Final Report:

Hershey’s Chocolate Factory

Table of Contents

I: Introduction 1

Body

II: 1

III-1 8

III-2 10

IV: 12

V: Conclusion 14

VI: References 15

VII: Appendix 16


I: Introduction

This report concerns the matter of the Hershey Company’s supply chain management. First, we will discuss the challenges this company has faced by classifying the problems into four big parts; Corporate Social Responsibility issue related to raw material procurement, inventory management and logistics problem, inefficiency in the packaging process and lastly, technological failure of Hershey’s Enterprise Resource Planning (ERP) system. For each we will discuss the solutions that have already been done by Hershey’s will be described and our team will suggest additional possible methods if there are any recommendable solutions.

II: Operational Issues—Hershey’s Supply Chain (Raw Material Procurement)

Hershey seeks to build a strong relationship with its suppliers, which is mutually beneficial and drives innovation and best practices for their total supply chain. Being a chocolate factory, Hershey’s supply chain starts with suppliers growing and harvesting the cacao beans. As you can see in the figure below, figure 1 and table 1 at the appendix, cocoa is cultivated in more than 50 countries, grows best in the climatic conditions found within approximately 20 degrees north and south of the equator. Nearly 70% of the world crop is grown in West Africa.

Cocoa production is increased by 131.7% in 30 years, representing a compound annual growth rate of 2.8%. There are three main varieties of cocoa: Forastero (which is used the most, 95%), Criollo and Trinitario. Criollo has the highest quality beans, and is considered as a delicacy.

The immature cocoa pods have a variety of colors but most often are green, red or purple. As they mature, their color changes to yellow or orange, particularly in their creases. Harvesting the beans usually occurs over several months and in many countries cocoa can be harvested at any time of the year due to the hot, rainy tropical areas it grows in. The harvesting process is much easier than for example fruiting trees because the cocoa pod grows directly from the trunk or large branch of a tree rather than from the end of a branch. But the pods do not ripen together so it has to be done one by one. They harvest pods between 3 ~ 4 times weekly during the season. The ripe and near-ripe pods are harvested from the trunk and branches of the tree with a curved knife on a long pole. This has to be done with care to avoid injuring the junction of the stem with the tree, as this is where the future flowers and pods will emerge. One person can roughly harvest around 650 pods per day.

After harvesting, the pods are opened with a machete to expose the beans. The pulp and cocoa seeds are removed and the rind is discarded. The pulp and seeds are then piled in heap, placed in bins, or laid out on grates for several days. During this time, the seeds and pulp undergo “sweating”, where the thick pulp liquefies as it ferments. This trickles away, leaving the cocoa seeds behind to be collected. If the “sweating” is interrupted, the taste of the cocoa bean can be altered and the cocoa beans can become useless. After “sweating”, the wet beans transported to a facility so they can be fermented and dried. They are fermented for 4 to 7 days and must be mixed every 2 days. The drying process takes even longer, 5 to 14 days, depending on the climate conditions. Most of the times they are dried with sunlight, which creates a better taste because no extraneous flavors such as smoke or oil are introduced which might otherwise taint the flavor. After being dried, they are collected in jute bags or in “mega-bulk” bulk parcels of several thousand tons at a time. Shipping in bulk significantly reduces handling costs; shipment in bags, however, either in a ship’s hold or in containers are still commonly found.

As you can read, this is a very labor-intensive process. Hershey has to make sure that working policies are met, especially because cocoa grows large in undeveloped countries with harsh circumstances. This directly relates to Hershey’s Corporate Social Responsibility and to its overall image.

Presently the Hershey Company has developed responsible sourcing programs to continuously improve their Corporate Social Responsibility (CSR). Building on Milton Hershey’s legacy of commitments to consumers, community and children, Hershey provides high quality Hershey products while conducting their business in a socially responsible and environmentally sustainable manner. To make sure that there is a clear policy; Hershey created the Hershey’s Supplier code of conduct.

The Hershey Company has a long history of operating with high ethical standards and integrity. They have been able to sustain this standard by balancing their strong desire for profitable growth with their commitments to their various stakeholders, including employees, shareholders, consumers and the communities in which they operate. The manner in which the employees manage the social, environmental and economic impacts of the business model is critical to the business success. The stakeholders expect Hershey to uphold high standards of responsible and ethical behavior in the company’s operations and to encourage a similar commitment by companies with which Hershey does its business. This code of conduct sets forth Hershey’s high standards and expectations with respect to key areas of corporate responsibility. Hershey’s goal is to work with suppliers and vendors to assure compliance with these requirements. (Refer to the appendix, document 1). The following aspects are handled in the document:

· Legal Compliance and Business integrity

· Social and Working conditions

· Environment and Sustainability

· Food Safety and Quality

· Verification and Compliance

· Supplier’s Certifications of Compliance

Broadly speaking, Hershey’s Corporate Social Responsibility strategy is: 1) through engagement with stakeholders, understand out performance in the global context in which we operate. 2) Set goals and targets for our engagement priorities and other important issues. 3) Measure and monitor our performance against these goals and targets. 4) Communicate to our stakeholders our performance on key issues and seek feedback from them regarding our performance. 5) Periodically reassess our goals and targets to ensure continuous improvement and performance in line with stakeholder expectations. The following table shows Hershey’s CSR framework.

Market place: Our dedication to drive integrity across our entire value chain shapes how we engage with our various stakeholder groups, including cocoa farming facilities, our business partners, our consumers and investors. In particular, we are focused on product quality and safety, consumer health and well-being and community programs in West Africa that modernize cocoa farming and improve social conditions to create a better future for children.

Environment: Reducing environmental impact across our value chain is central to building a sustainable business, and enhances our competitiveness through innovation, cost reduction, reputation and brand equity. We have committed to minimizing the environmental impacts of our operations, from sourcing raw materials, to manufacturing our products, to delivering them to market, while maintaining the high quality and value customers and consumers expect from the Hershey brands.

Workplace: Attracting and retaining the best talent is critical to our ability to grow and innovate, so we strive to provide a dynamic and challenging workplace that is rich with opportunity for employees. We see diversity and inclusion as levers to accelerate progress and results, and ultimately, contribute to a high-performance culture that is committed to a shared set of values and actively engaged with the priorities that face our company and world.

Community: For more than a century, we have maintained a strong focus on improving the places where we live and work, thanks to the vision instilled by our founder, Milton S. Hershey. At the heart of our community efforts is the well being of children, especially those at risk. Our commitment to communities begins with partnerships that support social and economic development, and our employees display that Hershey Values by seeking to benefit communities through direct giving and volunteering.

It looks as if they are aware of many issues concerning Social Responsibility and want to implement them in a correct way. They constantly try to find new goals to improve their Supply Chain and CSR. However, it is well know that in the cocoa harvest industry, child labor is very common, as stated in an article of CNNs Samuel Burke:

“The CNN Freedom Project sent correspondent David McKenzie into the heart of the Ivory Coast - the world’s largest cocoa producer - to investigate what's happening to children working in the fields.

His work has resulted in a shocking, eye-opening documentary showing that despite all the promises the global chocolate industry made a decade ago, much of the trade remains unchanged. There are still child slaves harvesting cocoa, even though some have never even tasted chocolate and some don't even know what the word "chocolate" means.

In the documentary "Chocolate’s Child Slaves," CNN discovers a human trafficking network and farmers using child labor for an industry offering low prices and little more than broken promises. Watch an excerpt above about Abdul, 10, who has been working in the fields for three years.”

For the chocolate industry child labor concerning cocoa harvesting is a big problem. In the case of Hershey, they have been sued early this year abusing child labor in the West Coast. Even more, Hershey has been accused by many student organizations of exploiting its migrant workers in its domestic plants. So far, Hershey has announced to make a $10 million dollar investment on the West coast in order to prosper their economy and end child labor. However, Hershey must take actions that are more firm in order to fix their brand equity by making its work environment more transparent and visible for the consumers to check. If not, this would lead to a loss of many consumers, which will critically damage the whole supply chain.

The second main ingredient of chocolate is milk. This is the reason why its first factory is located in the heart of Pennsylvania’s dairy country, where Hershey’s founder, Milton S. Hershey, even had his own dairy farm to create the best circumstances for the cows and produce the best milk for manufacturing Hershey’s chocolate. Eventually they sold the farm, but this shows how important milk is as an ingredient for Hershey’s chocolate. Until now, Hershey will only buy milk from the best dairy farms. Most of the farms make their own food for the cows, typically including corn and hay. This is directly fed to the cows and during winter season, it is stored in silages. They also raise their own calves and sell their male calves because they don’t produce any milk. They do not milk the cows by hand but use automatic machines for it. It is one kind of mass production. So it seems to be a perfect process, but there are also downsides. These days the dairy farms are huge product factories with many cows.

There are many concerns like animal waste, use of hormones and animal welfare. When a farm has a lot of cattle it creates a major environmental issue associated with manure handling and disposal, which requires substantial areas of cropland for manure spreading and dispersion, or several-acre methane digesters. Air pollution from methane gas associated with manure management also is a major concern. On the other side, when properly managed, dairy and other livestock waste, due to its nutrient content, makes an excellent fertilizer promoting crop growth, increasing soil organic matter and improving overall fertility and filth characteristics.

Some farmers inject their cows with growth hormones to maintain higher milk production. This is controversial due to its effects on animal and possible human health. The EU, Japan, Australia, New Zealand and Canada have banned its uses due to these concerns, but it is legal in the USA to use them.

Lastly, animal welfare is also a problem. This has been criticized by animal rights activities. Some of the ethical reasons regarding dairy production cited include how often the dairy cattle must remain pregnant, the separation of calves for their mothers, how dairy cattle are housed and environmental concerns regarding dairy production.

Hershey has to be very cautious about this and has to make sure that every supplier is using a rightful regulation and supplier code of conduct in a proper way.

III-1: Operational Problem— Inventory Management and Logistics

In 1990s, the Hershey Company continuously kept increasing their volume of the company and showed steady internal growth, adding new items. However, an operational issue came up after Hershey purchased Leaf Candy Co. in 1996. They bought $450 million of Leaf business and added product lines of 1300 SKUs, but Hershey’s maintained their existing distribution network without any changes to manufacture and distribute Leaf products, which brought about internal operational complexities.

While Leaf Company mainly used outbound shipment in 2300 to 3000 pounds range, Hershey’s’ shipment relied on utilizing smaller truckload lots, which meant that Hershey’s could not efficiently distribute them. Thus, extra products, which were not shipped, occupied much space of the warehouse and required system capacity as well. Nevertheless, Hershey’s did not expand the room of inventory storage and just kept running only small distribution centers that were already closely packed. Consequently, their distribution was not flexible at that time and could not support all the consumers’ needs, which led to the problem of customer service failure. Hershey has lost a quarter of their customers and stock prices also collapsed.

In response to this situation, Hershey has decided to open Eastern Distribution Center III (EDC III) in addition to existing EDC I and EDC II, combined logistics and distribution functions together in 1998 and started to plan a comprehensive supply-chain strategy. First, they tried to look all around carefully if there was anything that should be changed including cycle time, logistics, flexibility and SKU and predicted what their customers expected from Hershey’s. They gathered much information data from big supermarkets such as Target, Wal-Mart and CVS and put efforts to supply products whenever their customers needed. Furthermore, they took much care about “co-packing” because that was also a critical issue as a marketing and logistics strategy to help their customers buy Hershey’s product in a timely manner with flexible operations of manufacturing and shipping.