Case Study of Anadolu Efes Transshipment Problem Adapted from: Kksalan, M., & Salman, F. S. (2003).
admin
Case Study of Anadolu Efes Transshipment ProblemAdapted from: Kksalan, M., & Salman, F. S. (2003). Beer in the Classroom: A Case Study of Locationand Distribution Decisions. INFORMS Transactions on Education, 4(1), 65-77.Anadolu Efes has dominated the Turkish beer market in the last two decades as a result of carefulplanning and successful strategies in distribution, pricing and marketing. Consequently, Efes has become synonymous with beer in Turkey and has reached an impressive 78% market share in 2000 (Exhibit 1).The company has also extended its business line by buying the right to bottle Coca-Cola in Turkey in1998, and has been transforming into a multinational identity by building up international brewingoperations mostly in Eastern Europe, Russia and Central Asia. The two main challenges faced by thecompany in the new millennium are to succeed in its business diversification efforts and to maintain itsmarket position in its core Turkish brewing business.Emre Yaman, who was hired as the Chief Executive Officer of Efes nearly one year ago, has a couple ofmajor issues in mind as he shapes the business plan of the company for the years to come. In terms ofdomestic operations, an immediate issue is that the anticipated increase in beer demand will surpassEfes’ total production capacity in a couple of years. A capacity expansion plan has to be preparedcarefully to address this problem. Such a plan will also prove useful to deter any foreign entries to theattractive Turkish beer market. In fact, increasing competition is the other major issue in Emre Yaman’sagenda. He has already seen the first signs of pressure when Efes’ main competitor Turk Tuborg wasacquired by the Danish Carlsberg Breweries in September 2001 and subsequently launched the"Carlsberg" branded beer against Efes’ own "Miller Genuine Draft". Although Emre knows that Efes’long-time brand "Efes Pilsen" has a very loyal customer base, he believes that the strength of Efes’production-distribution network will play a key role in the competition.Emre Yaman mentions some of his concerns to Ali Yurtoglu, the Vice President for Logistics and DefneKutay, the Vice President for Marketing over a game of golf by the Bosphorus.Emre Yaman (CEO): "The latest figures in the annual activity report show that our distribution costsconstitute about 25% of our cost of goods sold. I wonder if we can do better."Ali Yurtoglu (Vice President for Logistics): "I have also been looking into this recently and assignedour new employee Selin Baydar to analyze our distribution system. She thinks that there is room for costreduction if we optimize our malt and beer shipment plan."Defne Kutay (Vice President for Marketing): "If we aim to lower costs, we may have to compromisefrom the efficiency of our supply chain. Our breweries may be reluctant to damage the loyalties that theyhave worked hard to develop. Ankara brewery has been supplying all the beer for the distributor inBursa and Istanbul brewery has been supplying all the demand of the distributor in Antalya for a longtime. Both of these breweries and distributors have built strong relationships and would prefer to keepthe existing relationships."Emre: "Why don’t we first look into the potential savings and decide later whether it is worth makingany changes."Ali: "Actually, we already have most of the data to make this analysis. We have estimates of the costs ofmalt and beer shipments between various locations. We know all malt plant and brewery capacities andcan obtain projected beer demand figures for the next year."Emre: "That sounds great. Once you obtain the results of the analysis, we can meet and decide on how to proceed.& Company BackgroundEfes Beverage Group is the largest business unit of Anadolu Holding, which was founded in 1969 inIstanbul and named after the Turkish peninsula Anatolia. The two founding families who still hold 55%of the shares control the holding. The remaining 45% of the shares are traded on the Istanbul StockExchange. In addition to the beverage sector, Anadolu has diversified interests in the automotive, officesupplies, packaging and financial sectors and has joint ventures with international companies such asHonda, Isuzu, Itochu and Faber-Castell.The principal activities of Efes Beverage Group are in the production and distribution of malt, beer andplastic crates. Beer sales accounted for 96% of 2000 gross revenues; the remaining 4% came from malt,plastics and other. Efes Beverage Group operates nine breweries and four malteries in five countries andalso conducts Coca-Cola operations in five CIS countries. Efes Beverage Group, together with its parent,Anadolu Holding, is the largest local shareholder in the Turkish Coca-Cola franchise, controlling 40% ofthe shares. In June 2000, the production companies of Efes Beverage Group merged into a single entity:Anadolu Efes Brewery and Malt Industry Corporation. According to Finansinvest Research Group ofIstanbul, the value of Anadolu Efes was $1.143 million in November 2001. As of May 2002, thecompany was the eighth largest Turkish company by market capitalization.Efes has an annual beer production capacity of around 1.4 billion liters. The company owns fivebreweries and two malt plants in Turkey. The domestic plants have an annual total production capacityof 910 million liters of beer and 97,500 tons of malt. The marketing and distribution company of thegroup is responsible for the direct distribution of Efes Pilsen, Efes Light, Efes Dark, Efes Extra, Everest,Miller and Beck’s products in six main regions of Turkey, and works through distributors in 300districts. In 2000, Efes’ share in the Turkish beer market has reached a record high of 78%. Turk Tuborgis its only significant competitor (Exhibit 2). The third player in the market is the state monopoly, Tekelwith nearly 1% share. Imported high premium brands do not even constitute 1% of the market.Efes sells its products in more than 30 countries worldwide (Exhibit 3). While a few shipping containersmake their way to the U.S. every year, Efes has seen outstanding consumer response in Russia, EasternEurope, the Caucasus and Central Asia. The company has been active in these markets via its subsidiaryEfes Breweries International after the construction of breweries in the Romanian city of Ploiesti andMoscow, and the acquisition of breweries in Kazakhistan and Ukraine in late 1990s. The sales volume ofEfes Breweries International almost tripled in 2000, during which the Moscow brewery became fullyoperational, and has increased its sales volume to 23% of total beer sales of the Efes Beverage Group.Turkish Beer MarketTurkish beer market has a size of 730 million liters and around $294 million sales value, according to a2001 report by Finansinvest Research Group(3). Finansinvest pointed out the potential for growth in themarket considering that an annual population growth of 1.2% is expected and around 50% of the currentpopulation of 65.7 million people is below the age of 25.Turkey increased its beer intake by more than 50% to a level of 16.8 liters per person from 1995 to 2000.Despite this exceptional growth, the per capita consumption is below the global average of 22.7 liters.Turkey ranks as the tenth largest beer-consuming nation in Europe despite its relatively low per capitaconsumption. The nation of 65.7 million people imbibed more than 1.1 billion liters of beer in 2000,about one-eighth of what leading Germany’s 82.8 million residents consumed.Beer consumption is closely related to cultural and demographic factors. Surveys indicate that around48% of the adult population in Turkey consumes alcoholic beverages, and around 42% percent of thosewho do not drink state that their religious beliefs are the main reason for abstaining. Although being apredominantly Muslim nation, Turkey has been a secular state since the establishment of the Republic in1923 and the Turkish government imposes no restrictions on alcohol consumption. However, theTurkish government banned broadcast advertising for all alcohol products in 1995, forcing Efes torethink its advertising strategy. Since then, Efes has particularly increased its sponsorship of sportingevents, concerts and its own successful professional basketball team.Trends in the Global Brewing IndustryWorld beer consumption was expected to be around 126 billion liters in 2000. USA and China accountfor 36% of the global beer market, while emerging markets make up a significant 45%. Consumption inemerging markets has been growing as drinking cultures of the populations change. Major US andEurope based brewers have been focusing on the Eastern Europe, China and the CIS countries forgrowth opportunities. In particular, Carlsberg has become more active in Eastern European markets andTurkey recently. Heineken has significant stakes in a number of Eastern European brewers but not withthe Turkish companies.Part I: Improving the Current Production and Distribution SystemBeer is produced by malting barley, brewing, distilling and bottling. The beer production process,described in Exhibit 4, has been going on in Anatolia for thousands of years (Exhibit 5), and hasremained essentially unchanged to our day; now taking place at the modern malt plants and breweries.Efes has two malt plants, both located close to main barley regions in Konya and Afyon (Figure 1). Maltproduced at these plants, or imported at the Izmir harbor is transported to Efes’ breweries in Istanbul andAnkara. Efes ships beer produced at the breweries to its main distribution centers in Istanbul, Izmir,Antalya, Bursa, Kayseri and to the Izmir harbor for export. The estimates on the transportation costsbetween the malt plants and the breweries; and between the breweries and the distribution centers aregiven in Exhibit 6. Exhibit 7 contains the beer demand forecast at the distribution centers for the nextyear and Exhibit 8 shows the current malt and beer production capacities as well as the malt yield.Exhibit 9 summarizes the current distribution plan prepared for the next year.Having solved a linear programming model to optimize the production and distribution system, SelinBaydar explains the results to her supervisor Ali Yurtoglu. "I used the model to figure out how manytons of malt to ship from each malt plant to each brewery and how much beer to ship from each breweryto each distributor. I also made sure that none of the capacities of the malt plants or breweries isexceeded, and all the beer demand of the distributors is satisfied. The shipment plan that minimizes totalcosts is quite different from the current plan but we can save around 10% in our transportation costs."Ali is content with the results. "Great, for such sizeable savings we may convince Defne and Emre that itis worth the effort for changing a few of the established relations in the distribution network."Selin Baydar is excited about the upcoming meeting with Emre Yaman, Defne Kutay, and Ali Yurtoglu,where she presents the results of her analysis of the distribution system.Emre: "I’m impressed by Selin’s findings on the distribution plan, but to what extent can we implementthem?"Defne: "We will need to work proactively with the distributors. We need to explain them how all partiesin the supply chain will eventually benefit from pulling the costs down. We should also go in thedirection of streamlining the information flow electronically to enable stronger supply chaincollaboration. When we first begin to implement the changes, we may launch a promotion campaign tokeep the distributors happy."Emre: "Let us aim to implement the optimal distribution plan, and resolve the initial problems withinthree months."Note: The information regarding the company background, Turkish beer market, and trends in globalbrewing industry are accurate as collected and cited from various sources in the Internet. Theproblem is a hypothetical one but is similar to problems Efes has been facing. Efes’ real distributionsystem has been simplified for the purpose of keeping the model size manageable. All the charactersand positions mentioned throughout the case are fictional.Figure 1: Picture Location of Efes’ Facilities.ExhibitsExhibit 4: Beer Production ProcessBeer is the product of fermentation of the carbohydrates in cereals, such as maize, rice, millet, oats, rye,wheat and most commonly barley. The main ingredients of beer are malt, water and hops. Malt, theprocessed grain that has begun germination by being soaked in water, provides beer its body and color.Hops is used in small amounts to prevent the brew from going sour, but also brings a characteristic bitterflavor and a pleasant aroma. Water constitutes as much as 95 percent of the ingredients used in thebrewing process. The mineral content in water influences the quality and the flavor of the beer.Brewing of beer is essentially a four-stage process. The first stage requires mixing malt, sugar, hops andwater into wort by means of a "cooking" procedure that involves mashing and boiling in large copperkettles. In the second stage of brewing, wort is chilled and transferred into a fermentation tank. Yeast isadded in the third stage, through which fermentation takes place in three to ten days. In the final stage,flat beer is stored for slow fermentation and aging for a few weeks to several months, depending on thetype of beer being produced, after which it is carbonated and bottled.Exhibit 5: A brief history of beer production in ancient times. Source: Efes PilsenerHow long have we been drinking beer?Mankind has been brewing and drinking beer for thousands of years. The earliest recorded beer recipewas found in clay tablets written 7,000 years ago. Beer originated in Mesopotamia and then found itsway to Anatolia and the Nile river valley. Four thousand years ago in Anatolia, Hittites, who hadfounded one of the biggest and most sophisticated civilizations of its age, were drinking beer in daily lifeas well as in sacred rituals. Ancient Egyptians used beer as a remedy for various maladies.Various civilizations around Asia and Africa produced beer using different types of grain. After theeighth century A.D., hops became a part of the beer production process, enabling better preservation. InMedieval Europe, monasteries and abbeys were where most of the breweries were located. Monks had anear monopoly on beer production. In the dark ages when this old continent was in the throes ofepidemics, drinking water was one of the main culprits of disease. Beer, on the other hand, was boiledand hence saved many lives as a disinfected and nourishing drink.Exhibit 1: Efes’ domestic beer sales volume over the years and the growth of its market share.Source: Anadolu Efes Annual Activity Report dated 2000.Exhibit 2: Share of major parties in the Turkish beer market (2000). Source: Finansinvest ResearchReport dated 2001.Exhibit 3: Countries to which Efes exports beer.Source: Anadolu Group (http://www.anadolugroup.com/)Exhibit 6: Malt and beer transportation costs.Exhibit 7: Beer demand forecast at the distribution centers for the next three years.Exhibit 8: The current malt and beer production capacities, and malt yieldExhibit 9: Current distribution plan for Year 1Exhibit 10: Current distribution plan for Year 1 (network diagram)WHAT TO DO – Improving the current distribution system: The current shipment plan enforces certainrestrictions due to existing relations between certain breweries and distributors. These relationship limitations can be summarized as follows:1)Ankara brewery has been supplying all the demand of the distributor in Bursa and Istanbul brewery has been supplying all the demand of the distributor in Antalya for a long time.Both of these breweries and distributors have built strong relationships and would prefer to keep the existing relationships. The Vice President of marketing feels that it is important to keep some of the current shipment routes even if they increase the costs a little bit. The distribution system can be optimized by a linear programming model (e.g., transshipment model), first keeping the desired existing shipment routes (as in Exhibit 9 and 10), and then by relaxing these limitations and summarizing the resulting savings in costs.As input data (parameters), the transshipment (distribution) model should use1. capacities of malt plants and breweries,2. beer demand at distribution centers,3. shipment costs of malt and beer, and4. malt yield at breweries.The decision variables represent1. the amount of malt shipped from each plant to each brewery and2. the amount of beer shipped from each brewery to each distributor.The constraints are:Malt Plants: Total shipment out CapacityMalt – Beer Balance: Beer brewed from received malt Beer shipped outBreweries: Total beer produced CapacityBeer to Dist. Centers: Beer received DemandExisting relationship limits (remove them when relaxed)WHAT TO SUBMIT: One of the team members should submit a SINGLE EXCEL file (.xls OR .xlsx only)including all the TEAM MEMBERS NAMES/IDs in the file through the IE341-Project1-Fall2014-EXCELFile Submission available under Assignments in Blackboard. Failure of submission will result in a 0 markfor the project. You can use the Week07-Transshipment Problem-MCNFP-BB.xlsx (under CourseMaterials in Blackboard) as a template for your answer. Note that for parts 1, 2(a) and 2(b), you should haveseparate worksheets in the same file, and also include Table 1 below for cost comparison into worksheet forpart 2(b). No need to submit your answers as a printout (as I will only mark your EXCEL file only.)1) You are to find the total cost of the current distribution plan for year 1. You can compute the totalcost for this plan using EXCEL.2) Optimize the distribution system by formulating and solving a linear programming (LP) model,a) with existing relationship limitations,b) by relaxing these limitations.You can optimize the total cost for 2(a) and 2(b) by using EXCEL/Solver and summarize the resulting savingsin costs in a table in EXCEL, as in Table 1 ((i.e., find X, Y, Z, X-Y and X-Z in Table 1).Table 1: Costs Savings (Current Plan vs. Optimized)MODELCurrentDistribution PlanOptimized Planwith existing limitationsOptimized Planby relaxing these limitationsTotalTransportation CostsSavings(Current Plan)-(Optimized)XN/AYX-YZX-Z8
