Supply Chain Strategy Analysis for Aldi
Supply Chain Management im Einzelhandel: eine strategische Analyse des Discounters ALDI
Research Paper (undergraduate) 2011 22 Pages
Table of Contents
2. An “As Is” map of Aldi’s supply chain for dairy products
3. Improving Aldi’s supply chain management
Appendix: Default Diagrams of the Aldi Supply Chain
In recent years, there has been an increased focus in the management of supply chains both from practical management as well as business research. One industry where SCM plays a critical role is the grocery retail industry (Magnus 2007). Trading goods that perish within weeks if not days requires a streamlined inbound logistics process as well as an inventory management that finds the right balance between customer expectations (i.e. finding the desired goods in store) and waste reduction (i.e. goods expiring before being sold)(Reynolds et al. 2004; Lindgreen et al. 2009). Different business models are in place in grocery retailing, e.g. superstores or discounters.
A major discount retailer is the German company “Aldi Süd”. One of their key assets is the strict focus on cost reduction throughout their supply chain (Zentes / Ritting 2009). Yet, in recent years, the rise of Aldi has slowed down significantly (Martell 2009; Zentes 2007). Focusing on the aspects of SCM, this paper will analyse potential reasons for this. In order to do this, first a map of the current Aldi supply chain (SC) is drawn and analysed. Applying secondary research (e.g. practical case studies, academic literature), the “As-Is” state is mirrored against best practices in SCM to identify gaps. The results of this are then used to draw an improved “To-Be” model of how Aldi could rearrange its SC.
2. An “As Is” map of Aldi’s supply chain for dairy products
Following the definition of SCM the description of the Aldi SC for dairy products starts at the raw material stage (Amann 2009). However, the detailed analysis and recommendations for improvement will be limited to the part of which Aldi can directly impact (which would be the direct suppliers, Ray 2010). The following diagram provides an overview of the SC, whereas the subsequent text will provide more detailed descriptions:
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Figure 1: Aldi As-Is Supply Chain (Source: author’s preparation; based on IGD 2009, Hertel et al. 2005, Fernie / Sparks 2004; purple boxes show diagram marks as discussed in the text)
The SC for dairy products is special compared to other foods, as the goods need to be kept in a “cold chain” to not risk the quality of the goods to fall apart (i.e. expire) before consumption (Diagram Mark, DM: 1) (Lindgreen et al. 2009). This leads to conflicting interests between the retailer and the producer: while the first aims at reducing inventory across the SC, thus keeping order sizes small, mass producers aim for economies of scale with large production and delivery volumes (Grünblatt 2010).
The suppliers use fresh ingredients as well as packaging material to produce e.g. yogurt (DM 2) (Hughes 2004). The production concept is usually close to “mass production”. Volumes are scheduled based on a producer-internal forecast, using input from historical data, current order data and by consideration of any known special offers in-store (DM 3)(Obersojer 2009). However being somewhat distant from the actual consumption data, the forecast is usually less accurate. This requires the suppliers (and their sub-suppliers) to create buffers, which incurs additional cost for stockholding and increases the risk of product expiry (Placzek 2007). This effect is also known as the “bullwhip effect” (Lee et al. 1997).
With the goods produced based on the forecasts, orders received by Aldi are shipped by the suppliers (using own or external truck fleets) to regional warehouses (DM 4) (Fernie / Sparks 2004). There, the deliveries are put into stock, before being commissioned with other’s producers dairy products into smaller deliveries for individual stores (DM 5) (Magnus 2007; Hertel et al. 2005). Given the high frequency of delivery of dairy products (due to the expiry risk), it could be that more integrative supply concepts could be used (Hofer 2009), especially given the complexity and cost of temperature controlled transport (Oliva / Revetria 2008), as well as increased focus on carbon footprint reduction (Edwards et al. 2010).
Subsequently, delivery to the stores is carried out using Aldi-owned trucks (DM 6) (Schlitt / Klusmann 2003). Given that transport is a key area for outsourcing, it seems questionable whether Aldi’s approach is still appropriate (Schlitt / Klusmann 2003). In the store, shipments are stocked by the local staff (DM 7), whereas Aldi has undertaken major efforts to shorten this by offering only a simple goods presentation (e.g. products remaining in carton boxes) (Zentes et al. 2007), but also by asking suppliers for easily storable and disposable packaging (Fernie / Sparks 2004; Magnus 2007).
On-shelf availability of products is key to satisfy retail customers, who expect the products to be available in store for purchase. So called “stock outs” (products not being available in store) lead to lost revenues and dissatisfied customers (Placzek 2007). Any sale is closed with the customers’ payment at scanner-equipped check outs (DM 8) (Pradhan 2009). Yet, depending on how good or bad the inventory forecast is, it could be that the demand volume is exceeded, leading to perished goods that are thrown away locally, leading to respective disposal costs (DM 9) (Fernie / Sparks 2004).
In order to maintain product availability, the store inventory needs to be closely monitored (Placzek 2007). The stock taking in Aldi stores is done manually (Brandes 1999). The remaining stock of dairy items is counted by store personnel and communicated manually to the RDC (DM 10), which then decides about when to order at the suppliers (Brandes 2004; ). Therefore, the internal reordering process is strongly dependent on human involvement, which increases labour cost and is error-prone (van Donselaar et al. 2010). On the other hand, with the store staff having little influence on the restocking process, their experience with local consumption patterns does get lost.
As stated above, the RDCs receive the inventory data from the stores, whereas it is their task to consolidate the data and decide about the reordering at the dairy producers (van Donselaar et al. 2010; Fernie / Sparks 2004)). Aldi uses basic IT systems (better called: electronic processing) to do this, however very often, supplier (re)orders are still carried out paper-based, e.g. via fax (DM 11) (Becker et al. 2010; Brandes 1999). Opportunities of using IT systems that provide real time sales data and other relevant information are lost and subject to the personal gut feeling of operative buyers (Zentes / Swoboda 2002). This gets even more critical as Aldi does not employ a central planning or controlling unit (Brandes 19999, Brandes 2004). Moreover, this also affects the suppliers, which as stated have to rely on internal forecasts to actually schedule their production (see DM 2 description above and in the diagram below).
A major aspect of SCM at a higher aggregation level is the procurement process. The headquarters of Aldi receive raw sales data that are provided by the RDCs (as a result of the local ordering processes) (Hertel et al. 2005). The consolidated information is then used to aggregate a total demand volume that is brought into annual negotiations with the suppliers (DM 13) (Falzmann 2008). These are usually fierce and adversarial, mainly focussing on price reductions (Klitt / Schlusmann 2003). Though, cooperative (retail) supplier relationships are promoted strongly by academics and practitioners (e.g. Ganesan 1994). Aldi misses these opportunities by concentrating on competitive relationships (Bromley / Thomas 1993; Monsees 2009; Reynolds et al. 2004).
Another SC-relevant aspect for Aldi is the cash flow (Elbert 2002). This is relatively straight forward for the payments received from the customers (DM 14). Aldi requires most of its suppliers to accept their payment terms – up to 60 days after the delivery (DM 15). Assuming goods are received, reshipped and sold within the expiry date (e.g. 3 weeks on delivery for yoghurt), Aldi generates the cash for the sale significantly before it pays the supplier (Gladen 2008). While this may be an advantage for Aldi in the first place, one could also assume that the suppliers calculate the need to refinance their costs for the long payment period into their product prices (D&B 2011). A more balanced approach should at least be considered.
The table on the next page summarizes the steps described for Figure 1 above, and assigns the issues identified throughout the text.
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Table 1: Aldi supply chain steps and respective issues (Source: author’s preparation)
 There is no clear definition of the term “Supply Chain Management” (SCM) (Mentzer et al. 2001). As this paper does not intend to discuss these varieties, this paper follows an understanding of SCM as “a set of three
or more entities (organizations or mdividuab} directly involved in the upstream and downstream flows
of products, sen-icesjinances. and/or information from a .source to a custome” (Mentzer et al. 2001, p.4). It needs to be clear that a supply chains comprises several elements (nodes), within and external to a company, which requires adequate strategies and tools to manage the links between these nodes (Slack et al. 2004). Therefore, there is no “one strategy” to manage all flows of all supply chain; far more, the strategies should reflect the specific challenge of nodes’ links and make use of dedicated management tools for the actual operations (Christopher / Towill 2002).
 Superstores are defined as outlets with a sales area of more than 5,000 square meters and more than 15,000 articles. Discounters on the other hand focus on cost reduction, e.g. by minimizing the available product range to about 1,000, simplifying in-store presentation or reducing advertising efforts and limit their store are to around 1,000 square meters; see Ahlert et al. (2010) for a detailed overview of current retail outlet formats.
 The term “Aldi” derives from the name of the founding brothers, Karl and Theo Albrecht, to be “Albrecht Discount (Aldi)”. “Aldi Süd” is the company that in Germany is operating mostly in the southern and western part. Independent from that “Aldi North”, serves the northern and eastern parts of Germany. The companies are led independently by Aldi’s two founding brothers, who decided on this split after not being able to reach consensus on the company’s strategic direction. In this paper, the term “Aldi” refers to “Aldi Süd”; see e.g. (Schmalhaus 2010).
 “cold chain” hereby means that the goods need to kept cold from the producer to the store, with clear rules of how long they can be held outside of cooled areas or means of transport (Oliva / Revetria 2008).
 Also called “Regional Distribution Centers”, RDCs
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- Supply Chain Management Kühlkette Lebensmittelhandel Supply Chain Strategie Aldi Discount Einzelhandel