16 Int. J. Integrated Supply Management, Vol. 4, No.

1, 2008

Best practices in distribution and retail networks:

the case of Indonesia and France

Uche Okongwu*
Department of Logistics and Organisation,
Toulouse Business School,
20 Boulevard Lascrosses,
31000 Toulouse, France
E-mail: u.okongwu@esc-toulouse.fr
*Corresponding author

Kristanto Santosa
PQM Consultants,
JI. Cempaka Putih Tengah 17 C No. 7A,
Jakarta 10510, Indonesia
E-mail: ks@pqm-iris.co.id

Abstract: Different echelons (companies) of a Supply Chain (SC) often make

decisions that create inefficiencies in the SC. For example, sales promotions
and trade deals offered by manufacturers encourage distributors to purchase
large quantities in advance, thereby generating excess inventories which create
bullwhip effects. This paper presents best practices that enable supply chains in
two different business and cultural setups (Indonesia and France) to neutralise
these inefficiencies in order to maintain a high level of efficiency, flexibility
and responsiveness. A comparative analysis of the two cases underlines the
need for managers to adapt their business models by adding a local touch.

Keywords: supply chain management; distribution and retail networks; culture;

trade incentives; bullwhip effect.

Reference to this paper should be made as follows: Okongwu, U. and

Santosa, K. (2008) ‘Best practices in distribution and retail networks: the case
of Indonesia and France’, Int. J. Integrated Supply Management, Vol. 4, No. 1,
pp.16–33.

Biographical notes: Uche Okongwu is currently a Professor of Supply Chain

Management (SCM) at Toulouse Business School, France. He holds a
MSc Degree in Mechanical Engineering and a PhD in Industrial Management.
At Toulouse Business School, he has held many faculty positions such as
Director of a MBA programme in Aerospace Management and Director of a
graduate programme in SCM. His current research work is focused on the
development and performance measurement of SCM systems. He is also an
independent consultant on SCM issues and industrial organisation.

Kristanto Santosa is a Partner/Co-founder of the Productivity and Quality

Management Consultants (PQM), and Director of IRIS, a system integration
consulting firm based in Jakarta, Indonesia. He is an Industrial Engineer
and holds a MSc Degree in Management. After eight years as a business
executive, he went into consulting since 1987. He is the co-author of

Copyright © 2008 Inderscience Enterprises Ltd.

 Best practices in distribution and retail networks 17

Turnaround Management, Best Practices from the Indonesian Experience

(2005) a book on corporate strategy written in collaboration with Professor
Rene Domingo of AIM, Philippines.

1 Introduction

In the global and highly competitive world of today, firms constantly search for new
organisational models to manage their Supply Chain (SC) in order to improve overall
performance in terms of efficiency, flexibility and responsiveness. Peck (2005) identified
four factors that could determine the vulnerability of a SC and thus the level of
performance achievable (Prasad and Sounderpandian, 2003). These factors are:
1 quality of Assets and Infrastructure (warehouses, accessibility and reliability of
telecommunications, ports, roads and airports)
2 value stream/product or process (availability of credible and reliable information
systems)
3 organisations and inter-organisational networks (contractual and trading relationships
between SC echelons)
4 environment (political, legal, regulatory, economic, social and cultural issues).
Factors 1 and 2 have been used by Wood et al. (1995), Simchi-Levi et al. (2000) and
Bookbinder and Tan (2003) to classify countries into three tiers:
Tier 1: Countries with highly developed infrastructure and where sophisticated
information systems are available. These are, mainly, North American and West
European countries such as France and Germany.
Tier 2: Countries with under-developed infrastructure and where information support
systems are not generally available. These are mainly newly developed countries such as
Brazil and China.
Tier 3: Countries with insufficient infrastructure and where information support systems
are not available. These are mainly developing countries such as Indonesia and Thailand.
If it is recognised that efficient information systems are positively related to operations
performance (Da Silveira and Cagliano, 2006) and that transportation is one of the most
important activities in the physical distribution function (Jayaraman, 1998), then we can
deduce that the performance of SCs in tier 3 countries is generally lower than that of SCs
in tier 1 countries. On the other hand, if it is admitted that collaboration is the
driving force behind effective supply chain management (Ellram and Cooper, 1990;
Horvath, 2001), that collaborative relationships require trust and commitment for
long-term cooperation (Sahay and Maini, 2002; Sahay, 2003) and that the effect of trust
on business-to-business cooperation would be stronger in the collectivist1 culture than in
the individualist2 culture (Terawatanavong and Quazi, 2006), we can deduce that cultural
variances would impact positively or negatively on the degree of collaboration between
SC partners.
18 U. Okongwu and K. Santosa

Hofstede (1991), cited by Hodgetts and Luthans (2000), has found that wealthy
countries have a high individualist culture while poorer countries have a high collectivist
culture. It could therefore be inferred that the collectivist cultural and collaborative
dimensions (factors 3 and 4 above) of the poor tier 3 countries would, to some extent,
compensate for the poor quality of their infrastructure and the non availability of efficient
information system (factors 1 and 2), thereby enabling them to obtain a fairly good level
of SC performance that is not too far from that of the wealthy tier 1 countries.
This paper aims to show how a tier 3 country (Indonesia) could achieve a level of
efficiency and responsiveness comparable to that of a tier 1 country (France), thanks to
the high degree of trust and flexibility inherent in its traditional business culture and retail
organisational structure. In both countries the upstream supply chain is dominated by big
companies who have similar systematic SC practices. We have, therefore, deliberately
chosen to study the downstream part of the supply network (the distribution and retail
network) whose SC practices look ‘chaotic’ in Indonesia compared with France’s more
organised modern setups. We want to demonstrate that despite this apparently chaotic SC
network, Indonesian small and medium scale firms have good practices that enable them
to neutralise SC inefficiencies and to maintain the fairly high level of efficiency,
flexibility and responsiveness necessary to survive in a competitive environment.
On issues related to supply chain management (SCM) development and
implementation, our comparative analysis shows that, in practice, there are many SCM
configurations and that “one size does not fit all” (Schewchuk, 1998; Towill et al., 2002).
It follows that managers (involved in international businesses) need to understand
specific characteristics of a supply chain network in order to adapt their business models
by adding a local touch. As René Brillet, the managing director of Carrefour Asia would
put it: “We are global, we act local.” (Kamath and Godin, 2001).

2 Methodology

The methodology used in this research is a case study approach based on documentation
provided by the firms studied, observation and multiple interviews of the key actors
(managers). On each occasion, the manager was observed and/or interviewed for a length
of time ranging from two to four hours. After our write-ups, the collected data were
reviewed with the respective firms for validation.
Given the fragmented structure of the Indonesian retail market, we will present two
different cases, one on functional products (food and beverages) and the other on an
innovative product (mobile telephone). On the other hand, since in France, both
functional and innovative consumer goods are distributed and sold in super- and
hyper-markets by retail chains, we will present only one case. There are three main types
of business setups in the consumer retail sector: company-owned, franchised and plural
form. In a company-owned business setup, all the retail outlets belong to the same firm
whereas in a franchise system, each retail outlet (hyper-market or super-market) is owned
and managed by an independent entrepreneur (the franchisee), within the framework of a
charter established by the franchiser. The plural form is a mixture of these two systems.
In order to have a fairly similar basis for comparison, we chose to study a French
franchised retail chain since this is the setup that is closest to the Indonesian cases where
the retail network is composed of independent enterprises.
 Best practices in distribution and retail networks 19

3 Case study framework

An analysis of the principal characteristics of a distribution network would enable us to

construct a framework for comparing the two country cases studied in this paper.
Christopher defined a supply chain (SC) as
“the network of organisations that are involved, through upstream and
downstream linkages, in the different processes and activities that produce
value in the form of products and services delivered to the ultimate consumer.”
(Christopher, 1992)
In practice, the way this network of organisations (especially the downstream part) is
structured and managed depends on three key elements:
• type of products (Fisher, 1997) and market characteristics in terms of volume,
variety and predictability (Christopher, 2000)
• strategic and tactical goals of companies in the supply chain (Narayanan and Raman,
2004)
• structure of distribution channels (Payne and Peters, 2004) and the nature of the
relationship between companies that constitute the supply chain (Harland, 1996).

3.1 Type of products and market characteristics

Fisher (1997) identified two types of products – functional and innovative – which have
different market characteristics. Functional products are those that have relatively long
product life cycles, predictable demand patterns, less variety, low margins, and allow
long lead times from order to delivery. Most often, companies that distribute and sell
functional products compete primarily on price, thereby searching for an efficient
distribution network in which cost is kept low by minimising inventory levels. The idea
of eliminating wastes (which includes inventory) in order to increase efficiency started in
the production function and was referred to as ‘lean manufacturing’ (Womack et al.,
1990) before becoming ‘lean enterprise’ which is a wider concept (Womack and Jones,
1996). Logistics cost could be driven further down by reducing freight costs
(scale economies achieved by delivering full truckload less frequently). The lean
objective becomes, therefore, difficult to manage since the delivery of full truckloads
implies high inventory levels. Moreover, efficient distribution networks sometimes turn
out to be uncompetitive because they are slow in adapting to market changes such as the
demand for a specific pack size that is not already in inventory. They therefore most often
lack flexibility and responsiveness.
Conversely, innovative products are those that have relatively short life cycles,
unpredictable demand patterns, high product variety, high margins, and necessitate short
lead times from order to delivery. Most often, companies that distribute and sell
innovative products compete primarily at the service level. They, therefore, have to be
agile (Nagel and Dove, 1991; Christopher, 2000; Christopher and Towill, 2001) and
require speedy response to market changes. Keeping high inventory levels in order to
achieve this high flexibility and responsiveness would decrease the efficiency of the
distribution network, more especially given that the company might get trapped with
obsolete products.
20 U. Okongwu and K. Santosa

It follows that one of the most fundamental trade-offs in a supply chain is between
efficiency and flexibility/responsiveness. It calls for a leagile supply chain. Naylor et al.
defined leagile as:
“the combination of the lean and agile paradigms within a total supply chain
strategy by positioning the de-coupling point so as to best suit the need for
responding to a volatile demand downstream yet providing level scheduling
upstream from the de-coupling point.” (Naylor et al., 1999)
Johansson et al. (1993) had earlier developed a model that would help to understand and
manage the leagility concept. Their model, taken further by Christopher and Towill
(2000) and Childerhouse and Towill (2000), expresses the value delivery of a business in
terms of an equation which encompasses market qualifiers and market winners, as
follows:
Total value = Quality × Service level/Cost × Lead time.
In this equation, quality and lead time are market qualifiers for both lean and agile
systems. Leagility can therefore be achieved by searching for a trade-off between service
level (which is a market qualifier for a lean system and a market winner for an agile
system) and cost (which is a market winner for a lean system and a market qualifier for
an agile system). The first problem statement (PS) for our case study is therefore:
PS1: What business practices do companies use to manage the trade-off between
efficiency and flexibility/responsiveness?

3.2 Strategic and tactical goals

If we consider that strategic management focuses on a firm’s goal to establish and
maintain a competitive advantage in its product markets (Walker, 1988) the goals of a
supply chain are threefold:
• maximise the satisfaction of the ultimate customer by delivering quickly and
responsively error-free products at a relatively low price
• minimise operational cost by eliminating non value-added activities and reducing
lead times, thereby creating value for shareholders
• maintain a competitive advantage for all the actors of the supply chain.
The first goal has been discussed in Section 3.1. The second and third goals often lead the
different echelons of the supply chain to permanently search for maximum individual
performance and this could create inefficiencies linked with the bullwhip effect. Lee et al.
(1997, 2004) defined the bullwhip effect as the phenomenon where orders to the supplier
tend to have larger variance than sales to the buyer (i.e., demand distortion) and where
the distortion propagates upstream in an amplified form (i.e., variance amplification).
They identified four causes of the phenomenon: demand signal processing, rationing
game, order batching, and price variations. The last two causes are treated in the cases
presented in this paper. Order batching exists when there are order surges created by
manufacturers’ salespersons who sign orders lately or prematurely in order to fill sales
quotas or when distributors want to benefit from scale economies by ordering full
truckloads. Price variation exists when distributors periodically buy big quantities
(that do not correspond to their immediate needs) and stock up for the future, in order to
 Best practices in distribution and retail networks 21

benefit from manufacturers’ special promotions like price discounts, quantity discounts,
coupons, rebates, price terms, and payment terms.
In other words, due to competitive pressure or urges to meet sales quotas or targets,
the marketing/sales personnel of the manufacturing companies regularly initiate different
kinds of trade promotions by offering the distributors and wholesalers price discounts,
free goods, and/or longer credit terms. This practice incites the wholesalers to purchase
big quantities that exceed their immediate sales requirements, thereby creating excess
inventory (which reduces the efficiency of the SC system) and triggers a bullwhip
effect which generates uncertainty and information distortion across the supply chain
(Lee et al., 2004; Svensson, 2005). We can understand why Sellers (1992) referred to this
practice as “the dumbest marketing ploy ever!”
Buzzell et al. (1990) estimated that, in the food industry (in the USA), increases in
manufacturer and distributor costs from trade promotion alone amount to about 2.5% or
more of retail sales. Admitting that trade promotions (and hence forward buying) cannot
be wished away, they suggest that companies must look for ways to execute them at
lower costs. Jackson et al. (1994) proposed a technique termed ‘Evaporating Clouds’ that
enables to move beyond classical logistics total cost analysis and cost trade-offs. From
this discussion, it follows that the second problem statement for our case study is:
PS2: What business practices are used by distribution/retail networks in different
business environments to neutralise the inefficiencies created by the bullwhip effect
generated by members of the network?

3.3 Structure of distribution channels and nature of relationship between the

echelons
Firms can not conceive and manage their distribution and retail networks the same way
for the following reasons:
• They manufacture and sell thousands of different products, with different
characteristics, to several different markets, in many different countries.
• In most developing countries, retail networks are composed of a multitude of small
(or even very small) enterprises that are supplied by small and medium independent
wholesalers and/or manufacturer-appointed distributors (Walker, 1996; Sim, 1999);
while in the developed western world, distribution and retail networks are
controlled by big multinationals that own hundreds of super- and hyper-markets
(Tordjman, 1994).
• The organisation of the network depends on the infrastructural, cultural, legal,
evolutionary and traditional constitution of the business environment in which firms
operate (Tordjman, 1994; Min, 1996; Luk, 1998; Robinson, 1998; Jiang, 2002).
Moreover, nowadays, retailing organisations in most countries range in type from
the traditional kiosk and small retail shops through the most modern super- and
hyper-markets, such as in Thailand (Feeny et al., 1996; Blois, 2001) and Indonesia
(Walker, 1996).
• The complexity of the distribution network varies a lot, ranging from direct delivery
from the manufacturer to the retail outlets through several echelons of distribution
centres, warehouses and wholesalers between the manufacturer and the retail outlets.
22 U. Okongwu and K. Santosa

Depending on the complexity of the distribution network, a low or high degree of

coordination and collaboration may be necessary between the manufacturers, distributors,
wholesalers and retailers. As we discussed in Section 1 the level of collaboration depends
on cultural variations, as well as on the level of trust, commitment and power balance
between the various echelons. The third problem statement for our case study is
therefore:
PS3: How do environmental factors (culture and tradition, trust, trade policies and
restrictions, SC players’ commitment and power) and distribution/retail network
complexity vary across countries?

4 Case studies

4.1 Case 1: Food and beverages distribution-retail network in Indonesia

(functional products)
In the Indonesian traditional supply chain of packaged foods and beverages,
manufacturers appoint distributors who sell their products directly to retailers and/or
end-users through their own branches and sales forces. Some portion of the sales is
usually channelled through appointed wholesalers to cover areas that the distributors can
not reach with their own network. Due to competitive pressures or urges to meet sales
quotas or targets, the marketing/sales people regularly initiate different kinds of trade
promotions by offering the customers (particularly the wholesalers) price discounts, free
goods, and/or longer credit terms. This practice incites the wholesalers to place extra
orders beyond their regular selling capacity, thereby creating a bullwhip effect.
The players of the distribution/retail network need a mechanism to neutralise or
reduce the instability and inefficiency created by the bullwhip effect. The wholesaler who
is lured into carrying more inventory than his normal selling capacity makes every effort
to relieve the situation by shifting the excess inventory as quickly as possible to retailers
and/or other wholesalers. To make this feasible, he decides to share with them part or all
of the promotional benefits that he received. For example, he can decide to keep the long
credit term of payment and pass on the discounts and free goods to the retailers and/or
other wholesalers. In order to get rid of their excess inventory as quickly as possible and
be cash-ready for other business opportunities, some wholesalers sometimes offer more
discounts than they received from the trade promotion. Figure 1 is a simplified model that
illustrates this practice. We studied this phenomenon by observing and interviewing two
wholesalers, A and B.
Wholesaler A imported a full container-load of branded wines and spirits in order to
receive an attractive price discount and reduce import and freight costs. But now that he
had this excess stock on hand, he had to try to transform it into cash as soon as possible.
Despite the fact that wholesaler B was wholesaler A’s strongest competitor in the wine
and spirits business, A called B to inform him that he had a recently purchased excess
stock of imported ‘branded whisky’. B pretended that he had sufficient stock of that
particular branded whisky in his warehouse, but added that ‘in good faith’ he was willing
to help A get rid of his excess inventory, providing that the price was attractive enough
and that the credit term was long enough to allow him look for customers for this
particular brand. Wholesaler A did not concede the credit term, but offered wholesaler B
 Best practices in distribution and retail networks 23

a very good price (equivalent to the price discount and free goods that he obtained from
the distributor). Thereafter, B asked for some time to check whether he had enough
storage space in his warehouse.

Figure 1 Food and beverages distribution-retail network in Indonesia

Instead of calling his warehouse manager as he had said he would, B called his major
customers (mainly five-star hotels) to inform them that he had extra stock of branded
whisky that he would let go at a very special price. After a few calls, B successfully
secured a deal with a customer who agreed to buy all the excess stock, but with a price
discount less than what he obtained from A. He then called A to confirm the deal,
indicating the address of his customer’s (hotel) warehouse as the point of delivery.
Having given A the impression that he had just done him a favour, B asked for
reciprocity by asking A to buy some of his slow-moving items from him, but also at a
special price.
At the end of the day and in a very short time, B made a 5% net profit on sales from
the branded whisky deal without even seeing the item (since they were shipped from A’s
warehouse to the warehouse of B’s customer). He also freed the money tied up in some
of his slow-moving items. As for A, he generated cash by obtaining a good credit term
and purchasing from A, at a good price, some items that he needed. Most importantly,
though competitors, A and B collaborated and jointly neutralised the excess inventory
created as a result of trade promotion deals that both A and B had made with their
respective suppliers. By reallocating and sharing excess inventory and profit margins, the
distribution/retail network partners succeeded in minimising the potential adverse
consequences of the bullwhip effect that they created.
Two fundamental lessons can be learned from this traditional supply chain practices.
First, co-opetition (which describes a business situation where two firms can collaborate
in some areas while competing in other areas) is a natural survival phenomenon and can
24 U. Okongwu and K. Santosa

be used to jointly neutralise the bullwhip effect created by individual (or collective)
rational or irrational behaviour of supply network partners. It follows that, for survival
reasons, a fairly high degree of efficiency can be achieved through the natural and
informal collaborative behaviour of supply network partners. Cadilhon et al. (2005), after
observing a similar phenomenon in the Vietnamese vegetable supply chain, concluded
that collaborative commerce can be adopted easily when the culture is conducive to
collaboration and to a partnership approach to trading relationships. Moreover, their
opportunistic and ad-hoc behaviour also enabled them to simultaneously explore business
opportunities upstream and downstream the supply chain, in a highly responsive manner.
Secondly, sourcing and selling are usually two separate functions in most big
organisations. Here, the players of the supply chain network reduce lead times by
merging and simultaneously exercising the two functions, thereby increasing
responsiveness and overall efficiency of the network.

4.2 Case 2: Mobile telephone distribution-retail network in Indonesia

(an innovative product)
The mobile telephone business in Indonesia illustrates one of the big challenges facing
organisations today: the need to respond to ever-increasing market volatility. Product and
technology life cycles are becoming shorter and shorter while fierce competition leads to
more frequent product changes and consumers demand more variety. Different from what
obtains in many developed countries, the retail business model of mobile telephones in
major Indonesian cities is somewhat unique. Mobile telephones (and many other
consumer electronic products) are sold mainly in a department store by small-scale
specialised shops which sell basically the same set of products and compete with each
other.
The organisation of the retail network is unique because the retailers, while keeping
little or no individual inventories, satisfy almost all customer demand by sharing the
inventories in the network. This business model probably started at a time when high
taxes and duties were imposed on imported consumer electronics, and some traders
indulged in smuggling activities. The smuggled products were kept by the importer
(or rather the smuggler) in a hidden remote location (warehouse) close enough to the
selling points. The importers reached a secret moral agreement with a pool of sellers who,
on customers’ request, could rapidly go and fetch any of the products from the importer’s
remote warehouse. The sellers never displayed the real products in their shops.
This retail setup for selling smuggled consumer electronic products gave birth to the
present-day retail network where specialised shops in a department store depend on a
‘pool inventory’ to satisfy customer demand. The shops do not display the real products
but mock-ups of almost all existing brands and models. When a customer arrives at any
of the shops and asks for a particular model of mobile telephone, the seller claims to have
the requested model in stock. Once the customer makes up his mind to buy the product,
the seller asks for a couple of minutes to go fetch it from his warehouse. In reality, he or
she goes to get the exact model from the ‘pool inventory’ located somewhere within the
department store. In the department store that we studied there are about ten of such pool
inventories owned by dealers. On a daily basis these dealers distribute to the sellers their
price lists which could be re-negotiated at each individual transaction. In some cases,
individual shops keep a small inventory of some items that they consider strategic.
 Best practices in distribution and retail networks 25

Also, upon demand from customers, they could easily obtain from other shops items that
they do not have in their individual inventory.
Here again there is competition and collaboration between members of the network.
This is a ‘mutualised co-opetition’ system where shop owners share both individual and
pool inventory while competing with each other on price. However, in such a situation,
margins on first-hand mobile telephones are very low (despite the relatively high margins
offered by the wholesalers) since sellers have to compete fiercely on price in order to
attract customers. Moreover, within the same department store, margins fluctuate
permanently since price is driven by a daily ‘head-on’ competition. It is therefore almost
impossible for the shops to rely on their mobile telephone sales to pay overheads such as
the rental cost of space in the department store. To survive, they indulge in secondary
activities such as buying and selling used (second-hand) mobile telephones. Surprisingly,
they make more money from this second-hand telephone activity. They also sell mobile
telephone accessories which offer even better margins and by so doing, they provide
personalised services to their customers. It is interesting to note that some customers also
buy and sell second-hand telephones from and to each other. This is a completely free
and flexible market as is shown in Figure 2.

Figure 2 A mobile telephone distribution-retail network in Indonesia

There are three key lessons to be learned from this business model. First, the concept of
‘value added network’ is really put in action since the retail shops work together as a
team to create value for their customers by offering highly competitive prices and
‘one-stop’ services for anything related to mobile telephones. Secondly, the concept of
co-opetition (collaborating while competing) is, in this case, a natural phenomenon that
originated from trade regulations and cultural business behaviours. This spirit of
collaboration between competitors enables the network to be highly flexible and
responsive, while minimising the overall inventory level. Thirdly, competition between
26 U. Okongwu and K. Santosa

retail networks enables maximisation of the value offered to the end-users. Collectively
(as a department store), the shops are in competition with similar department stores in the
city to provide lowest prices and best services to the customers.

4.3 Case 3: Company C: a French retail chain (for functional and innovative
products)
Company C is one of the 5 major retail chains in France, with staff strength of more than
75,000 employees and an annual turnover of 15 billion euros in 2004. The chain is a
group of independent entrepreneurs (franchisees) who own and run their hyper-market or
super-market within the framework of a social and economic charter defined by the
parent company (the franchiser).
Company C’s primary goal is to offer quality products to consumers at the lowest
possible price. This low-price objective is, to a very large extent, achieved by centralising
as much as possible the procurement activities of the retail outlets. Buying large
quantities enables the company not only to obtain very good trade deals from suppliers
(price discounts, rebates, and quantity discounts) but also to cut down transportation cost
through scale economies. It follows that the quantities purchased at a given time do not
correspond to immediate sales requirements, thus creating a bullwhip effect. Moreover,
inventory holding cost is relatively high. In this case, in order to maintain an optimal
level of network efficiency, the benefits derived from the trade deals and low
transportation cost must outweigh the high inventory holding cost and the cost of the
inefficiency generated by the bullwhip effect. It is also common to see the retail outlets
forward-buy large quantities (which they store at the regional warehouse) each time they
receive the information that a supplier may probably increase the price of its products.
This practice also creates the bullwhip effect.
For the effective and efficient implementation of its low-price strategy, Company C
installed a hybrid organisational structure (a mixture of centralised and decentralised
units) composed of a National Purchasing Centre (NPC), 16 Regional Purchasing and
Distribution Centres (RPDC) and 600 retail outlets (hyper- and super-markets). The NPC
sources, negotiates and buys products from both national and foreign suppliers, for all the
600 super- and hyper-markets. The 16 RPDCs source products at the regional level for
the retail outlets in their respective regions. They are also responsible for transportation
and inventory storage for their respective retail outlets. The 600 super- and hyper-markets
possess a purchasing department for sourcing specific local products, especially food and
beverages. On an average, about 60% of the items sold by a retail outlet are sourced at
the national level by the NPC, 15% at the regional level by the RPDC and the remaining
25% are sourced locally by the retail outlet.
This organisation enables company C to successfully manage the trade-off
relationship between cost and product variety/local taste. Sourcing all the products at the
national level would reduce cost (scale economy) but would most probably sacrifice local
customers’ variety and taste requirements. On the other hand, sourcing all the products at
the local level would take into account local customers’ variety and taste requirements
but would drastically increase overhead and transportation cost. Lee (2004) noted that
“Efficient supply chains often become uncompetitive because they don’t adapt to changes
in the structures of markets”. In company C’s organisation, standard functional and
innovative products are sourced at the national level, specific functional and innovative
products are sourced at the regional level, and highly customised and unstable products
 Best practices in distribution and retail networks 27

are sourced locally in order to incorporate local tastes and increase flexibility and
responsiveness. Perishable and local farm products belong to this last category.
Figure 3 shows the supply chain (distribution-retail network) structure of company C.
The ordering and replenishment process is divided into three stages:
• Based on sales forecasts, the retail outlets send their sales requirements to the NPC,
through their respective RPDCs.
• The NPC then negotiates large volumes and commercial terms with each supplier.
Before the end of the negotiation process, the retail outlets are asked to confirm their
orders.
• Finally, the committed quantities are shipped either directly to the retail outlets
(if volumes are big enough to make up full truckloads) or to the RPDCs, which then
immediately or periodically consolidate and dispatch the orders to the retail outlets.

Figure 3 The distribution-retail network of company C

Additional economies in transportation are realised through the use of the cross docking
concept. This concept helps to further increase the efficiency of a distribution/retail
network (Apte and Viswanathan, 2000). It is based on the Hub and Spoke system
(Lumsden et al., 1999) where items from suppliers arrive at the RPDC in full truckloads
and are broken up and then consolidated again to create full truckload shipments that go
to the various retail outlets, with little or no dwell time at the RPDC. The cross docking
concept is facilitated by the effective use of the Electronic Data Interchange (EDI)
technology which enables the retail outlets to send their orders concurrently to both the
RPDCs and the suppliers. Company C uses the EDI technology to place orders for more
28 U. Okongwu and K. Santosa

than 80% of its product groups. We note that on the average a RPDC keeps about
50,000 SKUs (stock keeping units) in inventory.
In line with the guidelines recommended by Apte and Viswanathan (2000), the cross
docking concept is used by the company mainly for innovative and functional products
with a stable and constant demand rate. It is also used for regularly consumed perishable
food items and chilled goods. In company C, these product categories represent about
75% of total sales but only 30% are today ordered and replenished using the cross
docking concept. Based on a recent analysis of warehouse data in the UK, Baker (2004)
reported that 74% of large distribution centres cross-dock 5% or less of their total
throughput and only 7% of the sites cross-dock more than 20% of their throughput.
With 30% of its throughput cross-docked, we can say that Company C is one of the
best-in-class in the use of this concept.
Given the forward buying strategy practiced in company C, the volumes ordered and
received by the retail outlets are sometimes greater or less than actual demand. In this
case, the managers communicate with each other through the internet (e-mail) and move
goods around from outlets with excess inventory to outlets in a stock-out situation,
providing that the extra unit transportation cost is less than the unit stock-out cost.
This helps to neutralise the bullwhip effect by reallocating inventory in the network based
on actual demand of the various outlets. When and if necessary, this inventory adjustment
and reallocation principle is also applied between the RPDCs. The whole mechanism is
governed by company C’s social and economic charter which stipulates maximum
cooperation between the retail outlets in order to satisfy the end users.

5 Discussion and conclusion

Though the Indonesian and French business environments are different, we can compare
the two systems by using factors related to the three Problem Statements (PS) developed
in Section 3.
• The factors related to PS1 are efficiency vs. flexibility/responsiveness of the network
and information support system, and to some extent information sharing and
distortion.
• The factors related to PS2 are mechanism for neutralising bullwhip effect,
information sharing and distortion, and sharing of trade incentives.
• The factors related to PS3 are structure of the distribution/retail network, culture and
tradition, level of competition, trade policies and restrictions, trust, players’
commitment, players’ behaviour, trade incentives and nature of relationship between
players.
The summary of this comparison is shown in Table 1. Generally, we can deduce
from this comparative analysis that the two systems achieve equilibrium between
efficiency and flexibility/responsiveness, but in two different ways and for different
reasons.
 Best practices in distribution and retail networks 29

Table 1 Comparison of Indonesian and French distribution and retail networks

SCM component The Indonesian retail networks The French retail chain
Structure of the Very small independent retail Huge retail chains (integrated
distribution-retail enterprises dominated by powerful distribution and retail networks) with
network wholesalers and distributors a high negotiation power
Culture and Bargaining is common and natural Products have price tags
tradition
Level of Fierce competition between Competition is very low between
competition retailers retail outlets of the same retail chain,
but high between retail chains
Trade policies Trade policies are not necessarily Very strict trade polices on contract
and restrictions enforced. Prices are constantly terms. Prices are neither renegotiated
renegotiated between network between retail outlets nor between
players distribution centres
Trust Trust exists naturally between Trust is formalised and imposed
players through a charter signed by retail
outlet owners
Players’ Commitment is linked to survival Players are highly committed
commitment (charter)
Players’ Players are aggressive and Players are docile for they are
behaviour completely free in the game of constrained by trade laws and the
negotiation company’s charter
Nature of Flexible Rigid due to excessive formalism
relationship
between players
Information Information is shared. But in the Information is shared in a much
sharing and negotiation process, there is a formalised manner
distortion cultural allowance for the
omission and distortion of
information
Information Oral (telephone and face to face) EDI and web-based technology
support system
Trade incentives Trade incentives are common Trade incentives are common but
regulated
Sharing of trade Trade incentives are constantly Trade incentives are neither
incentives negotiated and redistributed renegotiated between retail outlets
between network players nor between distribution centres
Mechanism for A flexible and natural reallocation The principle of inventory
neutralising of inventory in the network. reallocation is limited, since retail
bullwhip effect Moreover, the concept of pool outlet managers find it difficult to
inventory is used admit their forecast errors
Efficiency vs. Inventory reallocation is common In the hybrid organisation, the
flexibility in the functional products retail centralised national and regional
/responsiveness network. For innovative products, purchasing policy and process help
of the network pool inventory and the use of to reduce transportation cost, while
mock-ups on the display shelves flexibility and responsiveness are
help to reduce inventory levels, achieved through the decentralised
while close proximity of selling local purchasing units
points help to increase
responsiveness
30 U. Okongwu and K. Santosa

The Indonesian distribution/retail network is a free fragmented market that is under less
trade constraints (laws and regulations) and in which bargaining is a natural and
traditional component. The basic economic law of demand and supply, therefore, governs
the market and promotes a fiercely competitive environment that creates value for both
sellers and buyers. Given this aggressive competitive environment, the incentives
obtained from manufacturers are informally redistributed across the network, down to the
final consumers who buy the products at very low competitive prices. This competition
also obliges the retailers to be flexible and responsive in order to attract customers. Since
the retailers’ profit margins are significantly reduced by the fierce competition, they are
also obliged to develop and offer other peripheral services, hence increasing customer
value and satisfaction.
The concept of pool inventory helps to reduce holding cost, thereby increasing
efficiency. And the natural principle of sharing inventory among the network players
helps not only to further reduce the network inventory holding cost, but also to neutralise
bullwhip effects. The rules for sharing inventories are unwritten but are simply based on
mutual trust. This high level of trust is implicitly and naturally imposed because there is a
high risk of being excluded from the network if an individual does not respect the
unwritten rules of the game. However, oral communication and the informal nature of
transactions create information distortions and inefficiencies in the processes.
On the other hand, the French distribution/retail network is a controlled market,
constrained by very strict trade laws and regulations, and dominated by huge and
powerful retail chains. Moreover, there is traditionally no room for bargaining. The much
formalised structure of the network, coupled with the trade constraints, rigidifies the
system and reduces the level of competition between retailers within the same network.
Competition only exists between different networks, that is, between retail chains.
However, the retail network studied in this paper succeeds in achieving a fairly high level
of efficiency, flexibility and responsiveness, thanks to its hybrid organisational structure
and use of modern information technology and management concepts such as cross
docking.
This paper presents two different business environments and traditions (from
Indonesia and France). Though the market characteristics and the players’ behaviour are
different, the two systems manifest some best practices that could be borrowed from
each other in order to maximise the overall efficiency and responsiveness of the
distribution/retail network. We can formulate the exchange of these best practices in the
form of topics for further research:
• How should the Indonesian retail networks use modern information technology to
maximise efficiency while maintaining their high level of flexibility and
responsiveness?
• How can the concept of ‘pool inventory’ be incorporated into the French trade
policies in order to increase the efficiency of their distribution-retail system?
• How should the trade policies in France be reviewed in order to allow a better
distribution and sharing of trade incentives across the distribution/retail network?
 Best practices in distribution and retail networks 31

• How should French retail chains facilitate their entrance into the Indonesian market
by adopting and perfecting the local retailing system?
• What is the impact of rigid trade policies on the performance of French
distribution/retail networks?
If similar studies are carried out in other countries, answers to the above questions will
not only contribute positively to increasing the overall performance of both national and
international distribution/retail networks, but will also help to confirm the hypothesis that
supply chains can be organised and managed efficiently in different ways, in different
cultural environments.

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Notes
1
Hofstede (1991) defined collectivism as the tendency of people to belong to groups or collectives
and to look after each other in exchange for loyalty.
2
Hofstede (1991) defined individualism as the tendency of people to look after themselves and their
immediate family only.