MSc in Supply Chain Management

Assignment: Supply Chain Strategy Module No: EBU 4008

Student Number Marking Tutor

: 1010203 : Dr Julian Coleman

1. Introduction The purpose of the report is to; a. Review the supply chain strategy of Total Malawi Limited and implement an effective supply chain strategy to manage quality, value chain and distribution strategies, and strategic alliances with stakeholders. This review has been done using tools and techniques relevant to supply chain strategy such as PESTELE, Porters Five Forces, Order Winning/Qualifying Factors which have been detailed in the report. b. Structure of the Report a. Introduction b. Total Malawi Overview c. Total Malawi Business Strategy d. PESTELE Analysis of Total Malawi e. Evaluation of Total Malawis Competitive Forces Using Porters Five Forces

Page 2 of 30

f. Evaluations Of Customer Requirements Using Order Winner and Order Qualifier g. Review Of Total Malawi Current Supply Chain h. Recommendation on Total Malawi Supply Chain i. References

2. Total Malawi Overview 2.1. Company Background Total Malawi Limited (TML), is the second leading oil marketing company (OMC) in Malawi with a market share of 34% as of the year 2010. Apart from selling fuels/white products (Petrol, Diesel and Paraffin), high performance Lubricants and Car Care Products distinct TML from its competitors TML is a subsidiary of Total Group, an international oil company with its headquarters in Paris, France. Total came into Malawi in 1976 and by end 2006 it had gained a market share of 14%. In 2007 Total acquired Exxon Mobil assets in Malawi which increased its market share to 27%. With the merger in 2007 the Page 3 of 30

business has grown tremendously having an average annual net income of 810 Million Kwacha ($6m), with an increase in market share of 7% by end of 2010. TML is heading towards is vision to become the number one OMC in Malawi. 2.2. Supply Chain Background 2.2.1. Operations TML has 71 permanent employees, 52 service stations, 84 Industrial customer sites and 4 distribution depots. The core departments for the organisation are Commercial, Finance and Operations headed by the Commercial manager, Finance Manager and the Operations Manager respectively. The head of departments report to the Managing Director. The head office for TML is in Blantyre the commercial city of Malawi. TML gets its fuel products from Mozambique and Tanzania which are imported in Malawi by Petroleum Importers Limited (PIL). PIL is a consortium that was formed by TML in partnership with the other key OMCs (BP, Chevron and Petroda). Fuel products are transported by road and rail into Malawi by International Haulage Brokers and Central East African Railways; these are transport companies contracted by PIL. PIL distributes the product to the OMCs storage sites/depots as a percentage which is agreed by the four OMCs at the beginning of every year. Importation of fuel products in the country is regulated by the Government of Malawi (GoM); PIL is the only legal importer of fuels in Malawi. TML distributes the fuels from its four storage depots to all its sites using third party logistics.

Page 4 of 30

TML imports Lubricants and Car Care products directly from its sister companies in South Africa, Egypt and United Arab Emirates (UAE). These are transported by sea or road depending on the suppliers geographical position. Collection from TML storage depots is done by the customer. 2.2.2. Customers Malawis economy is heavily dependent on agriculture (Tobacco, sugar and tea). TML biggest customer is Illovo Sugar, the sole manufacture of sugar in Malawi, this business accounts for 15% of TML annual volume. TMLs peak business period is between March and February with tobacco transporters as big customers. This is the period when the tobacco auction floors are open. 70% of the fuels sales comes from the service stations and 30% from the industrial customers (Illovo, Lafarge, Mota Engil, Raiply, ESCOM, General Farming, etc.). Automotive lubricants and Car Care products are sold in service stations while the Industrial Lubricants are sold directly to specified industries. 2.2.3. Competitors Malawi has got six OMCs; TML being the second in market share and the biggest in terms of infrastructure. The five competitors are BP, Chevron, Petroda, Injena and Energem.

3. Total Malawi Business Strategy 3.1. TML Mission To offer our customers within a vast, varied and risky perimeter, the high quality oil services and products that are tailored to their needs. Page 5 of 30

To put ethics, respect for the environment and safety at the core of our concerns.

To create value by ensuring high profitability tailored to the context of our facilities.

To make our actions long term by promoting local development

3.2. TML Strategy Build one new station in Blantyre. Depots and stations invariants programme implementation (meet minimum safety and environmental standards in all facilities) Construct LPG Plant in Lilongwe. SAP\TL Implementation. Go live date: 1 May 2010 Kanengo Depot upgrade- ( Storage capacity & Fire fighting) Pass International small storage Safety Rating System (IssSRS) with level 2. Implement simple , efficient and reactive organization which everyone to excel Enhance staff member professionalism by rigor in hiring, quality training, acknowledgement of performance and promoting the best while avoiding poor performance, frustration and Low Productivity through involuntary exists. enable

Page 6 of 30

Promote and support unity in diversity of profiles and draw from its strength.

Promote equal career opportunities and fast track top performers

4. PESTELE Analysis of Total Malawi PESTLE analysis stands for "Political, Economic, Social, Technological, Legal and Environmental analysis" and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. It is a part of the external analysis when conducting a strategic analysis or doing market research, and gives an overview of the different macro environmental factors that the company has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. This tool assists organisations to enhance the opportunities as well as minimise the threats. 4.1. Political Factors Political factors are how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Furthermore governments have great influence on the health, education, and infrastructure of a nation. Political Factors Affecting TML Opportunities The Malawi Energy Regulatory Authority (MERA) was just formed two years ago and its still developing its policies Funding for investments not Threats The sales margins for fuels are controlled by the government

Page 7 of 30

concerned with the government 100 percent owned by Total

4.2. Economic Factors Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy Economic Factors Affecting TML Opportunities High bank lending interest rates in Malawi Threats Shortage of foreign currency in Malawi resulting on fuel shortage because PIL can not import product. Unstable exchange rates in Malawi

Economic growth in Malawi (increased Infrastructure development , growth in automotive industry) Seasonal market (High sales during the tobacco season) BP and Chevron pulling out of Malawi

New OMC entering the market through business takeover

4.3. Social Cultural Factors Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on Page 8 of 30

safety. Trends in social factors affect the demand for a company's products and how that company operates. For example, an ageing population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).

Social Factors Affecting TML Opportunities Customer attitude and opinion on product brand Life style trends (high improved living standards in Malawi) Threats BP is good at advertising and has good publicity

4.4. Technological Factors Technological factors include ecological and environmental aspects, such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation Technological Factors Affecting TML Opportunities Threats

Page 9 of 30

TML has very good Competing technology development (fuel card system) Maturity of technology (TML has a very mature IT system all sites are on network) ICT changes, TML is not resistant to change, in may 2010 it changed from SUN system to SAP

TML need to replace some of its technological equipment i.e. fuel pumps Loss of business due to network failure

4.5. Legal Factors Legal factors include discrimination law, consumer law, antitrust law, employment law, and health, safety and environmental law. These factors can affect how a company operates, its costs, and the demand for its products. Legal Factors Affecting TML Opportunities Regulatory bodies and processes are just new in Malawi Environmental regulations (TML has very high safety standards as compared to the industry norms) Industry specific regulations, industrial regulations are lower than the set standards for TML, TML is being involved in Page 10 of 30 Threats

structuring the industrial standards

4.6. Environmental Factors Environmental factors include weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness to climate change is affecting how companies operate and the products they offer. Climate change is both creating new markets and diminishing or destroying existing ones. This also looks at the work environment in terms of staff attitude, management style, staff engagement, organizational culture and staff morale.

Environmental Factors Affecting TML Opportunities Environmental issues / policies (International ,National and local) TML follows international environmental standards Ecological (Climate change), TML is taking part in fighting climate change through several sustainable development climate change projects i.e. solar projects Organisation culture, Staff attitude and Engagement. Threats Very old infrastructure (Buildings), some do not have shops.

Page 11 of 30

Staff morale, is low in some staff members due to unaligned salary and job grades

5. Evaluation of Total Malawis Competitive Forces Using Porters Five Forces Porters Five Forces of Competition provides a convenient framework for exploring the economic factors that affect the profitability of an organization as determined by five sources of competitive pressure. These five forces of competition include three sources of horizontal competition: competition from substitutes, competition from entrants, and competition from established rivals; and two sources of vertical competition: the bargaining power of suppliers and buyers. See the figure below

Page 12 of 30

5.1. Barrier to Entry Although fuel is not unique, it is not easy for new entrants since TML has the following advantages; It has an international brand, and customers are loyal to the brand. Access to inputs (fuels) by new entrants is not easy. Fuel in Malawi is imported by PIL; new entrants have to pick product from any of the four OMC at a service charge. The cost of getting established in the oil marketing industry in Malawi is very high. Constructing an average fuel storage facility costs $10 million and a standard service station cost $1.7 million. 5.2. Rivalry Among the Existing Players Rivalry among players in the oil marketing industry is very high although it is an oligopoly market. There are six OMC with a common strategy of rapid growth. One of TML competitors has got very good infrastructure and it is an international brand as well, this competitor puts a lot of pressure on TML. Both TML and this competitor has got 34% market share in retail business while the competitor has got 58% market share in industrial business, this 58% is as a result of steep discounts and generous credit. This is not possible in the retail business because pump price is regulated by GoM. TML manages the competition by providing very good pre and post sales services. 5.3. Threat to Substitutes

Page 13 of 30

All OMC in Malawi sell the same fuel, threat to substitutes comes in when it comes to lubricants. TML has got an upper had because it has a wide range of products that fits different segments of the market. 5.4. Supplier Power Although PIL is the sole supplier of fuels for all OMC, it has no power over pricing since it is a consortium formed by the four merger OMC and the board consist of managers from the OMCs. 5.5. Buyer Power The buying power in retail market is very weak than the industrial market because the pump price is regulated by GoM. TML has also reduced the buying power of some of its industrial customers by signing long term contracts and making partnerships with them in some sustainable development projects. In fuels market, customers can not easily switch competitors because we sell the same product at the same price, switching can just be costly on their part. 6. Evaluations Of Customer Requirements Using Order Winner/Qualifier 6.1. Order Winner/Qualifying Factors Order Winning Criteria or Market Criteria are the factors that customers use to decide among competing sellers. Terry hill defines an order qualifier as a characteristic of a product or service that is required. (Slack et al, 2007) Raising performance in an order winning and qualifying factor will either result in more business or improve the chances of gaining more business.

Page 14 of 30

These factors have been evaluated using hill methodology, see the table below.
1 Price Quality Delivery Speed Delivery Dependability Availability Product/Service Range Product/Service Design Brand Image After Sales Service 2 3 4 5 6 7 8 9

From the analysis above, it shows that the priority for TML should be availability of product followed by good services range, good after sales services and maintaining its brand image.

7. Evaluation Of Performance Of Competitor Supply Chain The performance of the competitor for TML will be evaluated using Hill methodology. See table below. In this case, I have chosen BP Malawi which is the greatest competitor for TML.
1 Price Quality Delivery Speed Delivery Dependability Availability Product/Service Range Product/Service Design 2 3 4 5 6 7 8 9

Page 15 of 30

Brand Image After Sales Service

From the analysis above, it shows that BP Malawis supply chain performance is better that TML because of its good brand image.

Page 16 of 30

8. Review Of Total Malawi Current Supply Chain 8.1. Locations TML operates in Malawi with its head office in Blantyre, three customer service centres (Blantyre, Lilongwe and Mzuzu), Four distribution depots one in each region of the country. TML has the best geographical presentation than any other OMC in Malawi, with 52 service stations and 84 industrial customers and present in 21 out of 27 districts of Malawi. See the figures below;

Page 17 of 30

Page 18 of 30

8.2. Capacity of Operation TML has a storage capacity of 6 million litres which is fully utilised. Mostly is hand to mouth type of operation in the depots. See the graph below.

Page 19 of 30

8.3. Transportation TML takes ownership of Transportation once the products have been delivered in its storage depots. TML uses third party transporters which are on a 5 years contract to deliver its products from the depots to its respective customers. TML has a total of 10 trucks with on board computers to monitor the driver behaviour. The age of these trucks range from 3 to 15 years and all the truck drivers undergo a defensive truck driving training. Average transport for 2010 was 1.2cents/litre. 8.4. Key skills, Knowledge and Experience of Supply Chain Personnel Supply chain team consist of two sections; logistics which is under operations and customer service which is under commercial. Logistics handles the product from receipt to delivery. This involves product receipt from PIL trucks, Inventory control in our depots, 3PL trucks management and delivery to the customer. Customer service gets and processes orders from customers and prepares delivery plans. The logistics section is headed by a 12 years experienced logistics manager (Bsc Mechanical) who has five qualified mechanical engineers (4 plus years experience) under him working as depot managers and one as a logistics engineer. Customer service section is headed by a 15 years experience customer service manager with five (four with O level certificates and one Bcom Business Administartion) customer service representatives under him. 8.5. Supply Chain Information Systems

Page 20 of 30

TML has got a very good supply chain information system. TML uses SAP as its accounting package. Product receipt, stock management (reconciliations on daily basis), customer orders, delivery plans, customer accounts are all managed from the system.

8.6. Supply Chain Performance Measures The key supply chain performance measures are; Safety in Operations, Product (throughput) availability, Inventory control, Transport management, Equipment availability, Timely Delivery Plans. 8.6.1. Safety in Operations Zero Fatalities Zero Accidents & Incidents, Zero Lost Time Injuries(LTI), Zero Product Spills, Zero Product Crossovers

8.6.2. Product Throughput (Availability) Depot target per year Limbe and Makata 50 million litres Kanengo (Lilongwe) 46 million litres

Page 21 of 30

Mzuzu 24 million litres

8.6.3. Inventory Control Product losses to be within Oil Loss Tolerances (Petrol 0.15%, Diesel 0.08% and Paraffin 0.10%) Daily SAP Vs Physical Stock Variations Reconciliations explanations and clearing 8.6.4. Transport Management Zero Fatalities Zero Accidents Zero Crossovers Zero Spills Zero product theft Well maintained trucks image enhancement Driver training Truck and transporter quarterly assessments Average transport cost of 1.3 cents per litre 24 hour truck availability

8.6.5. Equipment Availability 24 hours equipment availability Page 22 of 30

Attend to equipment break down within 24hours from time reported Preventive maintenance for all equipment

8.6.6. Timely Delivery Plans Delivery plans ready 24 hours before delivery time Route utilisation

9. Recommendation on Total Malawi Supply Chain Using the analysis that has been done; PESTELE, Porters Five Forces, Order Winning/Qualifier and Competitors Positioning, TML needs to align its supply chain strategy as follows; 9.1. Locations Order winning/qualifier analysis has shown that brand image is very key for getting and qualifying for an order while PESTELE has shown that BP is a threat due to its enhanced brand image. As much as TML has the best geographical presentation, it has a task to improve its brand image in its service stations in order to compete effectively on the market. This will also assist TML in threatening new entrants as per evaluation of porters five forces. PESTELE analysis has shown that one of the opportunities for TML is Economic growth in Malawi (increased Infrastructure development, growth in automotive industry). The GoM is constructing an inland port in Nsanje, TML through PIL should propose to the GoM to construct a pipeline from this port to its depots. This can increase its margins since transportation cost will be minimised. 9.2. Capacity of Operation Page 23 of 30

Order winning/qualifier analysis has shown that product availability is very key for getting and qualifying for an order; looking at the statistics for Mzuzu depot, it shows that the depot is over utilised (240%) meaning it is hardly meeting its customer demand. PESTELE analysis has shown that one of the opportunities for TML is Economic growth in Malawi (increased Infrastructure development, growth in automotive industry) and if we leave Mzuzu depot capacity as it is, soon it will not manage to supply the demand. This calls for increase in Mzuzu depot storage capacity. 9.3. Transportation Order winning/qualifier analysis has shown that speed to delivery has to be within industry standards to get and qualify for an order and PESTELE has shown that old equipment is one of the threats for TML. TML having a fleet aging up to 15 years results in frequent break downs which results in delayed deliveries. TML should revise its transport contracts to have trucks not more than 8 years old. 9.4. Key skills, Knowledge and Experience of Supply Chain Personnel PESTELE analysis and Porters Five Forces have indicated that brand image and advertising are very useful for competition and threatening new entrants. TML needs to have a Customer Service Executive in its customer service section whose main purpose will be to give TML customers the global picture of the organisation. The executive will also be conducting market research to assist in strategy formulation of TML. There is also a need to employ Depot Supervisors who will be assisting depot managers in their day to day work. 9.5. Supply Chain Information Systems Page 24 of 30

PESTELE analysis has revealed that network failure is one of the threats of TML since it results in loss of business for a period. TML should have a standby internet service provider to be TML cushion when the network for the main provider is down. Another way is for TML to revive its VSat system that is just idol for standby purposes. 9.6. Supply Chain Performance Measures TML has to include green supply chain as one of its key performance indicators when developing its supply chain strategy. From virtually nowhere a year ago, organisations are now bombarded about their green performance. Investors want to know that your organisation and supply chain is green. Shareholders, employees, and customers are eager to be associated with or purchase from a green company. Stokes, S., and Tohamy, N. (2009). This will help TML have a good brand image and get customers who are climate change sensitive. PESTELE has shown that old equipment is one of the threats for TML, the old meters that TML has in its depots, frequently break down (release a lot of product than what is registered on the meter), this brings a lot of losses to the company. TML need to put a program in place for meter replacement in depots and pump replacement in service stations. Analysing the value chain (series of processes, each of which adds value to the product or service for each customer) for TML, see figure below; versus PESTELE and Porters Five Forces.

Page 25 of 30

TML need to do business process re-engineering in the following processes as follows; 1. As it has been indicated by PESTELE, that TML has very old buildings. TML needs to upgrade its infrastructure; build shops and car service bays. This will enhance brand image and improve turn-in-ratio. This will assist TML to have Non fuel revenue which will not be depended on fuel availability which is also a threat to TML. This will also improve its brand image beyond its competitors. 2. TML need to come up with a proper salary and job grades to motivate the employees that have lost their morale due to this misalignment. 3. TML needs to propose to PIL that their product supply contract with PIL be flexible enough to revise its nominations (amount of product to pick) during product shortage periods i.e. to have a clause saying that the product nomination for TML will increase by 10% during crisis periods.

Page 26 of 30

4.

When reconciling physical stock versus SAP stock, physical stocks are measured manually; this results in a lot of variations due to dipping errors and tank configuration. It would be very good for TML to introduce automatic tank gauging which will indicate the exact amount of product in the tank. This system can also be directly linked with SAP to avoid manipulation of figures by human and quick update of physical stock in the system.

5. TML has very good services in its service station, but the service varies from station to station. There is need to standardise these services so as to make the customer home and loyal to the brand 6. TML needs to improve on its advertising and publicity image which is one of its threats. TML has got a very good fuel card system but it is a few individuals that know this technology. The same with its lubricants, a small segment know the goodness of TML lubricants. It could have been much better if TML could have these in billboards; most people are visual sensitive.

Page 27 of 30

10. References Barratt, M., Rabinovich, E., Sodero, A. (2010), Inventory Accurancy: Essential, but Often Overlooked, Supply Chain Management Review, Vol.14 No.2, pp. 36.

Blackwell(2010), Industrial Analysis: The Foundamentals, Sample Chapters, Wiley Blackwell Publications. Retrieved from web on 5th December 2010: http://www.blackwellpublishing.com/grant/pdfs/CSA5eC03.pdf

Cohen, S., Roussel, J., (2005), Strategic Supply Chain Management: The 5 Disciplines for Top Performance, McGraw Hill, NY.

Page 28 of 30

Faulkner, M. (2010), Business Review: Total Malawi Limited, Presentation to Total Group CEO, Paris, France.

Fawcett, S., Andraski, J., Fawcett, A., Magnan, G. (2009), The Art of Supply Chain Managemnet, Supply Chain Management Review, Vol.13 No.8, pp. 8.

Frazelle, E., (2002), Supply Chain Strategy : The Logistics of Supply Chain Management, McGraw-Hill, NY.

Harvard(2000), Harvard Business Review On Managing the Value Chain, Harvard Business School Press, Boston, MA.

Porter, M. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, NY.

Purdue(2010), Industrial Analysis: The Five Forces, Educational Materials, Purdue University. Retrieved from web on 5th December 2010:

http://www.extension.purdue.edu/extmedia/EC/EC-722.pdf

Slack, N., Chambers, S., and Johnston, R. (2001), Operations Strategy, Financial

Page 29 of 30

Times, Prentice Hall, NY.

Stokes, S., Tohany, N. (2009), 7 Treats of a Green Supply Chain, Supply Chain Management Review, Vol.13 No.7, pp. 8.

Page 30 of 30