally they come with decisions by analyzing
survey data.
Cargills maintain warehouses and collecting centers also in different locations
across the country. They collect their own mostly through direct channels, and this has taken a
huge advantage for Cargills over competitors, Cargills could offer best prices for the farmers
which competitors cannot achieve and
Cargils

offer

their

products

for

customers at comparatively low prices

than their competitors. Their main
Distribution center is situated at
Mattakkuliya.
Mattakkuliya is situated near Colombo
area and it is easily accessible for their
mainly focused districts. Then they
can improve their logistics function
and take a best use of logistics
function in line with total supply chain
objectives.

Image 2

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Case Study Cargills Supply Chain

Supply Chain Strategies

Considering the other super market chains there are certain things that make them competitive
among others .Cargills super market chain has categorized the products into branded products
and perishable products and they have distinctive supply chain strategies for these two
categories.
Considering the branded products they use a centralized warehouse to distribute the products to
all the 206 super markets located all over Sri Lanka. They have graded the outlets based on the
demand they have. Altogether there are around 5 grades and for each grade delivery pattern is
discrete. Order processing is done automatically based on past information by an internally
developed information system. So according to the order processed deliveries are done by the
centralized warehouse depending on the grade of the outlet. A Cargills outlet never gets shorter
of products since they always maintain a minimum margin of products that should be kept in the
shelves of the outlet. There are certain strategies implemented by them to make sure all the
15000 SKU s are delivered with the lowest cost and time and wastage which are described under.
These strategies make them really competitive along with their impressive marketing strategies
implemented.
What makes the supply chain of Cargills unique is the strategy theyve been using for perishable
products. These perishables can be categorized into four parts, vegetables, fruits, dairy products
and meat products. Of these vegetables and fruits is their main strength since they have a farmer
base of around 5000 spread all over the country. Cargills directly purchase the required amount
of vegetables directly from farmers by around 10 collection centers around Sri Lanka. Therefore
the middle man has been omitted from the process resulting in higher prices for farmers and low
prices for customers.

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Image 3

By this unique model Cargills has been able to be one of the forerunners in the industry. In a
conventional supply chain there are many players who try to gain the maximum profit resulting
in higher operational costs. Around 30% of the market value is received by the middleman while
the process after harvesting is costing around 40 % of the market price therefore resulting in only
30 % final value accruing to the producer.

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Case Study Cargills Supply Chain

Figure 6

Other than this there are many problems involved with this normal model of supply chain.
Normally the consumer is consuming a product which has deteriorated endlessly moving from
one middle man to another. Since the farmers are not encouraged by the lower price generated in
this system the products that are been produced uses lower quality planting materials and
sometimes premature harvesting resulting in inferior products entering into markets.
Understanding the reality Cargills invested a lot to change this conventional model. Farmers
were given free seeds and also technical advices were given in order to improve their skills and
knowledge in producing a good quality product. They were assured of a price that is higher than
the competitive market price prevailing.
As the below figure shows farmers can receive a higher price as few intermediaries are involved
in the supply chain which also enables Cargills to lower the retail price and improve their
competitiveness considering other super market chains.

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Case Study Cargills Supply Chain

Figure 7

Therefore a strong base is there for Cargills which resulting in a constant supply of vegetables.
Since their collection centers are located all around the country somehow the demand will be
fulfilled using alternative sources in case of a sudden disaster or supply fluctuation.
As per an example the demand of the perishable products pre-determined for tomorrow will be
collected today morning from those centers. Then the products will reach vegetable processing
center at Wattala on that day itself which will make sure consumers are getting the fresh products
distributed to their closest Cargills outlet.

Cargills have implemented strategies to reduce

their wastage and is able to reduce their post
harvest wastage from around 40% to 3% mainly by
investing on plastic crates long before government
implemented the policy, which makes them the
best among others.

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Case Study Cargills Supply Chain

Concisely features in the supply chain can be highlighted which are making it one of the
exceptional supply chains in spite of the fierce competition of the other super market chains.

Effective governance- Quality supplies

Coordinated delivery of services- Increase production and improve quality

Vertical integration Direct linkages between Cargills and suppliers

Information Flow Suppliers getting state of art knowledge on producing the best

Trust Minimum guaranteed price for farmers

Corporate Social Responsibility Empowering farmers

Diversification - Improved product quality

Chain Efficiency Reduced wastage

Inputs Free seeds

Sustainability Creating a win-win situation for both producers and buyers.

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Case Study Cargills Supply Chain

Suppliers

Suppliers

Suppliers

Miller Transport

Meat Factory

Suppliers

Suppliers

Suppliers

Miller Transport

Vegetable Collection Center

Ice Cream & kothmale

Factory

Suppliers

Suppliers

Suppliers

Suppliers

Kist Factory
FMGC DC

Miller Transport

Miller Transport

Supply chain of Cargills

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Distribution system in Cargills

Cargills supply chain is totally different from the normal supply chain system because
they use their own distribution system. Millers ltd involve in their all distributions not as a third
party as an own distribution section. As shown in the supply chain their distributions also
separate from each others like vegetable section use different root plan system and branded
products distribute in other way etc... We can study that they have excellent root planning system
to deliver products.
Cargills have their own 10 collection centers for vegetables around Sri Lanka and around
5000 of suppliers and those collection centers act as distribution centers also. Usually vegetable
section makes one delivery for a day directly food cities and one truck cover few food cities to
get maximum truck utilization from the nearest collection centers. And also collection centers
exchange the vegetables that cannot collect them.
Some other factories like meat and sausage section, dairy and ice cream also make
separate deliveries once a week directly to the outlets. Here they need special cooled trucks
because those are perishables and each truck usually covers more than one outlet for maximum
truck utilization.
And also Cargills have some other their own products like soaps and FMCG items, KIST
and biscuits manufacturing at factories are sent to the main distribution center at Mattakkuliya.
After that all of branded items sent through the main distribution center. Cargills use different
distribution strategy at main distribution center which they send all the branded products to all
their food cities from there. Usually they make one delivery for one week for each branch with
fully loaded truck. This distribution system help them to manage all the food cities at one place
with their cooperate plan.

Information system in Cargills

Now Cargills use their own information system to manage their entire business. They
used AS400 system early and now it is out of use. Usually every sale on retail outlets are counted
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Case Study Cargills Supply Chain

by the information system and after analyze uses them to forecasting and decision making.
Accordingly to sales and some other factors they have graded their food cities and they analyze
everything about them. Earlier food city manager decides what the quantities they need and
made the order and now it decides by the system and sends the orders for each section separately.
As an example separate order send to meat section, vegetable section etc... Then those sections
can easily manage their route plan system to reduce the distribution cost.
Better information system at Cargills, centralize the all information to the main
controlling center and to the management and it makes easy to analyze all the chain and decision
making.

Inventory management at Cargills

Cargills have more than 15000 of stock keeping units and it is necessary to have a better
inventory management at Cargills stores. Therefore they have excellent store management
system with allocated slots for each categorized item. As they keep only one distribution center
for branded products at Mattakkuliya they manage larger size of stocks there. They use forklifts
to move pallets and boxes within the store and move to and from trucks and Lorries. They have
their own transportation sector, so they can maintain their inventory management their own way.
Because of that they can continue inventory management to the lowest cost.
As well as they calculate their inventories based on storage structure or enter inventories
directly from feeding management software. Other thing is their inventories include all diets used
on the farm. As examples regarding total daily usage and value, period usage and value,
beginning inventory and value, ending inventory and value, and the date that current inventory
will run out if used at the current daily usage rates. According to this scenario Cargills Inventory
Management can consolidate their future forecast and overall amount and value numbers.

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Recommendations for future improvement
Its true that Cargills has a better supply chain than most of the other players in the market but
will it be capable enough to survive in the long run. Cargills is using lucrative marketing
promotions which are so close to the hearts of the consumers but it was seen in the real scenario
they dont put more interest on customer service. Cargills head office is the best example for
that. Yes they promote that they are paying a higher price for the farmers but they dont ever buy
additional amounts more than their demand which is pre-determined. So in the peak harvest
period farmers can only sell about 60% of their production which makes the traditional farmers
integrated with Cargills to look for other alternatives. Even the price level they are keeping is
just only 50 cents or 1 Rupee higher than the normal price for one Kilo Gram which doesnt
make it much difference to the social development scenario. Even the ethics integrated in the
supply chain is a bit problematic since it can be seen that alternative products are been made by
rotten vegetables fruits and meat and directly sell via there outlets. Therefore if they can develop
the supply chain involving more good aspects they can retain their name and fame in the coming
future.

References
Cargills Annual Report 2012/2011/2010/2009/2008/2007/2006
http://finacialsrilanka.blogspot.com/2012/10/analysis-of-annual-reports-of-cargills.html
http://www.cargillsceylon.com
Production Resources in Lagging Regions, World Bank Report: Case Study Sri Lanka, June
2007.

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