Supply Chain Project

Title: how PTC transitioned from a lean supply chain to a le-agile supply
chain system

Problem: Pakistan's tobacco industry was relatively stable, with fixed

growth rates every year and almost nonexistent volatility in demand.
Therefore, PTC designed its supply chain to minimize costs and ensure a
stable supply. However, during the fiscal year 2022-23, the government
increased the tax rates three times, leading to the price of an average
cigarette pack of PTC by more than two times. This, coupled with the
increase in the non-legitimate tobacco market and the smuggling of
cigarette packs, led to an unprecedented decrease in the demand for
PTC's products. As a result, PTC had to change its objectives and
significantly change its supply chain systems.

Summary:
– About the Pakistan tobacco market
– About PTC
– PTC's complete 'seed to smoke' supply chain
– Changes in the market
– How PTC adapted

About the Pakistan Tobacco market:

– The tobacco industry is a notable contributor to Pakistan's economy. It
provides employment opportunities directly and indirectly through
tobacco farming, manufacturing, distribution, and retail. The industry
also contributes heavily to the national exchequer through taxes and
duties.
– The tobacco industry in Pakistan is one of the most highly regulated
tobacco industries in the world, with a strict restriction on tobacco
advertising, promotion, and sponsorships, health warnings on tobacco
packaging covering up 70% of the total pack, and restrictions on
smoking in public places along with very high taxes on tobacco
products.
– Right now, the market is divided into two segments: the legitimate
market and the illegitimate market. The legitimate market consists of
two players, PTC and PMI. These are the only tax-paying entities in
Pakistan's tobacco industry. This sector enjoys a 50% market share in
 the tobacco market, out of which PTC enjoys an 80% share, with the
rest belonging to PMI. The remaining 50% of the market consists of
local players like Khyber Tobacco, who do not pay complete taxes
(therefore, the prices of their products are low) as influential people in
the government own them. The remaining market consists of
smuggled products through illegal channels.
– The government earns approximately 364 billion PKR in taxes and
levies from the legitimate tobacco market annually
– over one million people are economically dependent on the industry

About PTC:
– It is a subsidiary of British American Tobacco, which is the world's
biggest tobacco company, operating in over 180 companies
– It has a market share of 80% of the legitimate market and 40% of the
total market
– They had been in the subcontinent since way before independence.
PTC was incorporated into Pakistan in 1947.
– Brands - Dunhill, Benson and Hedges, John Player Gold Leaf, Capstan
by Pall Mall, Gold Flake, and Embassy
– 6 brands and 16 SKU’s in combustibles
– Two factories - one in Akora Khattak and one in Jhelum
– Due to the growing restrictions on combustibles, PTC has diversified
its portfolio into modern oral products and vapes by introducing Velo
and Vuze, both of which have taken the market by storm
– PTC divides its cigarette brands into two categories: premium and
value-for-money (VFM)
– premium packs are priced at PKR 500/unit and include John Player
Gold leaf, Benson and Hedges, and Dunhill, with Dunhill switch costing
PKR 550/unit
– VFM packs are priced at PKR 220/unit and include Capstan by Pall
Mall, Gold Flake, and Embassy, with Gold Flake costing PKR 170/unit
– Recently PTC came second in the SCM World Power of the Profession
Awards for their flawless supply chain, coming only behind the US
Army.

Supply Chain:
● Slide 1 - leaf

– Tobacco leaf is grown by farmers under contract with PTC and also
subsidized by them (1 year)
– The company agrees on the amount of tobacco leaves (in volumetric
tonnes) according to their forecast of the annual production of the
number of sticks (Demand goes from the company annually, and
DemandDemand is given from the planning department.
– The raw tobacco is brought into the factory.
– Factory engineers select the tobacco grade and what brand to make
today, according to DemandDemand.
– The hillier the area, the better the quality of the tobacco
– Demand goes from the company annually
– Demand given by the planning department

● Slide 2 - Primary manufacturing department

– Seed-to-smoke value chain
– Green leaf comes from farmers
– Threshing of leaf (separation/cutting of stem and lamina)
– After the threshing, it is called a prized leaf
– The prized leaf is conditioned, moisturized, and dried, and then cut
– Now it is called cut-rag tobacco (CRT), also the final blend
– VFM products contain 95% local blend and 5% imported blend,
whereas premium brands contain 75% local blend and 25% imported
blend
– Blend transported to SMD

● Slide 3 - Secondary manufacturing department

– The filter is cut into pieces according to the size of one stick
– Tobacco is rolled in the cigarette paper
– Tipping paper is attached to the filter, and the cigarette paper
– Ink applied to the cigarette (dye) (sticker on the filter in the case of
Dunhill)
– Adhesives applied to keep it intact

● Slide 4 - packing (SMD)

– The cigarette pack is a flat piece of paper that the machine forms into
a cigarette pack.
– Cigarettes are fitted inside the pack
– Aluminum foil attached to seal them
– The pack is wrapped with poly wrap. A tax stamp is on the pack, and a
tear of ribbon (TOR) is attached.
– Outer poly on the outer pack (containing ten cigarette packs)- Outer
TOR - Adhesives applied to keep the outer intact
– Packed into cartons - Tape applied to cartons
– Cartons are separated according to export and local market stock
– Stock is given to the logistics department
– The machines that do this job are called the maker packers

● Slide 5 - distribution
– PTC has four major distributors responsible for supplying PTC’s
products to 400,000 retailers across the country.
 – Distributors trucks come to the factory, take their stock, and go to
their regional warehouses.
– They are transported to their sub-regional warehouses, like in major
cities.
– From there, some wholesalers buy their stock from these warehouses
and sell it to retailers, mostly of which are from far-flung areas.
– Then, these distributors distribute the stock to retailers. This is done
on a cash basis; therefore, the representatives of the distributor have
to visit the bigger retailers at least twice a day and the relatively
smaller retailers at least once a day to restock their products.

● Description of this supply chain in terms of our course:

Changes in the Market:

– As the Pakistan economy was in quite a lot of trouble, the government
decided to further regulate the tobacco industry
– Previously, the premium brands were prices at PKR 250/pack with an
excise tax of 68% and the VFM brands were at PKR 110/pack with an
excise tax of 53%. The government changed this overnight to PKR
500/pack with an excise tax of 84% for the premium brands and PKR
220/pack with an excise tax of 63% for the VFM brands. the GST was
also raised from 17% to 18%. This meant that the government was
now earning upto PKR 408 on a PKR 500 pack and upto PKR 150 on a
PKR 220 pack. This was the third increase in taxes on the tobacco
industry in the span of one year.
– This further fuelled PTC’s troubles because the legitimate market
share decreased from around 70% to 50%. Influential people in the
government who already owned tobacco factories and weren’t paying
their due taxes or simply weren’t registered boosted their cigarette
production to sell at half the prices in the market. Their packs didn’t
even have the health warning, so the customers started to prefer
them. More people also started to smuggle international cigarettes in
Pakistan. As they were smuggled, they didn’t have any local taxes or
duties paid on them therefore they were also sold at below market
prices. This completely distorted the tobacco market.
– As a result, the demand fell from 30 billion annual sticks to 20 billion
annual sticks, which is a 33% decrease in the span of one year

How PTC evolved their supply chain as a result:

– PTC managed to keep its production costs low by operating on
economies of scale when it produced 30 billion sticks annually. Now
that the demand had decreased by almost 30%, their per-unit
production costs would increase if they reduced their production.
Therefore, they leveraged their parent company BAT’s huge network
 worldwide by keeping the production quantity the same and importing
the surplus inventory. PTC previously imported a minimal quantity of
their finished products because the local demand was huge; however,
as the local demand fell and the local currency depreciated, it became
a blessing in disguise as the production costs decreased in dollar
terms due to the depreciation of our currency. Therefore, Pakistan
became an attractive supplier of cigarettes for countries where BAT
did not have their production and relied on imports.
– PTC realized that the future of combustibles lay with even greater
government regulation and societal stigma. Therefore, they decided to
shift their focus away from combustibles and focus on developing
alternatives to build a sustainable future both for their company and
society. They used the combustibles as a cash cow and put funds into
research and development to identify new consumer patterns and
behaviors of people from different classes. As a result, they started to
diversify their portfolio. They had initially launched Velo, a modern oral
product that is the second largest Velo market in the world, here in
Pakistan. In the year following the tax hikes, they launched Vuze
nationwide, a disposable vape brand, and they plan on launching Vuze
vape devices once the market for disposable vapes is established.
They also plan on entering the energy drinks market in the future.
– For PTC, the VFM category of cigarettes was their principal cash cow
and had the largest market share. As the middle and lower middle
classes mostly consumed the products of this category, PTC feared
that, due to the current situation, many of their consumers would be
priced out of buying their products. Therefore, they decided to launch
an extension of their current brand, Gold Flake, which costs PKR 170/
pack, which is only PKR 60/unit more than the previous prices as
opposed to the PKR 140/unit increase in the prices of other VFM
products. This product was in the same tax bracket as other VFM
products; therefore, they paid the same tax. They cut the product cost
by decreasing the amount of imported tobacco used and the
packaging costs. This was to ensure that they maintained their
proportionate market share.
– PTC previously operated on a strict no-credit policy with their
distributors, who would continue this policy with the retailers.
However, due to the price hikes, the inventory cost increased
considerably for the retailer as he now had to pay double the cash to
hold the same amount of inventory. As a result, the retailers held
lesser stock, leading to stockout and lost sales. PTC showed flexibility
here by starting a 3-day credit policy with the distributors, who would
also give stock to their trustworthy and reliable retailers on credit. This
ensured that PTC did not lose any sales due to stockouts.
– The premium category of cigarettes was hit the hardest even though
–
the proportionate increase was less than that of the VFM category.
This was because many premium consumers dropped down to VFM
brands due to being priced out, and at PKR 500/pack, there were a lot
of other international/imported brands that were better quality
cigarettes but were relatively cheaper because they escaped import
duties while being smuggled. Keeping this in mind, PTC decreased the
production of premium products and increased the production of VFM
brands while keeping their production cycles flexible to cater to the
demand as it changes. They upgraded their manufacturing facilities to
allow quicker changeovers between different types of tobacco
products. This enabled PTC to rapidly shift production in response to
changing consumer preferences and any new tax implications
affecting different product lines.