GLOBAL SUPPLY CHAIN MANAGEMENT FORUM

CASE: GS-60 DATE: 9/9/07

TAMAGOYAOFJAPAN:

DELIVERINGLUNCHBOXESTOYOURWORK
TAMAGO-YA AND ITS BUSINESS Since it was founded by Isatsugu Sugahara in 1975, Tamago-ya (meaning Egg-house) had grown from a small mom-and-pop lunch box shop to the largest lunch box producer in Tokyo, Japan.1,2 Especially under Isatsugu and his son Yuichiro Sugaharas entrepreneurial leadership and strong orientation toward efficient supply chain management, the company grew rapidly, even during Japans recent decade-long economic stagnation (Exhibit 1). In 1982 it sold 3,000 lunch boxes a day. In 2002, the number increased to 50,000, and Tamago-yas revenue reached 5,700 million Japanese yen (JPY5,700 million=US$47.5 million), with net income JPY350 million (US$3 million).3 In 2006, it produced and delivered 70,000 boxes a day, employed 650 people (full and part-time), and grew revenue to JPY7,000 million or US$58 million.4 By 2007, Tamago-ya was unique in that: 1) Tamago-ya produced and delivered high-quality lunch boxes at low price of JPY430, or US$3.60, to office workers in the Tokyo Metropolitan area. 2) It received orders at 9 a.m. until 10:30 a.m. every day, and delivered by noon. Thus, the
1 http://www.Tamago-ya.co.jp/ 2 Isatsugu Sugahara, Tamago-ya of Columbus, Bunshun-Nesco, 2002. 3 $1=120 Japanese yen is assumed throughout the case. 4 Tamago-ya had incidental businesses such as a catering service. It employed 800 people and its revenue was JPY9,000 million, or $74 million when these were consolidated.
The case was prepared by Shinya Fushimi, Jason Kaminsky, Veronica Rocha and John Tsou under the supervision of Professor Jin Whang at the Graduate School of Business, Stanford University. We would like to thank Chairman Isatsugu Sugahara and the CEO and President Yuichiro Sugahara for sharing valuable information and insights. In addition, we thank Mr. Takaaki Ando at Mitsubishi Corporation for arranging the visit to Tamago-ya and sharing his perspective. The case is prepared for class discussions rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2007 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business.

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delivery lead-time was very small (1.5 hours for last orders), considering the long transportation time in busy Tokyo (about 1.5 hours from south to north). Tamago-ya hardly ever missed a delivery deadline, although demand was large and fluctuated from day to day (ranging between 60,000 to 75,000 deliveries). 3) Tamago-yas average loss ratio (the disposal ratio due to over-production or returns) was only 0.06 percent, while the Japans industry average was 2 percent. This translated to only 42 lunch boxes left over for 70,000 total productions a day. The combination of strong leadership with customer-focus orientation empowered workers achieving continuous improvement in supply chain management. In addition, the unique economic and cultural environment of Tokyo had led Tamago-ya to pull off its magic. Product Tamago-ya offered only one menu per day. Each lunch box contained more than six items, most of which were made from organic and natural ingredients (Exhibit 2). The lunches were freshly made each morning and kept warm until delivered. For example, a typical menu might include: 1) 2) 3) 4) 5) 6) 7) 8) Stir-fried beef with oyster sauce Baked red snapper with teriyaki sauce Boiled spinach with sesame dressing Curry-flavor potato and vegetable croquette Fish and mushroom boiled in soy sauce Coleslaw A slice of fresh orange Steamed rice

Although it served only one menu a day, the menu changed daily. Tamago-ya fixed its menus 14 days in advance and published them both on its website and on a sheet of paper handed out to customers. It deviated from the standard industry practice of fixing menus for an entire month at the end of the previous month. This way, Tamago-ya could search for the best recipes and ingredients up until the last minute. Instead of disposable lunch boxes (US$0.25 each), Tamago-ya used reusable ones (US$4 each) that could be used for up to one year. The overall cost of using reusable boxes was slightly higher than that of disposable boxes, since it took up to nine hours a day to wash and clean all the lunch boxes using specialized equipment and specially-treated water.5 But reusable boxes offered multiple benefits to Tamago-ya. First, they were more eco-friendly, either by saving trees (in the case of wooden boxes) or avoiding waste (in the case of plastic boxes). Also, reusable boxes provided van drivers with more opportunities to talk to customers as they collected boxes after the lunches were finished. Valuable customer feedback could be obtained just after the meal. Last but not least, due to the pick-up, customers were obliged to consume the lunch by 1:30 p.m. If

Historically, reusable boxes were more inexpensive than disposable ones.

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they did not, freshness might be compromised (e.g., sliced fresh cabbage gets soggy), or even worse, if taken home food might become spoiled. Tamago-yas carefully designed reusable lunch box allowed each van to load more boxes and facilitated the washing-cleaning process (Exhibit 3). A typical delivery van could carry 200 to 250 industry standard boxes. Tamago-yas compartmented box was slightly narrower but deeper than the standard design, with rounded-off corners.6 The rounded corners made it easy to wash away any food stuck inside the boxes. In addition, there was a side molding under the rim of the box, which served to keep a distance between two neighboring boxes in the washing process. Most importantly, the design allowed a van to load 430 boxes without reducing the amount of food in the box. This special design had improved profitability far beyond its break-even point, which was estimated to be around 200 boxes per van. Each Tamago-ya lunch box, complete with food, cost around JPY227.9 to produce, which translated to a COGS-to-price ratio of 53 percent. This ratio was high relative to the industry average of less than 40 percent. This was primarily because Tamago-ya used high-quality, and consequently expensive, ingredients. The company did not want to compromise the quality and taste of its lunches, which it viewed as its primary competitive advantage. Further, Chairman Sugahara believed that the company should keep the net income at 5 percent (healthy but not greedy) as a way of sharing the value with the community. Customers Tamago-yas primary customers were businesses or other groups in the Tokyo metropolitan area. Usually, someone in the office gathered orders from all the individuals in the office and placed one big order (e.g., 20 or 40 lunch boxes) on their behalf over the phone. The same person received the lunch boxes, distributed to individuals, and gathered back empty boxes for a later pickup between 1:30 p.m. and 2 p.m. In 2007, Tamago-yas customers included Mitsubishi Corporation, Sumitomo Corporation, NEC, IBM Japan, Tokyo Electric Power, NTT Docomo, Japan Airlines, JR East, Fujitsu, Toshiba, Mitsubishi Electric, Sony, Panasonic, and various government offices. Customers were segmented into eight geographical areas: Shinjuku, Shibuya, and Ebisu; Gotanda; Omori and Shinagawa; Shibaura Ginza; Ota ward and Kawasaki; Seashore factory area; East of Palace; and Nishi-Kasai and Odaiba (Exhibit 4). Sales and Drivers Tamago-ya did not have salespeople, nor did it spend money on marketing. Instead, van drivers promoted sales when they delivered lunch boxes; they visited offices near their existing customers and introduced the company and its product. For customer retention, van drivers

The capacity of the standard box was 1.5 times larger than Tamago-yas. While smaller, Tamago-yas lunch box contains as much food as the standard one because workers place the food contents in a more crowded manner than that of the standard box, thereby filling all the space inside the box. While most competitors used standard boxes for a spacious upscale look, Tamago-yas compact design allowed more efficient logistics; for example, a delivery cart could hold 12 Tamago-ya lunch boxes, or eight standard boxes. Also, the roof of the loading space of Tamago-yas van was slightly higher than the standard. This allowed the van to carry more lunch boxes.

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kept close communication with existing customers when they delivered lunches and picked up empty boxes. One driver said: It is rather easy to identify a good potential customer; if the people in the office appear to work closely and collegially among themselves when we visit their office, they are likely to become a good customer. If people work competitively and aggressively in the office, they will not be good customers, since people would rather go out for lunch to get away from their colleagues. All new customers first needed to be interviewed by Tamago-ya and registered in its customer database before they placed daily orders. When a firm or a group first called, Tamago-ya asked for its location and an estimate of the average number of daily orders. Tamago-yas basic sales criterion was to secure at least 10 lunch box orders per customer per day. However, Tamago-ya did not require customers to commit to a minimum number of orders, since it believed that flexibility in ordering is one of the most important drivers of customer satisfaction. To reconcile the flexibility of orders and its commitment to deliver its product every day, Tamago-ya screened new customers both by their order size and their locationthat is, from a delivery efficiency perspective. Tomago-ya did not accept all potential customers. The company would accept a very small customer whose average daily order size could have been less than 10, for example, if the customer was in the same building as existing customers, or if its office was located along an existing delivery route. On the other hand, Tamago-ya might refuse to take orders from a prospect willing to place large orders every day, if its location was on the opposite side of the existing van route and required time-consuming U-turns of delivery vans. There was no algorithm in place; each area manager, responsible for 20 to 25 drivers, ultimately decided which customers to add or delete in the route. Recently, for example, Tamago-ya dropped the Hibiya area, close to the famous Ginza area, because its customers were mostly small offices (like law offices), and traffic congestion was getting worse due to new construction. HR Practices

By 2007, Tamago-ya owned 150 vans7 and employed 200 drivers, who were organized into eight groups by region. Each group was divided into three subgroups, each typically consisting of five drivers. Each driver owned a route serving the customers en route every day. A typical driver delivered 400 lunch boxes a day, which translated to 2,000 lunches a day per subgroup. Assuming 250 delivery days a year and $4 per lunch, each subgroup generated US$2 million per year. This was a good size to manage as a decentralized operating unit at Tamago-ya, according to the CEO and President Yuichiro Sugahara. The subgroups performance and incentive system captured both overage and underage costs, in full alignment with the companys profit. Since van drivers were a key force, Tamago-ya gave fairly large rewards to competent drivers. It was not unusual for a van driver in his or her early twenties to receive a biannual bonus of JPY1 million (US$9,000). Members of a subgroupthe area manager (the subgroup head) at the headquarters

One van was assigned to each of 150 delivery routes. Thirty vans were reserved as adjusters, which were dispatched in case of unexpected orders.

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and five drivers in the fieldworked closely with the four to five operators at the call center and the production manager. In particular, as it got closer to the order closing hour 10:30 a.m., the process of matching demand and supply required real-time three-way communications (over the phone) across order taking production and delivery. Tamago-ya also provided a free lunch box for all its own 800 workers, a privilege which was only rarely interrupted in case of shortage. Forecasting Tamago-yas forecasting fully leveraged the information captured by van drivers. Every evening, Tamago-yas managers and van drivers in each region held a meeting to forecast the probable number of lunch boxes customers would order the next morning. The primary information source for forecasting was the van drivers daily reports. Chairman Sugahara said: Current information technology does not provide a solution to our forecasting issues. The number of orders changes every day. On average, we receive 70,000 orders a day, but the number fluctuates by thousands. Point of sales data just provides historical sales data and does not teach us why a customer who ordered 100 lunch boxes yesterday ordered only 30 today. Information is everything in our supply chain management. High-quality demand information can be captured only by employees who talk to customers directly and aggressively. Every day, van drivers wrote a report including their own forecasts of the next days orders as well as customer feedback on todays menu. When a van driver visited customers twice a day, s/he communicated with the person in charge in an informal and friendly manner, and listened to his or her evaluations of the days menu. The driver also asked for an estimate of the number of orders the customer might have the next day. Customers talked to van drivers frankly: Well, we are going to have a big sales meeting here tomorrow, so perhaps we will need 50 more lunch boxes for the sales people coming from other branches, or This week, many people will be away from the office attending a big trade show, or Well, some colleaguesall young women say todays beef steak was a little too salty. Van drivers also checked leftover items in lunch boxes when they picked up finished lunch boxes, and reported the details so that out-of-favor items could be removed in future menus. Or, Tamago-yas dieticians might insist on keeping certain less popular items (like broccoli or spinach) to balance the diet. A van driver summarized all such information in a daily report and attended a daily meeting at 5:00PM. Tamago-ya also used causal data to forecast demand. For example, their empirical studies showed that they received more orders on rainy days or very hot/cold days since people did not want to go out. Conversely, they received fewer orders on sunny days, especially on sunny days after a series of rainy days, since people do not mind going out for a walk to a restaurant or a convenience store for lunch. Largest orders arrived on a snowy day especially when the previous nights weather forecast failed to predict it. Also, Tamago-ya found that they received more orders just before pay days or after national holidays; on these days, people may have almost run out of cash and could not afford to go out for a more expensive lunch. By contrast, the worst day to Tamago-ya was the day sandwiched between a weekend and a national holiday, since some

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office workers may have chosen to take the day off, so the mean demand of lunch boxes went down and its uncertainty went up. Production and Logistics The key question about Tamago-ya was how it could produce and deliver an uncertain number of lunch boxes within a short delivery window to so many customers geographically dispersed in the heavily-trafficked Tokyo Metropolitan area. The answer can be summarized in the following directives: Dual-response production: First, build a stock of lunches up to a low-end forecast of the demand, and later, build more (if necessary) based on the up-to-date estimate as actual orders arrive. Tamago-ya counted on five key suppliers who were both nimble and flexible. Tamago-ya committed to the low-end forecasted quantity of ingredients on the previous day, and also carried an option to ask for more if necessary on the morning of production. Time-phased prepositioning of stocks: Divide the entire market into two regions by distance from the factory. Dispatch the first batch of vans early to the remotest region well before the order closing hour, with each van carrying an estimated quantity of lunch boxes. (This practice was often called inventory on wheels.) After order receipts were completed, dispatch the last batch carrying the exact amount of orders to the nearest region. Transfer stocks across vans to fill any demand-supply gap within and across regions. Use standby vans to adjust any remaining gaps. (In fact, Tamago-ya applied this concept to three, instead of two, regions.) The companys typical daily operational flow was: 17:00 18:00, the previous day: The total number of orders for the next day was estimated, as described in the previous section. Team leaders also estimated the number of lunch boxes for each customer in their respective zone. 4:00 a.m. Tamago-ya received ingredients from 30 to 40 authorized suppliers and kitchen staff started cooking menu items. 6:30 a.m. Factory workers started assembling lunch boxes by putting the items together. Since the company had not yet received any order at this point, it produced lunch boxes based on the (low-end) forecast they made last evening. 8:30 a.m. The first batch of vans loaded the estimated number of lunch boxes for the farthest customers and departed for their designated routes. At this point Tamago-ya had not yet received any actual orders. Production continued based on last nights estimates. 9:00 a.m. Tamago-yas operators began taking orders for the day by fax, by phone, or through the Internet. Production continued based on the previous nights estimates, but was gradually adjusted as actual orders were received. 10:00 a.m. 10:30 a.m. The first batch of vans arrived at their first customer drop-off. The drivers parked their vans in front of the customers buildings and waited for a call from headquarters. As soon as headquarters (HQ) received an additional order from a customer, it called the driver for that route to inform him or her of the new order. Finally, the HQ gave a

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go signal to bring the lunch boxes to the specified office. Some customers received their lunch boxes only a couple of minutes after they placed an order. 10:25 a.m. The second batch of vans departed the factory for middle-distance customers just before 10:30 a.m. At this point, Tamago-ya had received almost all of the actual orders for the day. They loaded (a) the lunch boxes specified by actual orders for those who had ordered (more than 90 percent of all lunches), and (b) an estimated number of lunch boxes for the customers who had not yet placed an order (less than 10 percent of all lunches). Production still continued in parallel, with the final number of orders constantly being adjusted. Tamago-ya finally stopped taking orders for the day sometime after 10:30 a.m. (e.g., 10:32 a.m.). 11:00 a.m. The third batch of vans loaded the final lunch boxes to fulfill actual orders and departed for short-distance customers. If the first or second batches over-carried lunch boxes, the third batch carried fewer lunch boxes according to the difference. If the previous batches under-carried boxes, the third batch carried more lunch boxes accordingly. 11:00 a.m. 12:00 a.m. If actual orders were different from the estimate, the dispatch center instructed van drivers via cell phones to move lunch boxes from one van to another, so that the vans had enough boxes and traveled along optimized routes. This dynamic load transfer was done at any place where vans could be parked together (e.g., a public parking lot). Locations and load transfer were determined between van drivers and an area manager. Decisions were based on their experience and intuition; no IT was used. 11:20 a.m. Tamago-ya also had 30 extra vans called adjusters. Very occasionally, Tamago-ya could not fill the difference between its forecast and actual orders. Also, accidents happened. The adjusters were dispatched at the last minute when the vans on the field could not adjust the number of lunch boxes on their own. This way Tamago-ya achieved extremely low overage (0.06 percent) and underage (close to zero). Of course, there were some extraordinary dayslike September 7, 2007, when a typhoon hit the Tokyo metropolitan area, and public transportation in Tokyo was disrupted. Usually, Tamago-ya received more orders when it rained. On that day, however, they had received fewer orders by the time they closed order-taking around 10:30 a.m. Then, many orders started to come in after the closing hour, as people arrived late at their offices. Tamago-ya fully expected this situation, but it slightly overestimated; 1,000 lunch boxes were left unsold. This was a rare instance of demand-supply mismatch. But by the end of the day lunch boxes left were sold in the secondary market (i.e., a set of partnering retail stores), and Tamago-ya did not see any big loss. Suppliers Obviously, suppliers were a critical part of Tamago-yas supply chain management, and the following example illustrates how it worked. On July 24, 2007 Tamago-ya started with a forecast of 68,200 lunch orders, but used its low-end forecast 64,000 (about 85 percent of its point estimate) to order ingredients from its suppliers on the previous evening. After it started receiving orders, Tamago-ya updated its database every 15 minutes and shared it with all parties including its five key suppliers. These key suppliers, strategically located near Tamago-ya, were involved in the last-hour demand fulfillment process. They brought ingredients to Tamago-ya every 15 minutes in response to the updated orders. Tamago-ya cooked the ingredients to produce menu items, which took another 15 minutes. Once food items were ready, Tamago-ya

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would prepare 300 additional lunch boxes every minute. By the time orders were closed at 10:30 a.m., the total number of orders turned out to be 69,510, and the gap of 5,510 between the low-end forecast and actual orders was completely filled when the last batch of vans left the factory at 11 a.m. Tamago-ya did not buy ingredients directly from original suppliers but placed orders with wholesalers, with the exception of lean meat and some fish. Sugahara said: We want to keep inventory of perishable ingredients as small as possible. Although wholesalers need a 2-3 percent markup, they manage inventories. The markup is smaller than the inventory cost we would incur, and good relationships with wholesalers make it possible for us to place occasional urgent orders. Tamago-ya had its production facilities close to its suppliers (in the southern end of Tokyo near Haneda Airport, see Exhibit 4), not to its customers, so that it had more flexibility in procurement in the case of unexpected demand. It also maintained relatively small warehouses, since it believed larger warehouses tended to lead to larger inventories. Tamago-ya only kept condiments (e.g., soy sauce) in stock for one week. All other fresh ingredients were delivered on demand, and were discarded if left unused for the day. Tamago-ya also outsourced a part of its production process. For example, cutting and boning of fish was partly outsourced to China. Tamago-ya kept more than one supplier for each of its ingredient categories. For example, Tamago-ya always kept two rice suppliers. It ordered 80 percent of its rice from one supplier and 20 percent from another, and had them compete against each other. Besides these two suppliers, more than 20 suppliers were on the approved supplier list. Tamago-yas procurement team spent Monday and Tuesday meeting existing suppliers. They reviewed the performance and discussed future plans in pursuit of continuous improvement. On Wednesday, Thursday and Friday, however, they met new candidates of suppliers who could bring in new values to the supply chain. Competition In addition to other lunch box manufacturers, convenience store chains such as Seven Eleven Japan were major competitors to Tamago-ya. Convenience stores had larger economies of scale, which enabled them to sell a variety of lunch box menus at a low price (less than US$5). However, convenience stores could not change menus frequently due to the inertia of its large scale. Also, people rushed to convenience stores for lunch boxes during lunch time, which resulted in long waiting lines and frequent stockouts. By contrast, Tamago-yas customers thought the quality of its product was better at a lower price. Furthermore, they could stay in the office with no hassle of going out and standing in lines, and with its availability guaranteed. The low price of Tamago-yas lunch boxes seemed to limit new entrants to the market. President Sugahara believed that at $10 per box there would have been numerous competitors, but by 2007 at the then current price of $4, no followers were evident. One potential concern was the general

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trend of Japanese work and lifestyle that led more people to work from home. It was not clear how fast this trend would expand and how it would affect Tamago-yas business. Growth, Social Responsibility and the Future With little reliance on information systems and technology, Tamago-ya had created an agile, sophisticated distribution system to respond to the demand for high-quality, low-priced lunch boxes. President Sugahara believed that Tamago-ya might have already reached the optimal size at 70,000 boxes per day in 2007. If they grew further, say, beyond 100,000, he was not sure how the company would source the quality ingredients (e.g., fresh mackerel) without breaking the current sourcing paradigm. Chairman Sugahara did not see a compelling reason for growing bigger, and preferred to keep Tamago-ya as a medium-sized private company wholly owned by the Sugahara family. In addition, he believed that the company should not be too greedy. Tamago-ya targeted 5 percent net income,8 with any excess profit reinvested in equipment, or used for better quality of food and higher employee compensations. It recommended the same attitude to its suppliers. In the same vein of social responsibility, Tamago-ya promoted healthy food (e.g., broiled fish and vegetables) ahead of popular food (e.g., hamburgers and fried meat). Chairman Sugahara said, Of course, the lunch prepared by the wife is the best, and ours is the second. Given its expertise in high-quality food and agile logistics, Tamago-ya was often approached by school meal programs or even foreign governments to provide a similar service for them. While Tamago-ya was in discussion with some of them, the company was aware that such a joint venture required a larger scale operation, a different setup, or/and a compromise in management philosophy. It is not easy to replicate the Tamago-ya model elsewhere, said President Sugahara, and we are happy and proud to be in Tokyo.

Actual net income ratio had been 5-7 percent.

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Exhibit 1 Business Growth of Tamago-ya

60,000 50,000 40,000 30,000

20,000 10,000 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Year

Exhibit 2 Sample Tamago-ya Lunch Box Menus

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Exhibit 3 Tamago-yas Lunch Box Design

Exhibit 4 Tamago-yas Geographic Segments

Tokyo Metropolitan Area

East of Palace Shinjuku Shibuya Ebisu Shibaura Ginza Gotanda

Nishi-Kasai Odaiba

Kanagawa Prefecture

Omori Shinagawa

Tokyo Bay

Ota Kawasaki

Seashore factory area