Reduction of wastage costs for products with short shelf life : A case study on the Swedish division of the global dairy company Arla Foods

Abstract: Background – inventory management theory has in the past been focused on traditional engineering industries. These theories are not completely applicable on industries such as FMCG where the main objective is to avoid obsolescence and not tied-up capital. A part of the FMCG industry that is especially pressured by short shelf lives is the food industry. The food industry has also the disadvantage that the customers demand instant deliveries, which makes production to order impossible. Arla Foods is a dairy company that is struggling with high and increasing wastage costs. The wastage cost is generated from products where last sales date is exceeded and Arla Foods CSE therefore has to trash the products even if the best-before date is still valid. These costs need to be reduced on both short and long term. Hence Arla Foods is perfect as a case company for this study. Purpose – the ulterior purpose of this study is to seek if the current theory is applicable on the food industry. This is investigated through a case study at Arla Foods with the following questions asked: Which factors drives wastage costs at a global dairy company such as Arla Foods? How do the factors relate to each other? Which actions could be taken to reduce the wastage costs at a global dairy company such as Arla Foods? To what extent could these findings be generalizable? Method – a thorough literature study is conducted to create an understanding of the existing theories. The case study is mainly based on interviews and observations with employees at Arla Foods. Data has been extracted from internal data bases and processed to complement the interviews and observations. Conclusion – the case company showed that the most significant wastage drivers on an article level were forecast deviations and batch size/delivery frequency. However, the main wastage drivers at Arla Foods were nothing that could be found in neither supply chain management nor inventory management theory – this was instead problems related to work process, organization, communication and strategy. Suggested solutions to these problems are among others: Going through the worst performing articles’ set-up in a structured way. Making sure that there exists a clear process and that all employees are educated in it. Having a back-up plan on what to do with excessive inventory. Using follow-up reports as tools to take action from. When these problems have been solved, Arla Foods can instead focus on planning principles such as taking steps towards a more integrated collaboration with their customers via Efficient Consumer Response. The findings are not proved to be general in any way, but the conclusion of the report still states that there is a high probability that these findings could be applied on other companies within the food industry in general and within the dairy industry in specific. If this is the case, then it is shown that the current theory lacks several aspects when it comes to food industry – aspects that maybe do not have the same importance within most of the traditional engineering industries. Originality – the literature review conducted before the case study did not show any other case study or research that has made an equally broad overview. Earlier studies have mainly been focused on that the food industry is in need of customized planning principles and systems. That research has in the end advocated implementation of Efficient Consumer Response or similar.