Introduction
Establishing a well-balanced supply chain is one of the cornerstones of business, especially in the food industry. Unlike other commercial areas, the food industry has more risks and peculiarities because the products of production — food, meals, or raw materials for production — have a limited shelf life, spoil quickly, and require more attention to ensure the safety of storage and transportation (Khan et al., 2020; Sá et al., 2020). For companies in the food industry, creating a supply chain that minimizes inventory and forecasts demand more intelligently has greater practical value.
This paper proposes a critical discussion of the case of KAR Foods, a Brazilian company that produces meat and meat products. KAR Foods supplies manufactured products directly to supermarkets and, to stimulate demand, creates a discount system that encourages customers to purchase meat in large quantities (Chopra, 2019). According to KAR Foods’ strategy, the optimization, digitalization, and rethinking of the former supply chain were necessary to reduce fixed costs. In fact, this resulted in a reduction to R$400 per order, down from R$4,000 previously.
Nevertheless, the key objective of this optimization, namely the reduction of product inventories in warehouses, was not achieved. Thus, this paper aims to critically evaluate KAR Foods’ strategic decisions from the perspective of supply chain management theories and concepts. The paper is structured so that, after discussing the discounting scheme used, it provides an assessment of the potential drawbacks and opportunities for the strategic development of KAR Foods.
Discounting Scheme
Since one of the objectives of the meat-producing company KAR Foods is to deliver quickly and free up warehouse space, it uses a discounting scheme to stimulate demand. Chopra (2019) states that the company supplies 10,000 kg of meat per month at R$4/kg, with a net profit of R$1.50/kg, based on the product margin and variable production costs. As part of its loyalty program, KAR Foods offers customers a 2% discount on purchases of 27,500 kg or more, reducing the final cost supermarkets pay but also resulting in an 8-cent-per-kilogram reduction in net profit. Nevertheless, the discount scheme is justified by the fact that placing and processing each order costs the company R$4,000, which means it is more profitable for KAR Foods when customers place fewer large orders than more small ones.
This discounting scheme can be viewed from two perspectives: the benefits and disadvantages it brings to KAR Foods. Research has repeatedly shown that discounting schemes offer a business advantage by stimulating demand and building stronger bonds with current and potential customers (Qiu et al., 2022; Tiganis et al., 2023). In my opinion, the benefits of using such a scheme are clear: it incentivizes supermarkets to place larger orders, which, in the short run, brings more revenue for KAR Foods.
As mentioned, it also reduces the company’s fixed costs, meaning KAR Foods saves money when encouraging customers to place orders. 8 cents per kilogram, said the savings in fixed costs can offset the 8 cents per kilogram decrease in margin, so in the end, the company can win. Moreover, the increase in order size could boost KAR Foods’ profitability and, therefore, add more value to the company. Another benefit of such a scheme could be the creation of an environment in which buying larger quantities is more favorable to customers — thereby increasing their loyalty, which could strengthen ties and attract new audiences. It is also worth noting that increasing order size should reduce the company’s warehouse stock and, therefore, lower the costs associated with storing meat products.
On the other hand, the discounting scheme also carries risks for KAR Foods, which should be taken into account. First of all, customers are buying more meat, which means the cost of storing the products is increasing. Chopra (2019) noted that supermarkets already incur a 20 percent cost to secure the products they purchase for a year, and in the long run, this may lead to a review of meat purchasing practices. If customers realize that such a scheme is not profitable for them, it may lead to an audience exodus from KAR Foods and, consequently, a decrease in sales (Arslan, 2020).
Customers may become interested in finding other suppliers that do not create weight restrictions on meat purchases to obtain discounts. In addition, it is not ruled out that purchasing large quantities of meat may pose a threat to consumer safety if supermarkets do not provide adequate storage conditions (Visciano & Schirone, 2021). As a consequence, the retail store’s reputation may fall, not only for the retail store but also for the producer KAR Foods, which will negatively affect demand for goods.
Overall, the discounting scheme seems quite optimal for stimulating sales and generating short-term profits. It can indeed create stronger bonds with customers by demonstrating loyalty. However, the risks of inadequate retention and reduced customer benefit perception may inhibit this scheme, leading to disruptive market consequences for KAR Foods. In other words, under the historical conditions described in this scenario, the discounting scheme may be justified, but it requires a more thoughtful strategic use.
The Potential of Keeping the Scheme
It is worth recalling that KAR Foods has used two variables to achieve its goal of reducing inventory. On the one hand, the discounting scheme was implemented to stimulate demand and create an environment in which customers would buy large quantities at once to clear the warehouse more quickly. On the other hand, fixed storage costs were to be reduced by optimizing the supply chain by a factor of 10.
Both of these factors were used by KAR Foods management to achieve their objectives, encourage faster inventory turnover, and strengthen customer relationships by demonstrating loyalty. As Chopra (2019) shows, KAR Foods achieved a tenfold reduction in fixed costs through optimization activities. Specifically, the company’s management documented the inflexibility of the current distribution system and, as a solution, implemented technologies to make it cheaper to handle mixed loads and increase flexibility. This makes sense from a labor perspective.
Academic discourse has repeatedly shown that optimization and digitalization are essential objectives of supply chain management, as they help reduce costs, shorten waiting times, and increase stakeholder satisfaction (Bigliardi et al., 2022; Seyedghorban et al., 2020). Thus, KAR Foods’ decision to optimize its supply chain made practical sense and led to the desired outcome of reducing fixed storage costs.
In the face of achieving a reduction in fixed costs of order processing, maintaining a discounting scheme may offset the benefits and nullify them. First, at a reduced fixed cost, offering customers a 2% discount may become unreasonable — the company has already achieved more favorable conditions for storing orders, and this is no longer as high a burden as if the products were stored at ten times the fixed cost. Second, by selling products at a reduced price, the company may risk losing profits that would be generated more quickly by reducing fixed costs.
Third, as shown earlier, the discounting scheme is indirectly correlated with the number of products in stock, meaning that the more often customers place large orders, the more products are kept in stock to meet demand (Qiu et al., 2022). In other words, there is an apparent mismatch between the company’s tactical goal (reducing inventory) and action (maintaining the discounting scheme).
Several additional, non-obvious disadvantages and risks become relevant when KAR Foods decides to retain customer discounts despite reduced fixed costs. On the one hand, customers who order frequently (i.e., so-called regular customers) may consider the discounts unfair compared to those who place large but infrequent orders. This makes sense, as a customer that KAR Foods has been working with for, for example, ten years may only qualify for the same discount as a new customer, which creates the potential for customer dissatisfaction (Qiu et al., 2022).
On the other hand, maintaining a discount system may limit customers’ choices by forcing them to place larger orders than they require. In turn, as has already been shown, this increases customers’ storage costs and, as a consequence, may prompt them to revise their supplier choices. Importantly, maintaining such a system fails to account for dynamic demand in the food market, thereby limiting customers’ ability to respond to market changes. Overall, the reduction in fixed ordering costs has created opportunities for operational optimization, but discounts are hindering this. Hence, there is a need to rethink the loyalty system and create an environment more favorable to both KAR Foods and supermarkets.
Suggestions for Further Changes
At this point, it is clear that KAR Foods has made meaningful efforts to optimize the supply chain and reduce fixed costs per order, but maintaining the discount system will have negative consequences in the future. Rethinking the loyalty program is thus an essential task for the company. Retention of the program is required because KAR Foods needs to demonstrate its own loyalty and keep customers engaged, and customers need to feel that purchasing meat from KAR Foods is profitable (Tiganis et al., 2023).
Thus, there is a need to restructure the discount system to benefit both parties. One of the primary ideas is to implement a system that accounts for purchase history, so that customers who place more orders receive preferential treatment than those who place fewer orders (Qiu et al., 2022). This system would cover the disadvantage of equalizing KAR Foods customers regardless of how many orders they placed.
In addition, it makes sense to recalculate the minimum meat order quantity based on the new fixed costs to estimate the new quantity needed to achieve the cumulative discount. As a result of these suggestions, KAR Foods will be able to retain current customers by motivating them to keep buying, avoid losing potential revenue to new customers in these quantities, and, most importantly, ensure faster warehouse clearance by not imposing a high bar to qualify for the discount.
Conclusion
This paper has critically evaluated KAR Foods’ strategy to reduce fixed costs in order processing and storage, as well as its discounting scheme to maintain customer loyalty. It was shown that work on supply chain optimization was completed, as one of the KPIs was achieved — fixed order costs were reduced by 10 times. On the other hand, it was shown that there was no practical benefit to retaining the discounting system in these circumstances, as the company had already ensured that storage costs were lower.
Maintaining such a scheme could have been disruptive for KAR Foods, as it created unfair conditions for different customer segments, offsetting the benefits of lower fixed costs, and did not account for dynamic demand, offering customers little freedom to make decisions. As an alternative, outlines of a new loyalty system in which customers could accumulate discounts were proposed, and the minimum order threshold (in kilograms) to receive it would be revised to account for new costs. Thus, rethinking is necessary to preserve the benefits of supply chain optimization and create a more sustainable, profitable loyalty management.
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