Logistics & Supply Chain Management
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Logistics & Supply Chain Management
Contract farming can be defined as agricultural production carried out according to an agreement
between a buyer and farmers, which establishes conditions for the production and marketing of a
farm product or products.Typically, the farmer agrees to provide established quantities of a specific
agricultural product, meeting the quality standards and delivery schedule set by the purchaser. In
turn, the buyer commits to purchase the product, often at a pre-determined price. In some cases the
buyer also commits to support production through, for example, supplying farm inputs, land
preparation, providing technical advice and arranging transport of produce to the buyer’s premises.
Another term often used to refer to contract farming operations is ‘out-grower schemes”, whereby
farmers are linked with a large farm or processing plant which supports production planning, input
supply, extension advice and transport. Contract farming is used for a wide variety of agricultural
products.
The Rationale for Contract Farming
Contract farming is one of the different governance mechanisms for transactions in agrifood chains.
The use of contracts (either formal or informal) has become attractive to many agricultural
producers worldwide because of benefits such as the assured market and access to support services.
It is also a system of interest to buyers who are looking for assured supplies of produce for sale or
for processing. Processors are among the most important users of contracts, as they wish to assure
full utilisation of their plant processing capacity. A key feature of contract farming is that it facilitates
backward and forward market linkages that are the cornerstone of market-led, commercial
agriculture. Well managed contract farming is considered as an effective approach to help solve
many of the market linkage and access problems for small farmers.
Key benefits of contract farming
The key benefits of contract farming for farmers can be summarized as follows:
1) improved access to local markets;
2) assured markets and prices (lower risks) especially for non traditional crops;
3) assured and often higher returns;
4) enhanced farmer access to production inputs, mechanization and transport services, and
extension advice
Additional key benefits for contract partners and rural development often include:
1) assured quality and timeliness in delivery of farmers’ products;
2) improved local infrastructure, such as roads and irrigation facilities in sugar outgrower areas, tea
roads, dairy coolers/collection centres, etc.
3) lower transport costs, as coordinated and larger loads are planned, an especially important
feature in the case of more dispersed producers.
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Logistics & Supply Chain Management
Issues of concern related to contract farming
As with any form of contractual relationship, there are potential disadvantages and risks associated
with contract farming. If the terms of the contract are not respected by one of the contracting
parties, then the affected party stands to lose. Common contractual problems include farmer sales
to a different buyer (side selling or extra-contractual marketing), a company's refusal to buy
products at the agreed prices, or the downgrading of produce quality by the buyer. Side selling by
farmers to competing buyers is perhaps the greatest problem constraining the growth of contract
farming. Contractors also may default by failing to pay agreed prices or by buying less than the preagreed quantities.
Another concern about contract farming arrangements is the potential for buyers to take advantage
of farmers. Buying firms, which are invariably more powerful than farmers, may use their bargaining
clout to their financial advantage. Indeed, if farmers are not well organised or where there are few
alternative buyers for the crop or it is not easy to change the crop, there is a danger that farmers
may have an unfair deal. Tactics sometimes used are changing pre-agreed standards, down grading
crops on delivery so offering lower prices, or over-pricing for inputs and transport provided.
Strengthening farmer organisations to better access appropriate services such as credit, extension
services and market information and improving their contract negotiating skills can redress the issue
of exploitation of farmers and poorly formulated contracts and their enforcement.
The above typical problems notwithstanding, the balance between advantages and disadvantages
for both firms and farmers seems to be on the positive side: contractual arrangements are more and
more frequently being used in agriculture worldwide.
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2.INTRODUCTION TO SUPPLY CHAIN
The supply chain includes all activities and processes involved in supply of a product or service to the
final customer. There are three phases to the flow of materials. Raw materials flow into production
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Logistics & Supply Chain Management
system, they are processed and finally finished goods are distributed to end customers through a
physical distribution system.
S
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R
PRODUCTION
DISTRIBUTION SYSTEM
C
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S
T
O
M
E
R
Dominant Flow of Products & services
Dominant Flow of Demand & Design Information
There are a number of important factors in supply chains:
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The supply chain includes all activities and processes to supply a product or service to a final
customer.
Any number of entities can be linked in the supply chain.
A customer can be a supplier to another customer so the total chain can have a number of
supplier/customer relationships.
While the distribution system can be direct from supplier to customer, depending on the
products and markets, it can contain a number of intermediaries (distributors) such as
wholesalers, warehouses and retailers.
Product or services usually flow from supplier to customer and design and demand
information usually flows from customer to supplier.
In the context of Agribusiness, various Raw materials – Seeds, Fertilisers, pesticides etc. goes into the
Farming process, the output then goes through the cleaning, grading, packing process and finally it
gets distributed through the Distribution system to the end consumers.
Supply Chain Concepts
In recent years there has been a great deal of attention to the concept of Supply Chain Management
(SCM). It is important to understand the fundamental issues behind the movement as well as the
impact on materials management.
Historical perspective: In the past, many company managers placed most of their attention on the
issues that were internal to their companies. Of course they were aware of the impact of suppliers,
customers and distributors, but those entities were often viewed as business entities only.
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Logistics & Supply Chain Management
Specialists in purchasing, sales and logistics were assigned to “deal” with those outside entities,
often through formal legal contracts that were negotiated regularly and represented short-term
agreements. For example, suppliers were often viewed as business adversaries. A key responsibility
of a purchasing agent was to negotiate the best financial and delivery conditions from a supplier,
whose job was to maximize his company’s profit. Organization theorists’ often called the functions
that dealt with outside entities boundary spanners, indicating that for most people in the
organization there were well-defined and rigid boundaries between their organization and the rest
of the world.
The first major change in that perspective for most companies can be traced to the explosive growth
in Just-in-time (JIT) concepts originally developed by Toyota and other Japanese companies in the
1970s. Supplier partnerships were felt to be a major aspect of successful JIT. With that concept,
suppliers were viewed as partners as opposed to the adversaries. In that sense the supplier and the
customer had mutually linked destinies, in that the success of each was linked to the success of the
other. Great emphasis was put on trust between the partners, and many of the formal boundary
mechanisms, such as the receiving/inspection activity of incoming parts, were changed or eliminated
altogether. As the partnership concept grew, there were many other changes in the relationship
including:
 Mutual analysis for cost reduction – Both parties examined the process used to transmit
information and deliver parts, with the idea that cost reductions would be shared between
the two parties.
 Mutual product design – In the past the customer often submitted complete designs to the
supplier who was obligated to produce according to design. With partnering, both
companies worked together. Often the supplier would know more about how to make a
specific product, while the customer would know more about the application for which the
design was intended. Together, they could probably produce a superior design compared to
what either could do alone.
 With JIT, the concept of greatly reduced inventory in the process and the need for rapid
delivery according to need, the speed of accurate information flow became critical. Formal
paper based systems gave way to Electronic Data Interchange and informal communication
methods.
The growth of supply chain concept: As the 1980s gave way to 1990s, the world continued to
change, forcing additional modifications to the trend.
 There has been explosive growth in computer capability and associated software
applications. Highly effective and integrated systems such as Enterprise Resource Planning
(ERP) and the ability to link companies electronically (through the Internet, for example)
have allowed companies to share large amounts of information quickly and easily. The
ability to have the information rapidly has become a competitive necessity for many
companies.
 There has been a large growth in global competition. Very few companies can still say they
have only local competition, and many of the global competitors are forcing existing
companies to find new ways to be successful in the marketplace.
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 There has been growth in technological capabilities for products and processes. Product life
cycles for many products are shrinking rapidly; forcing companies to not only become more
flexible in design, but also to communicate changes and needs to suppliers and distributors.
 The changes prompted by JIT in the 1980s have continued to mature, so that by now many
companies have new approaches to inter-organisational relationships, as a normal form of
business.
 Partially in response to the preceding conditions, more and more companies are
subcontracting more of their work to suppliers, keeping only their most important core
competencies as internal activities.
The current supply chain concept: Companies currently adopting the supply chain concept view the
entire set of activities from raw material production to final customer purchase as a linked chain of
activities. To result in optimal performance for customer service and cost, it is felt that the supply
chain of activities should be managed as an extension of the partnership. This implies many issues,
but three critical ones include:
1. Flow of materials
2. Flow of information, mostly electronically
3. Fund transfers
In addition, a new trend is to manage the recovery, recycling and reuse of material. The primary
supply chain management approach is a conceptual one. All portions of the material product, from
raw materials to final customer, are considered to be linked chain. The most efficient and effective
way to manage the activities along the chain is to view each separate organization in the chain as an
extension of one’s own organization. There can be many organizations in a supply chain. Take an
example, the chain of organizations that represent the flow from raw silicon used to make computer
chips to the delivery of the computer itself.
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Logistics & Supply Chain Management
Silicon
Production
Chip
Production
Printed Circuit
Board Production
Distributor
Retailer
Customer
Computer
Production
What is illustrated here is but one chain of a set of different component chains that represent a
network of suppliers and distributors for a product.
To manage a supply chain, one must not only understand the network of suppliers and customers
along the chain, but must also try to efficiently plan material and information flows along each chain
to maximize cost efficiency, effectiveness, delivery and flexibility. This clearly not only implies taking
a different conceptual approach to suppliers and customers, but also implies a highly integrated
information system and a different set of performance measures. Overall, the key to managing such
a concept is which rapid flows of accurate information and increased organizational flexibility.
Conflicts in Traditional Systems: in the past, supply, production and distribution systems were
organized into separate functions that reported to different departments of a company. Often
policies and practices of the different departments maximized departmental objectives without
considering the effect they would have on other parts of the system. These three systems are
interrelated, conflicts often occurred. While each system made decisions that were best for it,
overall company objectives suffered. For example, the transportation department would ship in the
largest quantities possible so it could minimize shipping costs. However, the increased inventory and
resulted in higher inventory-carrying costs.
To get the most profit, a company must have at least four main objectives:
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Provide best customer service
Provide lowest production costs
Provide lowest inventory investment
Provide lowest distribution costs
These objectives create conflict among the marketing, production, and finance departments
because each has different responsibilities in these areas.
Marketing’s objective is to maintain and increase revenue; therefore, it must provide the best
customer service possible. There are several ways of doing this:
 Maintain high inventories so goods are always available for the customer
 Interrupt production runs so that a non-invoiced item can be manufactured quickly.
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 Create an extensive and costly distribution system so goods can be shipped to the customer
rapidly.
Finance must keep investment and costs low. This can be done in the following ways:
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Reduce inventory so inventory investment is at a minimum
Decrease the number of plants and warehouses
Produce large quantities using long production runs
Manufacture only to customer order
Production must keep in operating costs as low as possible. This can be done in following ways:


Make long production runs of relatively few products. Fewer changeovers will be needed
and specialized equipment can be used, thus reducing the cost of making the product.
Maintain high inventories of raw materials and work in process so production is not
disrupted by shortages.
These conflicts among marketing, finance and production center on customer service, disruption of
production flow, and inventory levels.
Today the concepts of Just in Time (JIT) manufacturing stresses upon the need to supply to the
customers what they want, when they want, and to keep inventories at a minimum. These
objectives put further stress on the relationship among production, marketing and finance.
One import way to resolve these conflicting objectives is to provide close coordination of the supply,
production and distribution functions. The problem is to balance conflicting objectives to minimize
the total of all the costs involved and maximize customer service consistent with the goals of the
organization. This requires some type of integrated materials management or logistics organization
that is responsible for supply, production, and distribution. Rather than having the planning and
control of these functions spread among marketing, production and distribution, they should occur
in a single area of responsibility.
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Logistics & Supply Chain Management
Supply Chain in Agribusiness
The Agribusiness has been facing huge challenges due to increasing
operational complexity, technological challenges, frequently
changing customer needs, Government regulations, and the
dynamic market scenario. Recently large corporate have entered
the Agriculture business and food processing industry. Contract
farming is the emerging business model where corporate and
farmers/producers come together to achieve a common goal. In this
competitive environment, customers have become more
demanding in terms of quality food, safe & fresh food, on-time
delivery, right information and optimal price of consumables.
Studies show that 40% of food products are wasted due to
inadequate infrastructure, improper storage system and inefficiency
in the Food supply chain. Food safety has become a primary concern
across the world. Consumers are becoming more health conscious
in terms of hygiene, origin of food, ingredients and caloric contents.
Naturally, the supply chain of Agri products involves numerous
complex processes and at each stage of the supply chain the
product changes its nature and adds value to the product.
The typical Agri supply chain starts with the farm supplier, marketer, processor,
distributor/wholesaler, retailer and consumer. It is tough task to implement the supply chain
management solution in Agribusiness due to short Product life cycle, different storage requirements,
risk of Infestation and complex Quality requirements. Cold chain also plays a very important role in
achieving an effective supply chain. An effective Supply chain enables Agri industry to reduce
operating cost, lead time and inventory to sustain its growth in the market.
The new age consumer demands and wants to consume fresh products. The food industry faces
huge challenges in offering fresh products to its customers. Typically the fresh food supply chain
starts with the farm supplier, framers, and vegetable backers and then reaches wholesalers. From
wholesalers, the fresh food moves to independent retailers or catering suppliers or the supermarket
and then reaches to the customers. It is very difficult to offer fresh products to customers due to
unpredictable environmental conditions. In order to offer fresh products, the food industry needs to
establish higher delivery frequencies, smaller orders, less lead time, and a shorter order cycle to
meet consumer demand.
In fresh product supply chain, product identification is very challenging in terms of expiry date,
product origin etc. Since most of the fresh products are seasonal products, the cold chain storage
facilities play a very important role in keeping the products fresh, hygienic and safe. They are also
crucial for meeting the demand-supply gap for fresh products.
SCM Application in Agribusiness
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Logistics & Supply Chain Management
Procurement and Sourcing
The most disorganized player in the entire chain is the producer/farmer. The procurement and
sourcing process is very complex and unpredictable. The most important factor for the producer is
uneven supply of produce and unpredictable prices. If the price of a particular commodity is raised in
the current year, all farmers uniformly switch over to the same food commodity in the next year.
There is no proper system to ensure smooth supply and stable prices of the food products. There are
many other factors that affect the production/supply of the Agri products like monsoon,
environmental changes, government minimum support price, infrastructure, cultivation yield etc.
The government policy also plays a significant role in controlling the supply and price of the products
like allowing/banning export of food commodities, motivating alternative food products cultivation,
price control mechanisms, adequate compensation for failure, proper warehouse management etc.
Agribusiness need to have an effective procurement & sourcing process to ensure that consumers
get the right product at the right price. For effective procurement and sourcing, it requires better
forecasting of demand and supply, price transparency removal of unnecessary middlemen in the
supply chain, a revenue sharing mechanism in and across the supply chain, higher delivery
frequencies, smaller orders, less lead time, shorter life cycles time etc. Of late, the contract farming
business model facilitates an effective supply chain process and ensures stable supply and price of
the food commodity.
Cold Chain Management
A cold chain is a temperature controlled supply chain. The characteristics of food products are very
delicate and perishable and the cold chain facilities play a vital
role in the supply chain. In order to maintain quality, safety and
hygiene of food products, the food products are stored or
distributed in cold chain facilities from right through farmer to
reach end customer. The cold chain facilities also ensure
freshness and sufficient moisture content of food products like
fresh fruits, vegetables and spices. The cold chain infrastructure is
a very important factor in significantly reducing post-harvest
wastage. This allows effective storage system to manage supply-demand gap and control prices.
Since most of the Agri commodities are seasonal, the effective cold chain/warehouse facilitates in
ensuring supply of food products for the entire year.
Food Quality and Safety
In the food supply chain, the products pass through a number of players and add value to the
product at each stage. If the food quality & safety is compromised at any stage in the supply chain, it
affects end consumer health. The food industry needs great control over each stage to meet quality
standards and customer requirements. The food quality and safety is the collective responsibility of
all stakeholders of supply chain like farmers/producers, processor, transport operators, retail outlets
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and consumers. For the global export market, the Agribusiness has to meet quality standards to
achieve competitive advantage.
Traceability in Food Supply Chain
Traceability is a very important element in food supply chain in order to ensure product and process
integrity, improve consumer trust and maintain quality standards. The
new age consumers are highly conscious of the origin of food products to
ensure verified or disease-free food products. Since the quality of food
products will affect consumer health directly, the food products should
be traced on both upstream and downstream of the supply chain. In case
any contaminated or disease affected products are in supply chain, the
food supplier can recall them immediately. The traceability also
facilitates identifying and removing the cause of the problem in the entire supply chain from supplier
to customer. Traceability creates consumer trust and delivers quality and safety food to the
consumer. The Agri food industry requires the use of the GTIN (Global Trade Item Number) for
uniform product identification. This GTIN identification number can communicate weight, price, lot
or batch number, expiration date etc. Since GTIN provide uniform identification number across the
supply chain, GTIN can facilitate effective operation of other supply chain technology like ecommerce, RFID, bar coding etc.
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3.INVENTORY FUNDAMENTALS
Inventories are materials and supplies that a business or institution carries either for sale or to
provide inputs or supplies to the production process. All businesses and institutions require
inventories. Often they are a substantial part of total sales. There is a cost of carrying inventories,
which increases operating costs and decreases profits. Good inventory management is essential.
Inventory management is responsible for planning & controlling inventory from the raw material
stage to the customer. Since inventory either results from production or supports it, the two cannot
be managed separately and, therefore, must be coordinated.
Inventory and the flow of Material
There are many ways to classify inventories. One often-used classification is related to the flow of
materials info, through, and out of a production process.
Raw Materials – These are purchased items received which have not entered the production
process.
Work-in-process (WIP) – Are raw materials that have entered the production process and are being
worked on, or waiting to be worked on.
Finished Goods – The finished products of the production process that are ready to be sold as
completed items. They may be held at a factory or central warehouse or at various points in the
distribution system.
Supply and Demand Patterns
If supply met demand exactly, there would be little need for inventory. Goods could be made at the
same rate as demand, and no inventory would build up. For this situation to exist, demand must be
predictable, stable and relatively consistent over a long time period. However, in real life scenario,
Demand for most products is neither sufficient nor constant enough to warrant setting up a line-flow
system.
Functions of Inventories
Inventory serves as a buffer between Supply and demand. Inventories can be classified according to
the function they perform:
Anticipation Inventory – Are built up in anticipation of future demand. For example, they are
created ahead of a peak selling season, a promotion program, vacation shutdown, or possibly the
threat of a strike. They are built to help level production and to reduce costs of changing production
rates.
Fluctuation Inventory – Is held to cover random unpredictable fluctuations in supply and demand or
lead time. If demand or lead time is greater than the forecast, a stockout will occur. Safety stock is
carried to protect against this possibility. Its purpose is to prevent disruption in production or
deliveries to customers. Safety stock is also called as buffer stock or reserve stock.
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Lot size Inventories – This is to take advantage of quantity discounts, to reduce shipping, clerical and
setup costs, and in cases where it is impossible to make or purchase items at the same rate they will
be used or sold.
Transportation Inventory – These inventories exist because of time needed to move goods from one
location to another such as from plant to a distribution center or a customer. They are sometimes
called pipeline or movement inventories.
Hedge Inventory – Some products such as minerals, commodities e.g. grains or animal products are
traded on a worldwide market. The price for these products fluctuates according to world supply &
demand. If buyers expect prices to rise, they can purchase Hedge inventory when prices are low.
Hedging is complex and beyond the scope of this text.
Maintenance, Repair and Operating Supplies – Are items used to support general operations and
maintenance but which do not become directly part of a product. They include maintenance
supplies, spare parts and consumables such as cleaning compounds, lubricants, stationery etc.\
OBJECTIVES OF INVENTORY MANAGEMENT
A firm wishing to maximize profit will have at least the following objectives:
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Maximum customer service
Low-cost plant operation
Minimum inventory investment
Customer Service
In broad terms, customer service is the ability of a company to satisfy the needs of customers. In
inventory management, the term is used to describe the availability of items when needed and
is a measure of inventory management effectiveness. The customer can be a purchaser, a
distributor, another plant in the organization, or the workstation where the next operation is to
be performed.
There are many different ways to measure customer service, each with its strengths and
weaknesses, but there is no one best measurement. Some measures are percentage of orders
shipped on schedule, percentage of line items shipped on schedule, and order-days out of stock.
Inventories help to maximize customer service by protecting against uncertainty. If we could
forecast exactly what customers want and when, we could plan to meet demand with no
uncertainty. However, demand and the lead time to get an item are often uncertain, possibly
resulting in Stockouts and customer dissatisfaction. For these reasons, it may be necessary to
carry extra inventory to protect against uncertainty. This inventory is called safety stock.
Operating Efficiency
Inventories help make a manufacturing operation more productive in four ways:
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Logistics & Supply Chain Management
1. Inventories allow operations with different rates of production to operate separately
and more economically. If two or more operations in a sequence have different rates of
output and are to be operated efficiently, inventories must build up between them.
2. By leveling production, manufacturing can continually produce an amount equal to the
average demand. The advantage of this strategy is that the costs of changing production
levels are avoided in the form of:
 Lower overtime costs
 Lower hiring and firing costs
 Lower training costs
 Lower subcontracting costs
 Lower capacity required
3. Inventories allow manufacturing to run longer production runs, which result in the
following:
 Lower setup costs per item
 An increase in production capacity due to production resources being used a
greater portion of the time for processing as opposed to setup.
4. Inventories allow manufacturing to purchase in larger quantities, which results in lower
ordering costs per unit and quantity discounts.
But all of this is at a price. The problem is to balance inventory investment with the following:
1. Customer service: The lower the inventory, the higher the likelihood of a stockout and
lower the level of customer service. The higher the inventory level, the higher customer
service will be.
2. Costs associated with changing production levels: Excess equipment capacity, overtime,
hiring, training, and layoff costs will all be higher if production fluctuates with demand.
3. Cost of placing orders: Lower inventories can be achieved by ordering smaller quantities
more often, but this practice results in higher annual ordering costs.
4. Transportation costs: Goods moved in small quantities cost more to move per unit than
those moved in large quantities. However, moving large lots implies higher inventory.
If inventory is carried, there has to be a benefit that exceeds the cost of carrying that inventory.
Someone once said that the only reason for carrying inventory beyond current needs is if it costs
less to carry it than not.
INVENTORY COSTS
The following costs are used for inventory management decisions:
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
Item cost – Is the price paid for a purchased item, which consists of the cost of the items and
any other direct costs associated in getting the item into the plant. This could include
elements such as transportation, custom duties and insurance. The inclusive cost is often
called as Landed price.
Carrying costs – include all expenses incurred by the firm because of the volume of
inventory carried. This include:
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Logistics & Supply Chain Management
o
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

Capital costs – Money invested in inventory is not available for other uses and as
such represents a lost opportunity cost.
o Storage costs – Storing inventory requires space, workers, and equipment. As
inventory increases, so do the costs.
o Risk costs – This include Obsolescence cost, damages (while being held or moved),
pilferage or deterioration. This cost tends to be especially higher for Agri
commodities due to their low shelf life & perishability.
Ordering Costs – Ordering costs are those associated with placing an order either with the
plant or a supplier. The cost of placing an order does not depend upon the quantity ordered.
Whether a lot of 10 or 100 is ordered, the costs associated with placing the order are
essentially the same. However, the annual cost of ordering depends upon the number of
orders placed in a year.
Stockout costs – If demand during the lead time exceeds forecast, we can expect a stockout.
A stockout can potentially be expensive because of back-order costs, lost sales, and possibly
lost customers. Stockouts can be reduced by carrying extra inventory to protect against
those times when the demand during lead time is greater than forecast.
Capacity-associated Costs – When output levels must be changed, there may be costs for
overtime, hiring, training, extra shifts and layoffs. These capacity associated costs can be
avoided by leveling production, that is, by producing items in slack periods for sale in peak
periods. However, this builds inventory in slack periods.
Example Problem:
A company makes and sells a seasonal product. Based on a sales forecast of 2000, 3000, 6000
and 5000 per quarter, calculate a level production plan, quarterly ending inventory and average
quarterly inventory.
If inventory carrying cost is $3 per unit per quarter, what is the annual cost of carrying
inventory? Opening and ending inventories are zero.
Answer:
Quarter-1
Quarter-2
Quarter-3
Quarter-4
Total
Forecast Demand
2000
3000
6000
5000
16000
Production
4000
4000
4000
4000
16000
Ending Inventory
2000
3000
1000
0
Average Inventory
1000
2500
2000
500
Inventory Cost (dollars)
3000
7500
6000
1500
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Logistics & Supply Chain Management
INVENTORY PERFORMANCE MEASURES
From a financial point of view, inventory is an asset and represents money that is tied up and
cannot be used for other purposes. As we saw earlier in this chapter, inventory has a carrying
cost – the cost of capital, storage and risk. Finance wants as little inventory as possible and
needs some measure of the level of inventory. Total inventory investment is one measure, but in
itself does not relate to sales. Two measures that do relate to sales are the inventory turns ratio
and days of supply.
Inventory Turns:
Ideally, a manufacturer carries no inventory. This is impractical since inventory is needed to
support manufacturing and often to supply customers. How much inventory is enough?
There is no one answer. A convenient measure of how effectively inventories are being used
is the inventory turns ratio.
Inventory turns = (annual cost of goods sold / average inventory in dollars)
The calculation of average inventory can be complicated and is a subject for cost accounting.
In this text, it will be taken as a given.
For example, if annual cost of goods sold is Rs.1 million and the average inventory is
Rs.500,000, then:
Inventory turns = Rs.1,000,000 / $500,000 = 2
What does it mean? At the very least, it means that with $500,000 of inventory, a company
is able to generate Rs.1 million in sales. If, through better materials management, the firm is
able to increase its turns ratio to 10, the same sales are generated with only @100,000 of
average inventory. If the annual cost of carrying inventory is 25% of the inventory value, the
reduction of Rs.400,000 in inventory results in a cost reduction (and profit increase) of
Rs.100,000.
Example Problem:
1. What will be the inventory turns ratio if the annual cost of goods sold is Rs.24 million a
year, and the average inventory is Rs.6 million.
Answer
Inventory Turns = 24,000,000 / 6,000,000 = 4
2. What would be the reduction in inventory if the inventory turns ratio were increase to
12 times per year?
Answer
Average inventory = annual cost of goods sold / inventory turns
= Rs.24,000,000 / 12 = Rs.2,000,000
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Logistics & Supply Chain Management
Reduction in inventory = Rs.6,000,000 – Rs.2,000,000 = Rs.4,000,000
3. If the cost of carrying inventory is 25% of the average inventory, what will the savings
be?
Answer
Reduction in inventory = Rs.4,000,000
Savings = Rs.4,000,000 X 25% = Rs.1,000,000
Days of Supply:
Days of supply is a measure of the equivalent number of days of inventory on hand, based
on usage. The equation to calculate the days of supply is:
Days of supply = (inventory on hand / average daily usage)
Example problem
A company has 9000 units on hand and the annual usage is 48,000 units. There are 240
working days in the year. What is the days of supply?
Answer
Average daily usage = 48000 / 240 = 200 units
Days of supply = inventory on hand / average daily usage
= 9000 / 200 = 45 days
ABC INVENTORY CONTROL
Control of inventory is exercised by controlling individual items called stock-keeping units (SKUs). In
controlling inventory, four questions must be answered:
1.
2.
3.
4.
What is the importance of inventory item
Howe are they to be controlled
How much should be ordered at one time
When should an order be placed
The ABC inventory classification system answers the first two questions by determining the
importance of items and thus allowing different levels of control based on the relative importance of
items.
Most companies carry a large number of items in stock. To have better control at a reasonable cost,
it is helpful to classify the items according to their importance. Usually this is based on annual dollar
usage, but other criteria may be used.
The ABC principle is based on the observation that a small number of items often dominate the
results achieved in any situation. This observation was first made by an Italian economist. Vilfredo
Pareto, and is called Pareto’s law. As applied to inventories, it is usually found that the relationship
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Logistics & Supply Chain Management
between the percentage of items and the percentage of annual dollar usage follows a pattern in
which:
A
B
C
About 20% of the items account for about 80% of the dollar usage
About 30% of the items account for about 15% of the dollar usage
About 50% of the items account for about 5% of the dollar usage
The percentages are approximate and should not be taken as absolute. This type of
distribution can be used to help control inventory.
Steps in Making ABC Analysis
1. Establish the item characteristics that influence the results of inventory management. This is
usually annual dollar usage but may be other criteria, such as scarcity of material.
2. Classify items into groups based on the established criteria.
3. Apply a degree of control in proportion to the importance of the group.
The factors affecting the importance of an item include annual dollar usage, unit cost, and scarcity of
material. For simplicity, only annual dollar usage is used in this text. The procedure for classifying by
annual dollar usage is as follows:
1.
2.
3.
4.
5.
Determine the annual usage of each item.
Multiply the annual usage of each item by its cost to get its total annual dollar usage.
List the items according to their annual dollar usage.
Calculate the cumulative annual dollar usage and the cumulative percentage items.
Examine the annual usage distribution and group the items into A, B and C groups based on
percentage of annual usage.
Example Problem
A company manufactures a line of ten items. Their usage and unit cost are shown in the
following table along with the annual dollar usage. The latter is obtained by multiplying the unit
usage by the unit cost.
a.
b.
c.
d.
Calculate the annual dollar usage for each item.
List the items according to their annual dollar usage
Calculate the cumulative annual dollar usage and the cumulative percent of items.
Group items into an A, B, and C classification.
Answer
1. Calculate the annual dollar usage for each item.
Part number Unit Usage
Unit Cost $
Annual $ usage
1
1100
2
2200
2
600
40
24,000
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Logistics & Supply Chain Management
3
100
4
400
4
1300
1
1300
5
100
60
6000
6
10
25
250
7
100
2
200
8
1500
2
3000
9
200
2
400
10
500
1
500
Total
5510
b., c., and d.
Part number
Annual $
usage
$38,250
Cumulative
usage
Cumulative % Cumulative %
usage
of items
Class
2
24000
24000
62.75
10
A
5
6000
30000
78.43
20
A
8
3000
33000
86.27
30
B
1
2200
35200
92.03
40
B
4
1300
36500
95.42
50
B
10
500
37000
96.73
60
C
9
400
37400
97.78
70
C
3
400
37800
98.82
80
C
6
250
38050
99.48
90
C
7
200
38250
100.00
10
C
Control Based on ABC Classification
Using ABC approach, there are two general rules to follow:
1. Have plenty of low-value items: C items represent about 50% of the items but account for
only about 5% of the total inventory value. Carrying extra stock of C items adds little to the
total value of inventory. C items are really only important if there is a shortage of one of
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Logistics & Supply Chain Management
them – when they become extremely important – so a supply should always be on hand. For
example, order a year’s supply at a time and carry plenty of safety stock. That way there is
only once a year when a stockout is even possible.
2. Use the money and control effort saved to reduce the inventory of high value items: A
items represent about 20% of the items and account for about 80% of the value. They are
extremely important and deserve the tightest control and the most frequent review.
Different controls used with different classifications might be the following:



A Items – high priority: Tight control including complete accurate records, regular and
frequent review by management, frequent review of demand forecasts, and close follow up
and expediting to reduce lead time.
B Items – medium priority: Normal controls with good records, regular attention and
normal processing.
C Items – lowest priority: Simplest possible controls – make sure there are plenty. Simple or
no records, perhaps use a two-bin system or periodic review system. Order large quantities
and carry safety stock.
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NOTES
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Logistics & Supply Chain Management
4.WAREHOUSING
Warehouses are facilities that provide a proper environment for the purpose of storing goods and
material that require protection from the elements. Warehouses must be
designed to accommodate the loads of the material to be stored, the
associated handling equipment, the receiving and shipping operations and
associated trucking, and the needs of the operating personnel.
India is witnessing a spurt in warehousing infrastructure with the archaic
supply chain management facilities going for a makeover and capacity
addition. There is an element of dynamism and the online commodity
futures market is hastening the change. With the cold chain management
emerging as sustainable business, several private players have stepped in to
invest.
Benefits of Warehousing
Better storage facility will no doubt create better economic conditions for farmers. The foodgrains
wasted at the farmyard because of improper storage facility or low return to farmers pricing during
peak time will provide a second thought to farmers to store surplus. In turn, farmers will get storage
receipts. Now, banks are lending loans to farmers against warehouse receipts. This process
encourages farmers to store more food grains, and arrange the input costs without difficulty.
Farmers can thus get loans and invest in agri-inputs and farm machinery, which will definitely
increase agricultural production and the economical condition of farmers. Perishable goods need
more care and may bring in more returns to farmers. On the other hand, with storage of perishable
items, consumers may also get unseasonal fruits and vegetables throughout the year, which will
improve consumption patterns.
Types of Warehousing
Different types of agricultural commodities need different storage facilities. While some need to
maintain an optimum temperature and moisture, others may need to be kept free from insect and
pest attacks, and so on. Building a storage system involves heavy investment and variable costs.


Fixed cost involves capital cost, interest on capital cost, depreciation of infrastructure, taxes,
premium costs and wages of permanent employees.
Variable costs include repairs and maintenance cost, electricity costs, cost of protective
material and wages of temporary employees etc.
The types of warehousing are as follows:

Based on ownership
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Logistics & Supply Chain Management
o
o
o

Private – Owned by private parties
Public – Owned by Government agencies e.g. CWC and SWC
Bonded – Licensed by the government and is constructed nearby airports/seaports.
It stores imported goods till the payment/custom clearance is done by the Importer.
Based on type of commodities stored
o General – It is an ordinary warehouse to store general items, e.g. foodgrains.
o Special commodities warehousing – It is made to store specific commodities e.g.
tobacco, cotton, wool etc due to specific storage requirements.
o Refrigerators – it stores perishable commodities in a temperature controlled
environment.
Criteria for Good Warehousing
The following are the criteria for good warehousing:






Enough space for bulk, rack and other storage, i.e. maximum utilization of space.
Freeze and chilled environment, depending on requirement for various commodities
Sophisticated material handling equipment
Optimum light and humidity, light colored roofs and energy efficient operational
equipments.
Wide distribution network and access to nearby roads, ports and railways.
Safety measures like fire extinguishers
Warehousing Management
As with other elements in a distribution system, the objective of a warehouse is to minimize cost and
maximize customer service. To do this, efficient warehouse operations perform the following:
1.
2.
3.
4.
Provide timely customer service
Keep track of items so they can be found readily and correctly
Minimize the total physical effort and thus the cost of moving goods into and out of storage.
Provide communication links with customers.
Warehouse Activities
Operating a warehouse involves several processing activities, and the efficient operation of the
warehouse depends upon how well these are performed. These activities are
as follows:
1. Receive Goods: The warehouse accepts goods from outside
transportation and accepts responsibility for them. This means the
warehouse must:
a. Check the goods against Invoice/Delivery Challan/other
inward documents
b. Check the quantities and match it with inward documents
c. Check for damage/shortage and endorse the discrepancies on the LR/GCN/AWB
24
Logistics & Supply Chain Management
2.
3.
4.
5.
6.
7.
8.
d. Inspect goods if required
Identify the goods: Items are identified with the appropriate stock keeping unit (SKU)
number and the quantity received is recorded.
Put away: Goods are sorted and moved to the storage locations inside the warehouse, and
bin cards are updated.
Hold Goods: Goods are kept in storage and under proper protection until needed.
Preservation: Depending on nature of commodities, do necessary preservation/fumigation
of the goods for preventing any kind of infestation/deterioration.
Pick goods: Items required against an order to be picked from storage locations and moved
to the dispatch area. Goods making up a single order are kept together in the dispatch area,
and checked for omissions or errors.
Dispatch the shipment: Orders are packaged, shipping documents are prepared and goods
loaded on the right vehicle.
Operate an information system: A record must be maintained for each item in stock showing
the quantity in hand, quantity received, quantity issued, and the location in the warehouse.
The system can be as simple as a set of manual registers, or it may be a sophisticated
computer based system.
In various ways, all these activities take place in any warehouse. The complexity depends on the
number of SKUs handled, the quantities of each SKU, and the number of orders received and filled.
To maximize productivity and minimize cost, warehouse management must work with the following:
1. Maximum use of space: Usually the largest capital cost is for space. This means not only floor
space but cubic space as well since goods are stored in the space above the floor as well as
on it.
2. Effective use of labor and equipment: Materials handling equipment represents the second
largest capital cost and labor the largest operating cost. There is a trade-off between the
two, and in that labor costs can be reduced by using more materials handling equipment.
Warehouse management will need to:
 Select the best mix of labor and equipment to maximize the overall productivity of
the operation.
 Provide ready access to all SKUs: The SKUs should be easy to identify and find. This
requires a good stock location system and layout.
 Move goods efficiently: Most of the activity that goes on in a warehouse is materials
handling: the movement of goods into and out of the stock locations.
Space Requirements Planning
A warehouse layout should be based on the space requirements for and the inter-relationships
between individual warehouse processes. The first step is to determine the overall space
requirement for the processes. Receiving and shipping staging space is a function of the number of
receiving and shipping dock doors and the turn-around time for each dock. A common practice is to
allocate enough staging space behind each dock door to accommodate a truck load worth of
material. Floor space requirements for pallet storage and retrieval, case picking and broken case
picking should be computed as part of picking mode economic analysis. Space for packing and
25
Logistics & Supply Chain Management
unitizing, customizing and accumulation should be planned properly. Warehouse office space is
simply a function of the number of offices required.
Material Flow Planning
In a typical case, products flow in at receiving, move into storage in the back of the warehouse and
then to shipping which is located adjacent to receiving on the same size of the building. A U-shaped
flow design has a number of advantages over other flow designs, including:



Excellent utilization of dock resources
Facilitating cross-docking since the receiving and shipping docks are adjacent to one another
Excellent lift truck utilization since put away and retrieval trips are easily combined
Adjacency Planning
Based primarily on material flow patterns, processes with high adjacency requirements should be
located close to one another. For example, reserve storage should be located near receiving since
there is typically a lot of material flow between receiving and reserve storage. The natural flow
relationship often leads to the U-shape design. The key principle in process location is to assign
processes with high storage requirements to high-bay space and labor intensive processes to lowbay space.
Warehouse Layout
Warehouse layout is concerned with the location of
individual items in the warehouse. There is no single
universal stock location system suitable for all occasions,
but there are a number of basis system that can be used.
Which system, or mix of systems, is used depends on the type of goods stored, the type of storage
facilities needed, the throughput, and the size of orders. Whatever the system, management must
maintain enough inventory of safety and working stock to provide the required level of customer
service, keep track of items so they can be found easily, and reduce the total effort required to
receive goods, store them, and retrieve them for shipment. The following are some basic systems of
locating stock:




Group functionally related items together: Group together items similar in their use
(functionally related). If functionally related items are ordered together, order picking is
easier. Warehouse personnel become familiar with the locations of items.
Group fast moving items together: If fast moving items are placed close to the receiving and
shipping area, the work of moving them in and out of storage is reduced. Slow moving items
can be placed in more remote areas of the warehouse.
Group physically similar items together: Physically similar items often require their own
particular storage facilities and handling equipment. Small packaged items may require
shelving whereas, heavy items, such as tires or drums, require different storage and handling
equipment. Frozen foods need freezer storage space.
Locate working and reserve stock separately: Relatively small quantities of working stock
can be located close to the shipping area, whereas reserve stock used to replenish the
26
Logistics & Supply Chain Management
working stock can be located more remotely. This allows order picking to occur in a compact
area, far more efficiently.
There are two basic systems for assigning specific locations to individual stock items: fixed location
and floating location.
Fixed Location: In a fixed location system, an SKU is assigned a permanent location or locations,
and no other items are stored there. This system makes it possible to store and retrieve items
with a minimum of record keeping. However, fixed location systems usually have poor cube
utilization. Fixed location systems are often used in warehouses where demand is uniform,
space is not at a premium and throughput is small, and where there are few SKUs.
Floating Location: In a floating location system, goods are stored wherever there is appropriate
space for them. The same SKU may be stored in several locations at the same time and different
locations at different times. The advantage to this system is improved cube utilization. However,
it requires accurate and up-to-date information on item location and availability of empty
storage space so items can be put away and retrieved efficiently. Modern warehouses using
floating location systems are usually computer based. The computer assigns free locations to
incoming items, remembers what items are on hand and where they are located, and directs the
order picker to the right location to find the item. Thus, cube utilization and warehouse
efficiency are greatly improved.
Storage Alternatives in Agribusiness
1) Floor Storage –Bulk storage of foodgrains
is commonly done on the floor in the
warehouses using Wooden Pallets, or
Tarpaulin sheets to protect from termite,
seepage & other contamination.
2) Silo Bags - Silo Bags allows the producer
the time to take control of his own crop
and to market it later to achieve a better bottom line!

Eliminates
costly
on-farm
storage
systems (particularly useful in areas where
security of tenure is an issue)

Suitable for a wide range of commodities from
dry grains, wet grains, dried fruits, forages, nuts
and many other valuable commodities

Very low cost per ton stored

System is totally mobile and can be moved from location to location

Size ranges from a single 220+/- mt Silo Bag to a 50,000 mt Silo Bag site
27
Logistics & Supply Chain Management


Logistics savings and benefits - from lower freight costs to better management of
available logistics and timing
Silo Bags allows greater
security
and
asset
management
of
commodities

Store on-farm with no
wastage or slippage. Has the
ability to significantly reduce
wastage.

Allows the economic benefits of segregation; grains can be stored as to variety,
grade, protein or any other classification .

Storage can be done in a bumper season and the produce can be sold at better price
later.

Grain retains its quality and colour.

The bag is airtight, therefore no chemicals are required (perfect for organic
marketing).
3) Grain Storage Silos
Grain Storage Silos are quite commonly used for cereal and grain storage. The cylindrical body of the
silo is generally made of corrugated iron panels reinforced by strong external uprights in shaped
metal sheet. The material used for the storage silo is a steel of a high resistance with galvanization,
while the roof is made of trapezoidal elements in galvanised and ribbed steel plate, appropriate to
carry heavy loads.
Physical Control and Security
28
Logistics & Supply Chain Management
As inventory consists of tangible things, items have a nasty habit of becoming lost, strayed, or stolen,
or of disappearing in the night. It is not that people are dishonest, rather that they are forgetful.
What is needed is a system that makes it difficult for people to make mistakes or be dishonest. There
are several elements that help:




A good-part numbering system
A simple, well-documented transaction system: When goods are received, issued or moved
in any way, a transaction occurs. There are four steps in any transaction:
1. Identify the Item: Many errors occur because of incorrect identification. When
receiving an item, the purchase order, part number, and quantity must be properly
identified. When goods are stored, the location must be accurately specified. When
issued, the quantity, location, and part number must be recorded.
2. Verify quantity: Quantity is verified by a physical count of the item, by weighting or
by measuring. Sometimes, standard-sized containers are useful in counting.
3. Record the transaction: Before any transaction is physically carried out, all the
information about the transaction must be recorded.
4. Physically execute the transaction: Move the goods in, about, or out of the storage
area.
Limited Access: inventory must be kept in a safe, secure place with limited general access. If
should be locked except during normal working hours. This is less to prevent theft than to
ensure people do not take things without completing the transaction steps. If people can
wander into the stores area at any time and take something, the transaction system fails.
A well trained workforce: Not only should the stores staff be well trained in handling and
storing material and in recording transactions, but other personnel who interact with stores
must be trained to ensure transactions are recorded properly.
INVENTORY RECORD ACCURACY
The usefulness of inventory record is directly related to its accuracy. Based on the inventory record,
a company determines net requirements for an item, releases orders based on material availability,
and performs inventory analysis. If the records are not accurate, there will be shortages or material,
disrupted schedules, late deliveries, lost sales, low productivity, and excess inventory (of the wrong
things). These three pieces of information must be accurate: part description, quantity, and location.
Accurate inventory record enable firms to:




Operate an effective materials management system: If inventory records are inaccurate,
gross-to-net calculations will be in error.
Maintain satisfactory customer service: If records show the item is in inventory when it is
not, any order promising it will be in error.
Operate effectively and efficiently: Planner can plan, confident that the parts will be
available.
Analyze inventory: Any analysis of inventory is only as good as the data it is based on.
Inaccurate inventory records will result in:
29
Logistics & Supply Chain Management






Lost sales
Shortages and disrupted schedules
Excess inventory (of wrong things)
Low productivity
Poor delivery performance
Excessive expediting, since people will always be reacting to a bad situation rather than
planning for the future.
Causes of Inventory record errors:
Poor inventory record accuracy can be caused by many things, but they all result from poor
record keeping systems and poorly trained personnel. Some examples of causes of inventory
record error are:






Unauthorized withdrawal of material
Unsecured stockroom
Poorly trained personnel
Inaccurate transaction recording: Errors can occur because of inaccurate piece counts,
unrecorded transactions, delay in recording transactions, inaccurate material location,
and incorrectly identified parts.
Poor transaction recording systems: Most systems today are computer based and can
provide the means to record transactions properly. Errors when they occur are usually
the faulty of human input to the system. The documentation reporting system should be
designed to reduce the likelihood of human error.
Lack of audit capability: Some program of verifying the inventory counts and locations is
necessary. The most popular one today is cycle counting.
Measuring Inventory Record Accuracy
Inventory accuracy ideally should be 100%. Banks and other financial institutions reach this level.
Other companies can move toward this potential.
Tolerance: To judge inventory accuracy, a tolerance level for each part must be specified. For
some items, this may mean no variance, for others, it may be very difficult or costly to measure
and control to 100% accuracy. An example of the latter might be nuts or bolts ordered and used
in the thousands. For these reasons, tolerances are set for each item. Tolerance is the amount of
permissible variation between an inventory record and a physical count.
Tolerances are set on individual items basis value, critical nature of the item, availability, lead
time, ability to stop production, safety problems, or the difficulty of getting precise
measurement.
Auditing Inventory Records
Errors occur, and they must be detected so inventory accuracy is maintained. There are two
basic methods of checking the accuracy of inventory records: Periodic counts of all items, and
30
Logistics & Supply Chain Management
cyclic counts of specified items. It is important to audit record accuracy, but it is more important
to audit the system to find the causes of record inaccuracy and eliminate them. Cycle counting
does this periodic audits tend not to.
Periodic inventory:
The primary purpose of a periodic inventory (mainly annual) is to satisfy the financial
auditors that the inventory records represent the value of the inventory. To planners, the
physical inventory represents an opportunity to correct any inaccuracies in the records.
Whereas financial auditors are concerned with the total value of the inventory, planners are
concerned with the item detail.
The responsibility for taking the physical inventory usually rests with the materials manager
who should ensure that a good plan exists and it is followed. There are three factors in good
preparation: housekeeping, identification and training.
Housekeeping: Inventory must be sorted, and the same parts collected together so
they can easily be counted. Sometimes, items can be pre-counted and put into sealed
cartons.
Identification: Parts must be clearly identified and tagged with part numbers. This can
and should be done before inventory is taken. Personnel who are familiar with parts
identification should be involved and all questions resolved before the physical
inventory starts.
Training: Those who are going to do the inventory must be properly instructed and
trained in taking inventory. Physical inventories are usually taken once a year, and the
procedure is not always remembered from year to year.
Process: Taking a physical inventory consists of four steps:
1. Count items and record the count on
inventory sheet against respective item.
2. Verify this count by recounting or by
sampling.
3. Reconcile inventory records for differences
between the physical count and book
stock.
4. Pass necessary adjustment entries in books
to correct differences, after taking
necessary approvals.
Cycle counting
Cycle counting is a system of counting inventory continually throughout the year. Physical
inventory counts are scheduled so that each item is counted on a predetermined schedule.
Depending on their importance, some items are counted frequently throughout the year,
31
Logistics & Supply Chain Management
whereas others are not. The idea is to count selected items each day. The advantages of
cycle counting are:



Timely detection and correction of problems: The purpose of the count is first to find
the cause of error and to correct the cause so the error is less likely to happen again.
Complete or partial reduction of lost production.
Use of personnel, trained and dedicated to cycle counting; this provides experienced
inventory takers who will not make the errors “once-a-year” personnel do. Cycle
counters are also trained to identify problems and to correct them.
Count frequency: The basic idea is to count some items each day so all items are counted a
predetermined number of times each year, called count frequency. For an item, the count
frequency should increase as the value of the item and number of transactions (chance of
error) increase. Several methods can be used to determine the frequency. Three common
ones are ABC method, zone method, and location and audit method.



ABC method: In this method, inventories are classified according to the ABC system.
Some rule is established for count frequency. For example, A items might be
counted weekly or monthly. B items bimonthly or quarterly and C items biannually
or once a year. On this basis a count schedule can be established.
Zone method: Items are grouped by zones to make counting more efficient. The
system is used when a fixed location system is used, or when work-in-process or
transit inventory is being counted.
Location audit system: In a floating location system, goods can be stored anywhere,
and the system records where they are. Because of human error, these locations
may not be 100% correct. If material is mislocated, normal cycle counting may not
find it. In using location audits, a predetermined number of stock locations are
checked each period. The item numbers of the material in each bin are checked
against inventory records to verify stock point locations.
Agencies Involved in Warehousing of Agri Commodities
In India, the Central Warehousing Corporations (CWC), State Warehousing Corporations (SWC) and
Food Corporation of India (FCI) are involved in storing the major Agri commodities. Private parties
like ITC, Cargill, Reliance have also come into this sector. Government is also encouraging private
participation in this sector.
Kraft Foods : Managing Logistics Challenges in China - Case Study
Kraft Foods Inc., entered China in the mod-1980 by setting up two joint ventures: Kraft Tianmei
Foods in the northern city of Tianjin and Kraft Guangtong Food in southern province of Guangdong.
Kraft Tianmei Foods makes Tang, an instant fruit-flavored drink mix, and Sugus, fruit-flavored chews
and Kraft Guangtong Food produces Maxwell House coffee. These ventures provided instant
geographical reach across China. Its parent company Philip Morris, acquired Nabisco for $15 billion
in December 2000. As a result, it gained two more plants in the Chinese cities of Beijing and Suzhou,
32
Logistics & Supply Chain Management
which produce biscuit and crackers under Oreo, Chip Ahoy and Ritz brands. Consequently, it
extended its portfolio and reach.
For managing its business, it has five regional distribution centres across China, each with networks
into several neighboring provinces. Third party companies manage three distribution centers,
providing warehousing service and delivering goods to Kraft’s designated wholesalers across China.
Kraft Foods has also achieved horizontal organization structure instead of traditional structure to
reduce cycle times, lead times, reduce customer complaints, increase productivity and improve
customer satisfaction.
Strategy
Kraft Foods has renewed its global organization structure “One Company Structure” to strongly
position Kraft to deliver sustainable growth. The company has become a unified global company,
which allows it to capture ‘best of global and best of local’ and act with greater focus and speed than
ever before. Kraft is also transforming its product portfolio by focusing more on expanding its brands
globally across its Beverages, Snacks, Cheese and Dairy and Convenient Meal sectors. The company
is focusing to meet key consumer needs for health and wellness, and convenience, while also
responding to shifting demographics, as the population ages, becomes increasingly diverse and lives
in a growing number of one-to-two-person households. Kraft is also focusing on driving growth
through new products by Building underdeveloped segments within Kraft’s current categories,
sourcing volume from adjacent categories, and penetrating new markets, geographies and channels.
At the same time, the team is implementing processes to improve speed to market.
Managing Challenges
The MNCs are targeting China to boost its revenues because it is a developing market, and it is big.
However, there are impediments such as underdeveloped transportation infrastructure, fragmented
distribution systems, limited use of technology, dearth of logistics talent, regulatory restrictions, and
local protectionism.
In the year 2003, more than 18000 registered companies were claiming to offer logistics services in
China, but no one could offer nationwide distribution. Not even a single logistics provider
commanded 2% of the market. It was compulsory for MNCs to use third party service providers due
to Government’s restrictive policy to open Foreign Direct Investment (FDI) in the logistics sector.
To manage the logistics, Kraft Foods is dependent on outside logistics companies. Because under
China’s pledge to the WTO, its logistics sector will not be fully open to foreign competition until
2005. It is a compulsion for the MNCs that they have to outsource and rely on the Chinese joint
venture companies. But due to increased competition and consolidation in the logistics sector, more
and more Chinese companies are able to live up to the service criteria demanded by MNCs.
Kraft has adopted a strategy to hire midsized logistics companies rather than the largest firm in the
region. Kraft has hired PG Logistics Group, a private Guangzhou based logistics company to manage
its biggest regional distribution center in the eastern coastal city of Suzhou, which serves Shanghai
and nearby provinces of Anhui, Jiangsu, Zhejiang and Fujian. Tom Shu, the warehouse and
distribution manager, Kraft Foods in China, explained, “If you are ranked as the third-largest client
(with a logistics company), which means there are companies ranked ahead of you, your order might
33
Logistics & Supply Chain Management
be delayed when there is a shortage of vehicles. But if you are ranked at top with a smaller
company, you always have priority.
Earlier Kraft Foods used to team up only with the biggest logistics company in each region, but
changed its strategy after some time experiencing delays of upto two days in its orders, which were
unacceptable. Tom Shu noted that when a logistics company grows bigger, its network often
becomes more complicated to manage and has less flexibility to cope with potential emergencies.
PG Logistics is a big nationwide industry, but it has only mid-sized presence in Suzhou. Fan Xiwei,
Transport Manager of PG Logistics Suzhou subsidiary, said, “Kraft is our most important client.” PG
Logistics fulfills all stipulated standards for storage and delivery, mentioned by Kraft Foods. All the
products are sealed in special dry-food containers for transport. Once the sales manager approves
the order, the logistics company has to deliver within one to three days. But delivering goods within
the stipulated time is a major challenge in China. It is because roads are narrow, jammed with
overload trucks or blocked by protectionist local officials demanding fees from truck drivers.
However, PG Logistics maintains to deliver goods in time.
To keep logistics costs down and improve efficiency, Kraft has consolidated its distribution centers.
After acquiring Nabisco in Dec, 2000, it has gradually reduced the number of such distribution
centers from 13 in 2001 to five in the year 2004. Food consumers are not loyal. So, Top Shu made
every effort to reduce the inventory level. Maintenance of inventory is important to maintain the
cost of goods. However, to maintain the demand, Kraft Foods was maintaining some safety stocks.
But the company has lost 20% of its potential revenue because of unsold goods and cash tied up in
the form of inventory. Kraft’s distribution center consolidation helped in bringing down the
company’s total operational costs in China by 5-10% over the past few years. Kraft has also focused
on one of its chronic logistics problems in China, the pilfering of goods being transported by rail. So,
Kraft adopted a strategy to hide the most expensive products at the bottom of the container. Its
workers stack relatively cheap coffee mix near the door of a container, and jar-packed coffee inside.
34
Logistics & Supply Chain Management
NOTES
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Logistics & Supply Chain Management
5. Central Warehousing Corporation
A premier Warehousing Agency in India, established during 1957 providing logistics support to the
agricultural sector, is one of the biggest public warehouse operators in the country offering logistics
services to a diverse group of clients.
CWC is operating 490 Warehouses across the country with a storage capacity of 9.8 million tones
providing warehousing services for a wide range of products ranging from agricultural produce to
sophisticated industrial products.
Warehousing activities of CWC include food-grain warehouses, industrial warehousing, custom
bonded warehouses, container freight stations, inland clearance depots and air-cargo complexes.
Apart from storage and handling, CWC also offers services in the area of clearing & forwarding,
handling & transportation, procurement & distribution, disinfestation services, fumigation services
and other ancillary activities.
CWC also offers consultancy services/ training for the construction of warehousing infrastructure to
different agencies.
Services
Scientific storage and handling services for more than 400 commodities include Agricultural produce,
Industrial raw-materials, finished goods and variety of hygroscopic and perishable items.

Scientific Storage Facilities for more than 200 commodities including hygroscopic and
perishable items through network of 490 warehouses in India with its 5,976 trained
personnel.

Import and Export Warehousing facilities at its 36 Container Freight Stations in ports and
inland stations.

Bonded Warehousing facilities.

Disinfestation services.

Handling, Transportation & Storage of ISO Containers
DEVELOPMENT OF RAILSIDE COMPLEXES
Railways has vast network for not only operating passenger trains but also for freight movement, an
imminent need was assessed to augment the utilization level of Railway transportation system so as
to reduce the pressure on road traffic by making it cost effective and efficient operation for the
trade. As such, concept of Rail Side Warehousing facilities was evolved by the Corporation as value
addition to the rail transport system which extends benefits to the users in avoiding multiple
handling of their stocks and resultant escapable losses on this account; curtailing handling cost and
having a hassle free efficient operation.
36
Logistics & Supply Chain Management
For transforming the concept into tangible shape, CWC successfully
developed a pilot project of Rail Side Warehousing facility at
Whitefield, Bangalore in association with South Western Railway in
February 2002 and on the strength of fruitful effect of this project on
the front of increase in traffic/freight revenue and the kind of
satisfaction that trade enjoyed out of it on availing this value added
services in the arena of rail transportation, CWC and Ministry of
Railway joined their hand in the avenue of developing Rail Side
Warehousing facilities at 22 strategic locations of Railway Terminal to
provide better services through total logistic solution to Rail users for,
not only to attract additional traffic, but also to provide a cost
beneficial and efficient transport cum storage service to the trade
under single window concept.
Disinfestation and Pest Control Services
Govt. of India, vide Notification dated 23rd March 1968, entrusted
additional responsibility to CWC to undertake Disinfestation/Pest Control Services beyond its
warehouses in respect of Agricultural produce or other notified commodities.
Over the years, CWC has developed the expertise in Pest Management in the following areas :










Rodent Control
House hold Pest Management- Cockroaches, Mosquitoes, House Flies, Bed Bugs,
Spiders, Lizards, Carpet Beetles, Fleas, Crickets, Ants, Wasps, Locusts etc.
Storage Pest Management
Anti-termite treatments (Pre & Post Construction)
Container Fumigation
Ship Fumigation(on Board)
Pre-shipment fumigation of Export Cargo
Rail Coach disinfestations
Aircraft disinfestations
Disinfestations of Airports & Ports
CWC is the only organization in the public sector recognized by the Directorate of Plant Protection
Quarantine and Storage, Ministry of Agriculture, Govt. of India as well as the Export Inspection
37
Logistics & Supply Chain Management
Council of India to undertake Pre-shipment fumigation and Ship (on board) fumigation of exportable
commodities. CWC earned a major breakthrough in disinfestation of aircrafts of Air India using timer
device. CWC has thus earned the status of a National Pest Control Agency.
CWC has taken lead in accreditation of its pest control operators under newly introduced National
Standards on Phytosanitary Measures NSPM 11 & 12 to facilitate MBR fumigation treatment of
export/import cargo carrying wood packaging material (WPM) in compliance to the FAO/IPPC
guidelines issued through International Standard on Phytosanitary Measures ISPM -15. Under this
accreditation regime, the Corporation is catering to quarantine treatments at the following major
centres:














CFS-JN Port
CFS-Tuticorin (Tamil Nadu)
CFS-Chennai
CFS-Adalaj (Ahmedabad)
CFS-Kandla Port (Gandhidham)
CFS-Vizag
CFS-Whitefield (Bangalore)
CFS-Panambur (Mangalore)
ICD-Patparganj (Delhi)
CW-Nampally (Hyderabad)
CW-Kakinada (Hyderabad)
CWC-Regional Office, Bhopal
CWC-Regional Office, Kolkata
CW-Cochin (Hyderabad)
CWC-Regional Office, Mumbai
Major clients of CWC for pest control services include: Many leading grain exporters
 Shippers for containerized cargo
 Indian Railways
 Air India
 Air Sahara
 Air Deccan
 Indian Airlines
 Jet Airways
 Airport Authority of India
 Indian Oil Corporation
 GAIL (India) Limited
 Reserve Bank of India
 AIIMS
 Central Public Works Department
 VSNL, ONGC, AIR etc.
Pre-shipment fumigation and ship fumigation facilities are offered at the following ports:
Mundra

38
Kandla
Logistics & Supply Chain Management

Jamnagar

Pipavav

Mangalore/Karwar

Tuticorin

Visakhapatnam

Kakinada

Kolkata

Haldia

Navi Mumbai

Port Blair
Some of the Grain exporters who have availed CWC’s pest control services during the recent past
include:Satnam Overseas
Cargill India Ltd.
Adani Exports Ltd.
MMTC
PEC
STC
Vicnivas Agencies
PUNSUP
Seaways
Bishan Swaroop Ram Kishan Agro
Olam International
LMJ International
SS Exports
V. Arjun
Vishal Exports
Ruchi Soya
VASS Exports
CWC also takes POD guarantee for off-loading pest free cargo at the foreign destinations (country of
import) at a nominal cost in addition to the usual fumigation charges.
CWC is keen to enter into agreements with users for providing Pest Control Services as well as
Strategic Alliance with other pest control service providers/firms dealing with pest control related
activities for further widening its clientele.
Bonded Warehouses
CWC operates 75 Custom Bonded Warehouses with a total operated capacity of nearly 0.5 million
Mts. The concept of custom Bonded Warehousing has been promoted with a view to facilitate
deferred payment of custom duty to encourage entrepreneurs and export oriented units to carry out
their operations with least investment. These bonded Warehouses are located all over the country at
places well - connected with the port towns for smooth movement of goods to and from the
discharge points.
39
Logistics & Supply Chain Management
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41
Logistics & Supply Chain Management
6.Food Corporation of India
The Food Corporation of India was setup under the
Food Corporations Act 1964, in order to fulfill
following objectives of the Food policy :



Effective price support operations for
safeguarding the interests of the farmers.
Distribution of food grains throughout the
country for Public Distribution System; and
Maintaining
satisfactory
level
of
operational and buffer stocks of food
grains to ensure National Food Security.
Since its inception in 1965, having handled various situations of plenty and scarcity, FCI has
successfully met the challenge of managing the complex task of providing food security for the
nation. It has constantly worked towards developing strong food security system which has helped
to sustain the high growth rate and maintain regular supply of wheat and rice right through the year.
The efficiency with which FCI tackled one of the worst droughts of the century not only cemented its
role as the premier organization in charge of food security in India, but also brought it accolades
from international organizations.
Today it can take credit for having contributed a great deal in transforming India from a chronically
food deficit country to one that is self-sufficient.
Procurement of Foodgrains
To nurture the Green Revolution, the Government of India introduced the scheme of minimum
assured price of foodgrains which are announced well before the commencement of the crop
seasons, after taking into account the cost of production \ inter-crop price parity, market prices and
other relevant factors.

The Food Corporation of India along with other Government agencies provides effective
price assurance for wheat, paddy and coarse grains.

FCI and the State Govt. agencies in consultation with the concerned State Governments
establish large number of purchase centres throughout the state to facilitate purchase of
foodgrains.

Centres are selected in such a manner that the farmers are not required to cover more than
10 kms to bring their produce to the nearest purchase centres of major procuring states.

Price support purchases are organized in more than 12,000 centers for wheat and also more
than 12,000 centers for paddy every year in the immediate post-harvest season.
42
Logistics & Supply Chain Management

Such extensive and effective price support operations have resulted in sustaining the income
of farmers over a period and in providing the required impetus for higher investment in
agriculture for improved productivity.

India today produces over 200 million tonnes of foodgrains as against a mere 50 million
tonnes in 1950.

In the last two decades, foodgrain procurement by Government agencies has witnessed a
quantum jump from 4 million tonnes to over 25 million tonnes per annum.

Foodgrains are procured according to the Government prescribed quality standards.

Each year, the Food Corporation purchases roughly 15-20% of India's wheat production and
12-15% of its rice production.

This helps to meet the commitments of the Public Distribution System and for building
pipeline and buffer stock.
43
Logistics & Supply Chain Management
Storage Management

Another facet of the Corporation's manifold
activities is the provision of scientific storage
for the millions of tonnes of foodgrains
procured by it. In order to provide easy physical
access in deficit, remote and inaccessible areas,
the FCI has a network of storage depots
strategically located all over India. These
depots include silos, godowns and an
indigenous method developed by FCI, called
Cover and Plinth (CAP).

CAP storage is a term given to storage of
foodgrains in the open with adequate
precautions such as rat and damp proof plinths,
use of Dunn age and covering of stacks with
specially fabricated polythene covers etc.

FCI has 24.18 million tonnes (owned & hired) of
storage capacity in over 1451 godowns all over
India.

In order to reduce storage and transit losses of
foodgrains and to bring additional resources
through Private Sectors participations. Govt. of
India had announced a National Policy on
Handling Storage and Transportation of
Foodgrains in June, 2004 for Bulk and
conventional godowns. In the Ist phase, after a
series of deliberations, it was approved that
total capacity of lakhs MT be created at the
identified based depots and field depots
through private sector participation on BuildOwn & Operate (BOO) Basis. RITES were
appointed as consultants for the project. A
letter of acceptance of proposal of the project
in two circuits has been awarded to M/s.
Advani Exports Ltd., the lowest bidder to
complete the Project in 3 years from the date
of execution of the service agreement.
Figs. in Million Tonnes
44
Logistics & Supply Chain Management
1st
1st Apr. 1st Apr. 1st Apr. Apr.
Capacity 2003
2004
2005
2006
Covered
Owned
12.82
12.82
12.91
12.93
Hired
13.77
10.85
10.46
9.9
Total
26.59
23.67
23.37
22.83
CAP ( Cover and Plinth)
Owned
2.26
2.21
2.25
2.21
Hired
2.88
1.36
0.41
0.51
Total
5.14
3.57
2.66
2.72
Grand
Total
31.73
27.24
26.03
25.55
Quality Control and Scientific Preservation

The Food Corporation of India has an
extensive and scientific stock preservation
system. An on-going programme sees that
both prophylactic and curative treatment is
done timely and adequately. Grain in storage
is
continuously
scientifically
graded,
fumigated and aerated by qualified trained
and experienced personnel.

Food Corporation of India's testing
laboratories spread across the country for
effective monitoring of quality of foodgrains
providing quality assurance as per PFA
leading improved satisfaction level in
producers
(farmers)
and
customers
(consumers).

The preservation of foodgrain starts, the
minute it arrives in the godowns. The bags
themselves are kept on wooden crates/poly
pallets to avoid moisture on contact with the
floor.
Further
till
the
bags
are
dispatched/issued, fumigation to prevent
infestation etc. of stocks is done on an
average every 15 days with MALATHION and
once in three months with DELTAMETHRIN
etc. on traces of infestation, curative
treatment is done with Al. PHOSPHIDE.
45
1st
Apr.
2007
1st Apr. 1st Dec.
2008
2008
12.94
9.34
22.28
12.95
8.71
21.66
12.97
8.96
21.93
2.29
0.63
2.92
2.2
0.03
2.23
2.21
0.32
2.53
25.2
23.89
24.46
Logistics & Supply Chain Management
FCI's testing
laboratories spread
across the country
(188) ensure that the
stored foodgrains
retain their essential
nutritional qualities
as per FAQ.
District Labs
Regional Labs
Zonal Labs
Central Lab
164
18
5
1
Transport Management

Ensuring accessibility to food in a country of India's size
is a Herculean task. The foodgrains are transported from
the surplus States to the deficit States.

The foodgrain surplus is mainly confined to the Northern
States, transportation involves long distance throughout
the country. Stocks procured in the markets and
purchase centers is first collected in the nearest depot
and from there dispatched to the recipient States within
a limited time.

Transporting by trucks
FCI moves about 270 Lakh tonnes of foodgrains over an
average distance of 1500 Kms.
Movement by Rail
Movement
Year
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
2002-2003
2003-2004
Foodgrain
235.5
191.1
190.8
221.9
161.6
204.5
248.8
297
Sugar
12
11
11
7
3
3
2
0.8
46
Total
247.8
202.1
201.8
228.9
164.6
207.5
250.8
297.8
Movement by waterways
Logistics & Supply Chain Management
2004-2005
2005-2006
2006-2007
2007-2008
2008-09(Nov,08)
338.7
315.5
288.7
277.92
155.8
1.4
1.8
2.4
1.78
1.14
340.1
317.3
291.1
279.7
156.94
Lakh Tonnes (Prov.)

Regularly rice and wheat procured in the Northern
States is moved to far flung corners Imphal, Manipur or
Kanyakumari in Tamnilnadu and to the higher reaches of
the Himalayas in the North.

An average of 1,20,0000 bags (50 Kg) of foodgrains are
transported every day from the producing States to the
consuming areas, by rail, road etc.

The stocks to Kashmir valley, H.P, NE, Sikkim A&N Islands
and Lakhadweep etc., which don't have rail link, are fed
by road.

Thus by effective planning and Management of the
transport System FCI regularly moves foodgrain and
sugar from the procuring Region to the concerning
Region.
Distribution of Foodgrains
The national objective of growth with social justice and
progressive improvements in the living standards of the
population make it imperative to ensure that foodgrain is
made available at reasonable prices.




Public Distribution of foodgrains has always been an
integral part of India’s overall food policy. It has
been evolved to reach the urban as well as the rural
population in order to protect the consumers from
the fluctuating and escalating price syndrome.
Continuous availability of foodgrain is ensured
through about 4.5 lakhs fair price shops spread
throughout the country.
A steady availability of foodgrains at fixed prices is Distribution through Fair Price
assured which is lower than actual costs due to
Govt. policy of providing subsidy that absorbs a part
of the economic cost (about 45%).
The Govt. of India introduced a scheme called
47
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Logistics & Supply Chain Management
Targeted Public Distribution Scheme (TPDS)
effective from June, 1997. The stocks are issued
under this scheme in the following two categories:a) Below Poverty Line (BPL): Determination of the
families under this category in various states is
based on the recommendation of the Planning
Commission. A fixed quantity of 35 Kg. foodgrains
per family per month is issued under this category.
The stocks are issued at highly subsidized Price of
Rs.4.15 per Kg. of wheat and Rs. 5.65 per Kg. of rice.
FPS in remote hill areas in HP
Antyodaya Anna Yojna - During the year 2000-2001
Govt. of India decided to release foodgrains under
Antyodaya Anna Yojna. Under this scheme the
poorest strata of population out of earlier identified
BPL population is covered. Foodgrains are being
provided to 1.5 crores poorest of the poor families
out of the BPL families at highly subsidized rates of
Rs.2/- per kg. of wheat and Rs.3/- per kg. of rice by
FCI. This is the biggest food security scheme in the
world.
Carrying foodgrains to remote areas for
b) Above Poverty Line ( APL) – Families which aredistribution by natural means
not covered under BPL are placed under this
category. The stocks are issued at Central Issue
Price of Rs. 6.10 per Kg. of wheat and Rs. 8.30 per
Kg. of rice.
Carrying foodgrains by goats
There are number of other welfare schemes of the Govt. of India:
(a) Mid-Day-Meal-Scheme (MDM)- The Govt. of India have introduced MDM – National Programme
of Nutrition Support to Primary Education in Primary Schools w.e.f. 15.8.1995. Under the scheme
every child is entitled for 3 Kgs. of wheat/rice per month @ 100 Grams.
The Scheme is partly run by Govt./Aided Schools/Local Bodies to serve free cooked / processed hot
meal. FCI is supplying foodgrains free of cost to the State/UTs. This scheme is partly financed by
Ministry of HRD.
(b) Wheat Based Nutrition Programme (WBNP) - A scheme run by Department of Women and Child
Development, Ministry of HRD for providing nutritious food to children below 6 years of age and
expectant/lactating women. Foodgrains supplied by FCI at BPL rates.
48
Logistics & Supply Chain Management
(c)&(d) SC/ST/OBC Hostels & Welfare Institutions & Hostels- The Ministry of CAF&PD and the
Ministry of Social justice & Empowerment coordinate to monitor of the Scheme for providing
foodgrains to SC/ST/OBC Hostels. Hostels having students belonging to SC/ST/OBC categories are
eligible to draw 15 Kgs. Foodgrains per resident per month.
The Government of India decided that w.e.f. 2.11.2000 foodgrains (wheat/rice) will also be allotted
to the state Governments at the rate of 5 Kg per head per month for indigent people living in
Welfare Institutions, such as. Beggar Homes, Home for Nari Niketan etc. sponsored by the State
Govts. and the concerned administration. Foodgrains are supplied by FCI at BPL rates. It may be
clarified that from the year 2002-03, the MOCAF&PD has been making the requirement of the
State/UT under the head "Welfare Institutions & Hostels" to meet the requirement of the State/UT
for providing foodgrains to different type of welfare institutions. Since April 2005, the Ministry of
CAF &PD has enhanced quota of allotment under this scheme to 5% of the monthly allotment made
under BPL & AAY.
(e) Annapurna Scheme- Indigent Senior Citizens of 65 years of age or above eligible for National Old
Age Pension under NOAPS, but not getting pension can get 10 Kgs of foodgrains per month. FCI is
issuing foodgrains under this scheme to State/UT Govts. at BPL rates.
Under this scheme of Ministry of Social Justice & Empowerment, Indigent people living in Welfare
institutions like Beggar Homes, Orphanages, Nari Niketans etc. are given 15 kgs of foodgrains per
person per month. Foodgrains are supplied by FCI at BPL rates.
(f) Sampoorna Gramin Rozgar Yojana- A scheme financially supported by Ministry of Rural
Development in which foodgrains are supplied to the States/ UTs by FCI free of cost.
(g) Special Component of Sampoorna Gramin Rozgar Yojna - Under the Special component of the
SGRY financed by Ministry of Rural Development for augmenting food security through additional
wage employment during natural calamity. FCI release foodgrains free of cost to the State/UTs.
(h) Foodgrains to Adolescent Girls - Pregnant and Lactating Mothers (AGPLM). GOI introduced this
Scheme w.e.f January, 2003. Under this scheme foodgrains is being supplied by FCI at BPL prices to
the State/UT Govt. for Adolescent Girls, Pregnant and Lactating Mothers ( AGPLM). The identified
under nourished woman/girl is provide 6 Kg. of foodgrains (wheat/rice)/month. The scheme is partly
supported by Planning Commission.
(i) World Food Programme (WFP) - FCI is sparing stocks to WFP projects from the Central Pool
stocks as and when required by them. FCI is working as 'FOOD BANK' for World Food
Programme(WFP) projects in India. When India was deficit of foodgrains, WFP used to get stocks to
meet the deficiency through import.
(J) Emergency Feeding Programme - Under this scheme, Ministry of CAF & PD releases allocation of
rice at BPL rates, for KBK Districts (Bolangir, Kalahandi, Koraput, Malakangiri, Nabarangpur,
Naupada, Rayagada & Sonepur) of Orissa State on monthly basis. Under this scheme, rice @ 6
kg/beneficiary/month is issued for 2 lakh beneficiaries. This programme is mentioned by Ministry of
Social, Justice and Empowerment at Central level.
49
Logistics & Supply Chain Management
(k) Grain Bank - this scheme provides Grants for establishment of village Grain Bank to prevent
deaths of Schedule Tribes specially children in remote and backward tribal villages facing or likely to
face starvation and also to improve nutritional standards. The scheme provides funds for building
storage facility, procurement of weights & measures and for the purchase of initial stock of one
quintal of foodgrains of local variety for each family. The allocation of foodgrains was made by the
GOI, Ministry of Tribal Affairs during the year 2002-2003. Under this scheme foodgrains are allotted
to States at BPL rate. Allotment under this scheme has not been received from the year 2003-2004.
(l) National Food for Work Programme - this programme has been launched by the Prime Minister
during November 2004 for providing foodgrains in identified 150 most backward districts of the
country. The beneficiaries of this programme are laborers engaged by the State Govt. in
development work. Foodgrains is given as part of wages under the scheme to the rural poor at the
rate of 5 kg. per man day. More than 5 kg foodgrains can be given to the laborers under this
programme in exceptional cases subject to a minimum of 25% of wages to be paid in cash. Under
this programme foodgrains are issued to states/UTs free of cost. This scheme is mentored by
Ministry of Rural Development.
Stock Management

The Central Pool stock is maintained by FCI, State
Govts. and their agencies.

The total stock in Central Pool as on 31/12/2008 is
354.16(Figs. in Lakh MT)
Stock in Central pool as on 31/12/2008
With
Foodgrains FCI
With State Grand
Govt.
/ Total
Agencies
Rice*
Wheat
Total
112.3
100.32
212.62
61.24
80.3
141.54
Stocks in silos
173.54
180.62
354.16
* Unmilled Paddy with FCI & State agencies
also shown in terms of Rice
Foodgrains Stock in CAP Storage
Stocks of Foodgrains & sugar in Central Pool as on
31.12.2008 (Figs. in Lakh MT)
Rice
Wheat
Wheat at Port
Total
Coarse
Grains
Sugar
Grand Total
In Storage
173.54
180.62
354.16
4.01
0.12
358.29
In Transit
2.22
1.50
3.72
0.08
3.80
Total
175.76
182.12
357.88
4.01
0.20
362.09
50
Manual stitching of bags
Logistics & Supply Chain Management
Position on 05/01/2009
NOTES
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52
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7.Packaging & Labeling
Packaging is the science, art and technology of enclosing or protecting products for distribution,
storage, sale, and use. Packaging can be described as a coordinated system of preparing goods for
transport, warehousing, logistics, sale, and end use. Packaging - contains, protects, preserves,
transports, informs, and sells.
Package labeling or labeling is any written, electronic, or graphic communications on the packaging
or on a separate but associated label.
A label is a piece of paper, polymer, cloth, metal, or other material affixed to a container or article,
on which is printed a legend, information concerning the product, addresses, etc. A label may also
be printed directly on the container or article.
Labels have many uses: product identification, name tags, advertising, warnings, and other
communication. Special types of labels called digital labels (printed through a digital printing) can
also have special constructions such as RFID tags.
The purposes of packaging and package labels
Packaging and package labeling have several objectives:

Physical protection - The objects enclosed in the package may require protection from,
among other things, shock, vibration, compression, temperature, etc.

Barrier protection - A barrier from oxygen, water vapor, dust, etc., is often required.
Permeation is a critical factor in design. Some packages contain desiccants or Oxygen
absorbers to help extend shelf life. Modified atmospheres or controlled atmospheres are
also maintained in some food packages. Keeping the contents clean, fresh, sterile and safe
for the intended shelf life is a primary function.

Containment or agglomeration - Small objects are typically grouped together in one
package for reasons of efficiency. For example, a single box of 1000 pencils requires less
physical handling than 1000 single pencils. Liquids, powders, and granular materials need
containment.
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Logistics & Supply Chain Management

Information transmission - Packages and labels communicate how to use, transport, recycle,
or dispose of the package or product. With pharmaceuticals, food, medical, and chemical
products, some types of information are required by governments.

Marketing - The packaging and labels can be used by marketers to encourage potential
buyers to purchase the product. Package design has been an important and constantly
evolving phenomenon for several decades. Marketing communications and graphic design
are applied to the surface of the package and (in many cases) the point of sale display.

Security - Packaging can play an important role in reducing the security risks of shipment.
Packages can be made with improved tamper resistance to deter tampering and also can
have tamper-evident features to help indicate tampering. Packages can be engineered to
help reduce the risks of package pilferage: Some package constructions are more resistant to
pilferage and some have pilfer indicating seals. Packages may include authentication seals
and use security printing to help indicate that the package and contents are not counterfeit.
Packages also can include anti-theft devices, such as dye-packs, RFID tags, or electronic
article surveillance tags, that can be activated or detected by devices at exit points and
require specialized tools to deactivate. Using packaging in this way is a means of loss
prevention.

Convenience - Packages can have features which add convenience in distribution, handling,
stacking, display, sale, opening, reclosing, use, and reuse.

Portion control - Single serving or single dosage packaging has a precise amount of contents
to control usage. Bulk commodities (such as salt) can be divided into packages that are a
more suitable size for individual households. It is also aids the control of inventory: selling
sealed one-litre-bottles of milk, rather than having people bring their own bottles to fill
themselves.
Packaging types
It is sometimes convenient to categorize packages by layer or function: "primary", "secondary", etc.

Primary packaging is the material that first envelops the product and holds it. This usually is
the smallest unit of distribution or use and is the package which is in direct contact with the
contents.

Secondary packaging is outside the primary packaging – perhaps used to group primary
packages together.

Tertiary packaging is used for bulk handling, warehouse storage and transport shipping. The
most common form is a palletized unit load that packs tightly into containers.
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Logistics & Supply Chain Management
Tertiary packaging
These broad categories can be somewhat arbitrary. For example, depending on the use, a shrink
wrap can be primary packaging when applied directly to the product, secondary packaging when
combining smaller packages, and tertiary packaging on some distribution packs.
MATERIALS USED FOR TRANSPORT PACKAGING
The following materials are commonly used for Transport Packaging:
1. Wood
2. Corrugated fibreboard
3. Paper-based materials
4. Textile packaging materials
5. Plastics
6. Cushioning materials
1. Wood
Wood used for pallets, crates and boxes is one of the most important raw
materials for transport packaging in developing countries and in particular
for those countries which have often abundant natural resources of this
indigenous material. In trade between developing countries, wooden
packaging will continue to play a significant role for many decades to come.
It is too expensive to dismantle or otherwise recuperate used wooden boxes. They take up an
immense volume in the waste disposal system, they are impossible to recycle and very difficult to
dispose off. Many countries are reluctant to accept wood as packages for imported products unless
accompanied by a certificate that the wood has been specially treated to prevent a simultaneous
accidental import of insects or forest diseases (Australia). Regulations regarding fumigation or other
treatment of wood to make it acceptable in target markets must therefore be taken into account –
something which creates severe practical compliance problems, particularly for the small exporter.
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Logistics & Supply Chain Management
2. Corrugated fibreboard
Corrugated fibreboard is no doubt an excellent packaging material and has
rapidly taken over a large part of transport packaging both for domestic and
exported products. Corrugated boxes are light weight, easy to handle,
convenient to utilize on pallets and do not post any particular disposal
problems – being easily recycled by the paper industry in most countries.
3. Paper-based materials
Paper-based materials find applications for transport packaging purposes
mainly as barrier materials combined with plastic, bitumen wax, anticorrosion chemicals etc., and sometimes reinforced with glass fibre or
other threads. In most cases the manufacturing process to make these
materials is rather complicated, and requires a good base paper quality
and a heavy investment in production machinery. It therefore seems more
logical for developing countries to concentrate on the use of plastic films
that can be fairly easily and economically extruded locally.
4. Textile packaging materials
Textile packaging materials are based upon various vegetable fibres such as jute
(burlap), kenaf, cotton, sisal, figue, etc. Gunny sacks are traditionally used for
transporting grains, potatoes, and other agricultural products.
These materials have traditionally found a large use for transport packaging
purposes as sacks, bales, etc. Hygienic and perhaps also economic
considerations make it difficult to forecast any bright future for these materials.
Textile sacks and to a certain degree also bales do not fit very well into modern systems of material
handling, unitizing etc., because of their irregular and ‘rounded’ shapes – they usually do not stack
well.
Even if one has to be pessimistic about the future substantial use of these types of packaging
materials for transport packaging purposes, they might find secondary applications within the
packaging field – maybe as internal wrappings, cushioning materials, etc.
5. Plastics
Plastics provide for many very interesting solutions to a number of transport
packaging problems typically encountered by developing countries today. One
area of application, which until now has been subject only to limited attention,
is the use of plastics as bulk transport packages either rigid as various forms of
tanks or flexible in the form of large shipping bags with a capacity of over one
cubic meter. Even if the investment in containers of this kind tends to be high,
the overall ‘containing’ cost per unit of products packed are very often competitive in relation to
other conventional packaging solutions. Unfortunately, the great distances involved seldom make it
profitable to use such bulk packages or containers on a returnable basis. Some collapsible ‘big bags’
might, however, be utilized many times over, especially if a practical arrangement with the shipping
companies can be worked out.
The greatest use for plastics in connection with transport packaging, however, can be found in other
applications. Sacks made out of woven polypropylene or polythene tape are rapidly taking over from
various types of textile sacks as explained earlier in this paper. Solid film plastic sacks are used for
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Logistics & Supply Chain Management
the transport of chemicals, fertilizers, etc., and in some cases for agricultural products – with
perforations in the sack to allow the packed products to ‘breathe’.
The most interesting application at present for plastics in transport packaging is, however, related to
unitizing of loads. Pallets or skids, carrying a number of smaller transit packs or even consumer packs
are more and more provided with a containing and protecting cover of shrink film or stretch film.
This operation is neither complicated nor particularly expensive, and can be performed at varying
degrees of automation and sophistication.
6. Cushioning materials
A particular group of packaging materials, which has obviously not
been treated with sufficient importance until now, consists of various
cushioning materials. More and more developing countries today are
trying to develop their production and export of non-traditional
products, such as, for instance, handicrafts, pottery, electronics and
other types of manufactured products. Many of these products are
fragile and need extra protection, especially during export shipments.
This is also as a matter of fact applicable for certain agricultural products such as pineapples,
mangoes and other sensitive tropical fruits.
The cushioning materials currently in use are often very rude, ineffective and questionable as to
their present and future acceptance in industrialized target markets. Among all the indigenous
fibrous materials, often available in abundance in developing countries, there are many interesting
alternatives to currently used old newspapers and other paper waste, hay and straw, which are
unacceptable and sometimes even banned in many importing countries. New and simple,
inexpensive manufacturing processes should be developed to utilize indigenous materials such as
animal hair, coconut coir, jute, kenaf and similar natural fibres for cushioning purposes. Various wet
pulpingforming- drying processes of e.g. waste paper, straw, bagasse etc., could also be feasible to
develop for increased use in developing countries. The main objective should be to find feasible
alternatives to investment-heavy processes as for example, the manufacture of moulded
polystyrene foam, plastic films with trapped bubbles of air, etc. Expanded plastics no doubt give
excellent shock protection in transport packaging, but the moulds require costly investments unless
polystyrene sheets and blocks, made for insulation purposes, however, often provide for a more
economic solution.
Symbols used on packages and labels
Many types of symbols for package labeling are nationally and internationally standardized. For
consumer packaging, symbols exist for product certifications, trademarks, proof of purchase, etc.
Some requirements and symbols exist to communicate aspects of consumer use and safety.
Recycling directions, Resin identification code (below), and package environmental claims have
special codes and symbols. Bar codes (below), Universal Product Codes, and RFID labels are common
to allow automated information management.
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Resin identification code
Bar Code Label
Label application to a pallet load
Technologies related to shipping containers are identification codes, bar codes, and electronic data
interchange (EDI). These three core technologies serve to enable the business functions in the
process of shipping containers throughout the distribution channel. Each has an essential function:
identification codes either relate product information or serve as keys to other data, bar codes allow
for the automated input of identification codes and other data, and EDI moves data between trading
partners within the distribution channel.
Elements of these core technologies include UPC and EAN item identification codes, the SCC-14 (UPC
shipping container code), the SSCC-18 (Serial Shipping Container Codes), Interleaved 2-of-5 and
UCC/EAN-128 (newly designated GS1-128) bar code symbologies, and ANSI ASC X12 and
UN/EDIFACT EDI standards.
RFID labels for shipping containers are also increasing in usage. A Wal-Mart division, Sam's Club, has
also moved in this direction and is putting pressure on its suppliers for compliance.
Shipments of hazardous materials or dangerous goods have special information and symbols (labels,
plackards, etc) as required by UN, country, and specific carrier requirements. Two examples are
below:
With transport packages, standardised symbols are also used to aid in handling. Some common ones
are shown below while others are listed in ASTM D5445 "Standard Practice for Pictorial Markings for
Handling of Goods" and ISO 780 "Pictorial marking for handling of goods".
Fragile
Do not use hand hooks
This way up
58
Keep away from sunlight
Logistics & Supply Chain Management
Keep away from water Centre of gravity
Clamp as indicated Do not clamp as indicated
Packaging development:
Package
development
involves
considerations
for
sustainability,
environmental responsibility, and
applicable
environmental
and
recycling regulations. It may involve a
life cycle assessment which considers
the material and energy inputs and
outputs to the package, the packaged
product (contents), the packaging
process, the logistics system, waste
management, etc. It is necessary to know the relevant regulatory requirements for point of
manufacture, sale, and use.
The traditional “three R’s” of reduce, reuse, and recycle are part of a waste hierarchy which may be
considered in product and package development.
Prevention – Waste prevention is a primary goal. Packaging should be used only where needed.
Proper packaging can also help prevent waste. Packaging plays an important part in preventing loss
or damage to the packaged-product (contents). Usually, the energy content and material usage of
the product being packaged are much greater than that of the package. A vital function of the
package is to protect the product for its intended use: if the product is damaged or degraded, its
entire energy and material content may be lost.
Minimization – (also "source reduction") The mass and volume of packaging (per unit of contents)
can be measured and used as one of the criteria to minimize during the package design process.
Usually “reduced” packaging also helps minimize costs. Packaging engineers continue to work
towards reduced packaging.
Reuse – The reuse of a package or component for other purposes is encouraged. Returnable
packaging has long been useful (and economically viable) for closed loop logistics systems.
Inspection, cleaning, repair and recouperage are often needed.
Recycling – Recycling is the reprocessing of materials (pre- and post-consumer) into new products.
Emphasis is focused on recycling the largest primary components of a package: steel, aluminum,
papers, plastics, etc. Small components can be chosen which are not difficult to separate and do not
contaminate recycling operations.
Energy recovery – Waste-to-energy and Refuse-derived fuel in approved facilities are able to make
use of the heat available from the packaging components.
Disposal – Incineration, and placement in a sanitary landfill are needed for some materials. Certain
states within the US regulate packages for toxic contents, which have the potential to contaminate
emissions and ash from incineration and leachate from landfill. Packages should not be littered.
59
Logistics & Supply Chain Management
Development of sustainable packaging is an area of considerable interest by standards organizations,
government, consumers, packagers, and retailers.
Packaging machines
Bottling lines for beer plant
A choice of packaging machinery includes: technical capabilities, labor requirements, worker safety,
maintainability, serviceability, reliability, ability to integrate into the packaging line, capital cost,
floorspace, flexibility (change-over, materials, etc.), energy usage, quality of outgoing packages,
qualifications (for food, pharmaceuticals, etc.), throughput, efficiency, productivity, ergonomics,
return on investment, etc.
Packaging machines may be of the following general types:

Blister packs, skin packs and Vacuum Packaging Machines

Bottle caps equipment, Over-Capping, Lidding, Closing, Seaming and Sealing Machines

Box, Case and Tray Forming, Packing, Unpacking, Closing and Sealing Machines

Cartoning Machines

Cleaning, Sterilizing, Cooling and Drying Machines

Converting Machines

Conveyor belts, Accumulating and Related Machines

Feeding, Orienting, Placing and Related Machines

Filling Machines: handling liquid and powdered products
60
Logistics & Supply Chain Management

Inspecting, Detecting and Check weigher Machines

Label dispensers Help peel and apply labels more efficiently

Package Filling and Closing Machines

Palletizing, Depalletizing, Unit load assembly

Product Identification: labeling, marking, etc.

Shrink wrap Machines

Form, Fill and Seal Machines

Other speciality machinery: slitters, perforating, laser cutters, parts attachment, etc.

Bakery goods shrinkwrapped by shrink film, heat sealer and heat
tunnel on roller conveyer

High speed conveyor with bar code
scanner for sorting transport packages

Label printer applicator applying a label
to adjacent panels of a corrugated box.

Robotics used to palletize bread
NOTES
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8.POST HARVEST AND OFF-FARM PRESERVATION TECHNIQUES
Preservation of farm products is an essential engine in developing countries, where production is
focused on short harvesting period. Furthermore, there is one open question: why should we have
a closer look at the production and post-harvest aspects?
It is obviously to: Valorize the production surpluses, increase and secure the producers’ incomes,
favor income generating activities, and increase production in general.
Indeed, the huge quantities produce through crop farming (cereals, vegetables, fruit…) as well
as livestock farming (meat, milk…) suffer under various distortions. They are due to the lack of
appropriate technologies for preservation and transformation, low financial means,… and this
leads to food shortages at some periods of the year, to the non-valorization of harvested products,
and it seriously affects household economy.
Duration of preservation depends on the crop. Preservation offers the following advantages:
 Adapt the product to market conditions,
 Fight against the momentary decay of the product thanks to climate
 Increase the nutritional and micro biological qualities of the product
 Protects the product against pests.
The consequences of bad preservation are numerous, as follows:
 Preservation time reduced
 Important loss in stock
 Lack of means for reliable preservation
 Inappropriate workflow
BASIC PRINCIPLES FOR PRESERVATION OF CROP AND LIVESTOCK PRODUCTS
Preservation goal
1. Keep the natural culinary and gustative quality of preserved products
2. Limit product decay until it is marketed
3. Prevent food shortage periods
4. Answer the customers’ needs according to their choices. It is very important here to know
what the preservation conditions are, depending on the biochemical composition of the
product and its preservation time. To preserve cereals and vegetable, the humidity rate
must stay between 12% and 15 %.
Basic preliminary steps for good preservation
a. Upstream steps:
- Weigh-in (weight, humidity, temperature, oil content)
- Labeling,
- Sorting,
- Cleaning
b. Downstream steps:
It is important to take the following four aspects into account:
- Preparation of stock
- Product packaging
- Stockpiling
- Stock management (humidity, pest controls)
- Follow-up on the evolution of the product in stock
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Factors causing crop and livestock products’ decay
According to these factors, the operator will try to master what follows:
1. Prevent and control microbes
2. Stop enzymatic activity
Then it will be necessary to control
 Water content
 Air humidity
 Luminosity
 Protection against parasites
Preservation techniques
1. Drying
This technique entails the partial and progressive elimination of water contained in the product.
A )Drying technology through wet method
When warm air flows through a product mass, it takes off a large quantity of water. It is
necessary to calculate the operating time, so that water content standards are respected
according to the product. Example: tea factory. This technique requires a specific device,
with heating material such as: wood, coal, peat. Key features:
- Easy to control
- Applicable in any season
- Expensive
B ) Natural sun-drying method
It consists in spreading out the products in the sun to lower the humidity content. Often,
this technique goes hand in hand with tossing the product to make the drying process
uniform. Key features:
- Accessible
- Less expensive
- Efficient
- Difficult to evaluate drying
- Mainly for small scale farmers
Drying is very important in preserving crop and livestock products. But it is important to
respect the following advice:
- Low temperature
- Stabilized humidity
- Ban desiccation
2. Boiling, heating, and pasteurization
Once applied on a product, these techniques imply a biochemical change (in the chemical
composition of the products), which allows for good preservation. Depending on the product,
boiling can be followed by drying before preservation.
Example :
- Cassava leafs can be kept for 6 months after having being boiled
64
Logistics & Supply Chain Management
- Milk pasteurization.
3. Preservation by chemical usage
Some products can be kept via chemical means. It is the case when sodium chloride is used to
preserve meat, fresh vegetables, when citric acid is used for banana preservation, when enzymes
are used to stop bananas from getting ripe, etc.
4. Vegetable preservation
The following steps for preparation are to be respected:
Washing
Peeling or crushing
Cutting the product in pieces
Drying
Parameters to be respected
N Parameters
o.
Carrots Green
beans
Onions
Cabbage
Tomato
es
1
Initial water content %
75
70
80
80
95
2
Recommended final water content %
5
5
4
4
10
3
Maximal temperature °C
75
70
55
55
65
4
Drying rate
1/10
1/8
1/10
1/18
1/10
5
Drying criteria
Brittle and
crunchy
Brittle
and dark
-
Hard
brittle
6
Preservation time
12 months
12 months
12 months
12 months
5. Preservation of fruits
Fruit type
1. Unripe pineapple
2. Ripe pineapple
3. Very ripe pineapple
4. Avocado
5. Bananas
6. Prunes
7. Strawberries
8. Guavas
9. Oranges
10. Lemons
11. Papaya
12. Mango
Temperature
13-Nov
7,5
10-Jul
10-May
15-Nov
5,5-7
0
10-Aug
6-Apr
15-Nov
8,5-10
9-Jul
Preservation time
2-4 weeks
2-3 weeks
3-4 weeks
2-4 weeks
1,5-3 weeks
4-5 weeks
5 weeks
2 weeks
6 months
1-4 months
1-2 weeks
7 weeks
65
and
Leather
consistency
Logistics & Supply Chain Management
Fumigation
Fumigation is a method and process of pest control that completely fills an
area with gaseous pesticides to suffocate or poison the pests within.
Pesticide fumigation process is utilized for control of pests in buildings
(structural fumigation), soil, grain, and produce, and is also used during
processing of goods to be imported or exported to prevent transfer of
exotic organisms. Fumigation process is the recognized means of
combating infestation by the application of fumes to disinfect or purify.
Fumigation usually involves the following phases:




First the area to be fumigated is usually covered to create a sealed environment.
Next the fumigant is released into the space to be fumigated.
Then, the space is held for a set period while the fumigant gas percolates through the space
and acts on and kills any infestation in the product.
Next the space is ventilated so that the poisonous gases are allowed to escape from the
space, and render it safe for humans to enter.
Fumigant
A fumigant is a chemical at a particular temperature and pressure that
can exist in gaseous state in sufficient concentration and for sufficient
time to be lethal to insect and other pests.
Most commonly used fumigants for commodities in India:
Methyl Bromide and Phosphine are the two most common fumigants used for treating raw
commodities, processed food and wooden packaging material. In hospital settings
and pharmaceutical manufacturing, ethylene oxide fumigation is used for sterilization. The various
options available for fumigation include:








Phosphine
Methyl Bromide
1,3-dichloropropene
Chloropicrin
Methyl isocyanate
Hydrogen cyanide
Sulfuryl fluoride
Formaldehyde
Differences between Methyl Bromide and Phosphine gas ?
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Methyl Bromide (MBr) is a liquid under pressure that turns into a gas when released after heating. It
is stored in cylinders or cans. MBr is highly penetrative, can kill insect eggs, highly toxic to a broad
spectrum of insects and similar pests, and is lethal even in relatively short exposure periods (typically
24 hours for non-perishables). However, it reacts with food containing high levels of fat, certain
types of rubber, etc, and is forbidden for some commodities.
Aluminum Phosphide (ALP) when allowed to react with atmospheric water vapor, produces
Phosphine gas. It is available in tablet form. ALP exposure periods are higher (typically 72 hours) and
is not lethal to all insect eggs. However, ALP can be safely used for oil seeds and fatty foods like
cashew nuts.
Methyl bromide is very effective against insect pests, but is not lethal to commonly found fungal
species. Therefore, for wooden packaging material etc., an anti-fungal treatment is required in place
of Methyl Bromide treatment.
Both fumigants are highly toxic to humans and pets. As the fumigation treatments involve complex
procedures, they have to be performed in a precise manner in the fashion prescribed by the national
standards.
Choice of Fumigant:
The Plant Protection Adviser to Government of India issues notifications from time to time (PQ
orders) relating to the fumigant and dosage to be used for different
commodities.
In case of shipments to Australia, only Methyl Bromide fumigations are
acceptable.
Fumigation of Wooden Packaging (including dunnage) is mandated under
the International Standards for Phytosanitary Measures (ISPM) -15, which
recommends using Methyl Bromide only.
Organizations/Agencies Responsible for Fumigation Treatments
Each of the following parties is responsible for themselves and to one another for the successful
conduct of fumigation operations1.
2.
3.
4.
5.
The person or organization seeking the treatment
Importer/exporter of the consignment
Regulatory agencies (Central/State Governments)
Transport providers
Other agencies such as customs, port authorities, shipping agents etc.
Responsibilities of the owner of the commodity / shipping agent / warehouse manager / agent
representing buyer/ exporter or importer
Fumigation is a hazardous operation, and generally it is a legal requirement that the operator
carrying out the fumigation operation holds official certification to perform the fumigation.
The correct ventilation of the area is a critical safety aspect of fumigation. It is important to
distinguish between the pack or source of the fumigant gas and the environment which has been
fumigated. While the fumigant pack may be safe and spent, the space will still hold the fumigant gas
until it has been ventilated.
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



Choose a fumigation agency that holds a valid license issued by State Government and
accredited by the Plant Protection Adviser of the Government of India, Directorate of Plant
Protection, Quarantine & Storage.
Inform the fumigation agency before commencing the treatment, about the quarantine
treatment requirements of the commodity, the composition of consignment; storage condition
and place of the commodity; end use of the consignment; package conditions and specific
market requirements (fumigant residue limits, where applicable) and other contract or
agreement requirements, where applicable.
Ensure sufficient time is available to perform treatments to meet the quarantine requirements.
Inform the transport contractor not to move the fumigated consignment or container until the
degassing and release of the commodity or container.
Ensure proper stocking of consignment or placing container on the ground to facilitate carrying
out proper treatment.
SMALL-SCALE PRESERVATION TECHNOLOGY WITH COAL COLD STORAGE
Introduction
The perishability if some farm products is still a challenge for the preservation of products to be
marketed or transformed.
In the farming world of developing countries, producers can still not afford refrigerating units.
However, there are some technologies affordable for the average producers, which allow them to
protect their products from decay, for example coal cold storage.
Indeed, this preservation technique was developed by the ADAR (agence de développement de
l’agri-business au Rwanda), the agency for agri-business development in Rwanda. The technique
was very quickly adopted by companies working on agri-food transformation in Rwanda, and it is
especially used to preserve perishable farm products such as vegetable and fruit, on a short-term
basis, right after harvest.
Technique principle/Cooling with humid air flow (evaporation)
Generally speaking, when a cold airflow goes through a product mass, the products get colder,
taking the temperature of the flow.
The technique implies a structure with walls made out of coal, built in such a way that the
interstices let the external air flow in. The flow gets colder when it meets the humid, often
watered coal walls (see structure).
The ambient temperature inside of the stock goes down to about 7 to 10°C, and the hygrometry
(air humidity) reaches 85%.
This temperature is ideal to preserve most fruit and vegetables, and therefore, this technique
allows for a 2 weeks preservation of products in transit for marketing or transformation.
Structure and technique procedure
Structure
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Other measures/dimensions
 Distance between roof and coal wall: 10cm for ventilation purposes
 Pile height: 2m
Materials
 Coal bearing wall with trellised supports
 Bottom slab made out of well-evened stones or concrete
 Roof made out of grass or wooden tiles for support
Conducting the technique
 Watering the walls (siphon water over the wall) at least twice a day.
 The watering frequency depends on the water quantity and the season.
 Check regularly the products to be preserved
 It is well advices to build this structure next to water to facilitate watering.
Advantages and disadvantages of the technique
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9. A study on Agribusiness Supply Chain
India appears poised for an expansion of investment to modernize agribusiness including input
supply, distribution and marketing and food processing, despite the tardy pace of change in
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agricultural policy, trade and investment in the country. Significant investment opportunities are
likely in the markets for both basic and high-value foods, where demand can be driven by rising
incomes and price reductions achieved through increased integration and efficiency in the supply
chain.
Agribusiness Supply chain in India – Trends
The Indian rural market is characterized with a large number of buyers and sellers but at the same
time, it is highly scattered. Although, there are a large number of buyers and sellers, the concept of
perfect competition does not prevail here. The Indian agribusiness is featured by the presence of too
many small intermediaries resulting in small size businesses so their amount of investment and
potentiality to procure is substantially less. Moreover, the existence of too many small
intermediaries result in increased result in an increased cost in the entire supply chain instead of
adding value to it. Bulk procurement by the government or by any big agency is one of the ways to
get out of this problem. This is expected as the decrease in the number of intermediaries and bulk
procurement will narrow the gap between the price we pay and the price paid to the farmers at the
time of procurement. Simultaneously, because of the presence of a large number of intermediaries,
the margins of individual wholesalers and retailers are low as they transact in a very low quantity.
Above all the stringent Agricultural Produce Markets Acts makes the consolidation of agricultural
produce next to impossible. To understand the Indian agribusiness supply chain it is required to
undergo a brief dissection of the prevalent supply chains of agri-business in India. India follows
normally three methods in agribusiness supply chain :
1. Farm Gate Purchases : In this process, there is a prior arrangement between the buyers and
the farmers. Keeping in view the unreliability of process-able varieties and variability of the
procurement prices, the arrangement is normally made prior to the harvest. Buyers in this
case are the marketing groups or the cooperative or a trader (contacted through a collection
center). This is a normal process in the fruits market. The major advantage of this process is
that it results in long-term relationship between the buyers and sellers. While checking
quality is costly, the trust and the reputation of the sellers is the only parameter for the
buyers to judge the quality of the product. Next, this process reduces the number of
intermediaries in the supply chain, thereby reducing the gap between the supplier price and
the customer price. But, one of the lacunas of the system is that farmers cannot go to the
best bid at the time of harvest. Another problem to implement the system due to poor road
conditions in rural India.
2. Local Markets : This is alternatively known as Mandi system. Here, the farmers accumulate
their produce and in specific days they sell it to the rural hats organised in a particular day in
a central place in a village or district centre or beside a village’s access road. Normally, the
small traders or commission agents buy the agricultural produce from the farmers sell it to
the district level mandis and the district lever traders and wholesalers sell the produce to the
large traders and wholesalers. But in this system because of the
presence of large number of intermediaries the cost of supply chain
further increases. This results in the further increase in consumer
price. As the assortment is made from various sources, the quality of
processed food product cannot be guaranteed. This drags the supply
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chain of Indian agribusiness into the vicious cycle of low demand, low capacity consumption,
high per unit cost and low demand.
3. Assembly Markets : In some places of the country, we find the existence of assembly
markets where agricultural produce are traded in bulk, either by the producers themselves
or by traders to the outside buyers. The buyers are mainly the collection agents of the urban
wholesalers. These markets operate throughout the year (sometimes seasonal depending
upon the nature of the farm produce) and usually in combination with the local market are
located on main highways, main roads, or ferri ghats.
4. Direct Sales to Urban Markets : In this method, the farmers directly sell their products to
the urban market, retailers or the wholesalers. However, due to lack of infrastructural
facilities, poor road conditions and the precarious financial status of the poor marginal
farmers, this method largely limited to very few states such as West Bengal.
In this context we can say that to strengthen the base of the Indian agribusiness, the enhancement
of logistics and favorable law and order is necessary. Secondly, the
food processing industry of the nation, which has not yet been in the
limelight, must be improvised in parallel to the methods of increasing
the agricultural produce. This is the only way of consolidation along
the food chain followed by the development of markets through
enhancement in the vertical integration in the Indian Agribusiness
supply chain. But this kind of vertical integration calls for a huge initial
investment. This necessitates the intervention of either the government or some giant private
agribusiness investor.
Issues to Consider in Developing Markets in India
For selecting the type of market to be used, first of all the assessment of the levels of supply is
necessary. For the existing market only by observing the traders can we understand the flow of
supply. For the developing market, the new or improved prospective markets have to be looked for.
In case of the new market the only way to assess the market is by the demand and supply forecasts.
The second issue for selecting the type of market is the purpose of production. If the farmers
produce fruits and vegetables in bulk for the urban market, then the assembly market would be the
best choice. While in case of export products, reliability is the key factor. So normally the established
independent marketing channels like the farm gate purchase or the rural local market would be
helpful. The third question for selecting the appropriate marketing channel is deciding the area of be
covered by the market, alternatively know as “catchment area”.
However, the use of e-commerce can make a big impact in creating a vertical coordination in the
Indian food chain. Latest information about weather forecast, crop cultivation procedures, postharvest technology, water management through satellite tracking, commercial information, market
information for grains, fruits and vegetables, processed food, low cost technology, government
policies on agriculture and agribusiness can be made effortlessly available to rural masses through
information technology advancement at rural places. The Maharashtra Chamber of Commerce,
Industries and Agriculture has the proposed setting up Gramin Information Centres (GIC) for
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facilitating the latest information on technology and market access, which will permit farmers and
Rural Food Processing Industries to sketch their activities on commercial lines for getting maximum
value for their produce. In order to sustain, it is vital for the food industry, that it has well developed
backward linkages. Information technology can play an important role in further strengthening these
linkages.
Emergence of E-Choupal
In this scenario, sometime back, the ITC chose the most unexploited avenues of agribusiness. As per
the annual report of 2004, “It had foreseen an inspiring vision; selected a challenging corporate
strategy, and formulated a world-class execution plan with consummate investments in technology,
brands, people and governance. The result: ITC of today is a completely transformed organization,
driven by vision, powered by verve; internationally viable; a national asset. ITC has evolved from
being a leading agri-commodity exporter to a major player across the agri-value chain. But the most
unique intervention is perhaps the concept of ‘e-choupal’, which catalyzes the potential to address
several issues confronting the competitiveness of the traditional Indian agricultural value chain. ‘eChoupal’ is till date the unparallel way to deliver real-time information and customized knowledge in
the local language to the marginal farmers and small landholders to improve their decision-making
ability. Thus, it is drive to align the farm output with the market demand so as to bring a stable day
reach equilibrium in this arena.
Launched in June 2000, ‘e-Choupal’ has already become the largest initiative among all Internet
based interventions in rural India. ‘e-Choupal’ services today to more than 3.1 million farmers
growing a range of crops – soyabean, coffee, wheat, rice, pulses over 31,000 villages through 5050
kiosks across siz states (MP, Karnataka, AP, UP, Maharashtra and Rajasthan). The E-Choupal brings
following benefits to agribusiness:




Relevant and Real-Time Information about price of crops in local & nearby mandis,
weather information along with advisories for the farmers.
Customized knowledge to improve special quality products.
The storage and other logistics facility of ITC also support the high quality farm produce
to maintain its identity from the ‘farm-gate to dinner-plate’ supply chain.
Transaction costs much lower than mandi/Haat chain.
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10. Processed Food Supply Chain
India is one of the major food producing countries in the world, but its share in the international
food trade is minimum. With the liberalization process and growing globalization, there has been a
vast change in the food industry providing infinite scope for both exporters and investors of the food
industry. The changing economic scenario resulting in changes in people’s lifestyle and habits led to
a growing demand for innovative food products and ready-to-eat processed food or readymade food
stuff. Hence, the manufacturers of the food products have started manufacturing the same so that it
can meet the ever changing taste of consumers. People also prefer healthy and safe food for
maintaining their health. This demand can be fulfilled with the help of effective processed food
supply chain operations. The food processing, combined with marketing, help in finding solution for
the problems of agriculture surplus, rural job opportunity, reducing wastage, and better
compensation to the developers. This sector needs huge private investment for establishing
sufficient infrastructure facilities and supply chain. Hence, it is important that attention is paid to
supply chain, cold chain, post-harvest losses and improving linkages of farming to the food
processing industry.
Food Process Supply Chain
The food processing industry plays a vital role in both national and international markets, in
connecting farmers to the end user. The food products like wheat and rice products, sugar, oil,
pulses etc, are converted into edible form by the food processing industry and then they are sent for
producing processed food like biscuits, cakes, fruit breads and other bakery products, confectionery
products, dairy products, fast food, packed breakfast, meat and fish products. Before the food
products reach consumers, it crosses various stages in its supply chain. The food supply chain
comprise three stages: many sectors like agriculture, horticulture, sea food are the primary
producers, the manufacturers who process the food into a ready-to-eat format with the packaging
companies are in the middle stage, and the retailers, wholesalers and caterers are the last stage of
the food supply chain. The processed food products do not follow a set pattern in its movement
from one stage to another in the food supply chain before it reaches the consumer. The supply of
processed food, however, follows the essential stages of supply chain operations such as
procurement and sourcing, inventory management, warehouse management, packaging and
labeling system, distribution management, etc.
Procurement and Sourcing
In the supply chain operations, procurement and sourcing is significant and primary operative
function. The food products are procured from the producer/farmers for sourcing to food
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manufacturing industry. In order to achieve long term economic sustainability the farmers should be
linked to the market as they are involved in the production of raw material for industry use. The
food processing industry gets involved directly in the procurement process. Sometimes, vendors
may also supply material to the processing industries. The procurement and sourcing process is
based on the demand for the particular food product. For identifying the demand, the food industry
must do demand forecasting, based on those demand, it can source the material and can also
manufacture the precuts, so that the industry can avoid wastage. The demand for the food product
will not be the same at all times. It may change according to the season, so the industry should
manage its sourcing and procurement as well. The food retailers of the developed countries source
year-round supply of food products for local consumption. They even import from the developing
countries to meet the local demand.
Inventory Management
An inventory management is the next most important operating function of the processed food
supply chain. As the demand for the processed food products is not same throughout the year, the
food processing industry must have proper inventory management for meeting the whole year
demand. The food industry has to maintain a particular level of inventory stock at all times to meet
customer demand without gap. The industry maintains order process system to sustain the
continuous production flow. If the level of inventory reaches minimum stock levels, the industry will
automatically make an order for procuring the material. At the same time the food processing
industry should focus on the investment on stock, while carrying out inventory management so that
it can avoid money blocking in the stock. The food industries also concentrate on quality stock with
safety and output with minimum inventory level in order to maintain the cost effectiveness on
inventory.
Warehouse Management
Warehouse management is a very significant supply chain infrastructure
in the food processing industry. Before material reach the processing
industry, the inventory gets stored at the warehouse, after which it
moves to manufacturing plant for conversion. A proper technology can
be adopted for tracing and identifying the stock levels in the warehouse.
Normally, the warehouse will be built at a place convenient to logistic
the raw materials to various production units and the finished products to the retail outlets. The
warehouse location will facilitate supply chain process in shipping, loading in trucks, rails etc. the
warehouse helps the food producers in supplying quality products and safe food to the consumer.
The facilities available in the warehouse will differ according to the nature of the products.
Cold Chain
The life of perishable product is very short and the marketing facilities
also poor in some countries. The cold chain is one of the supply chain
systems which facilitate maintaining better storage conditions for the
perishable products right from the farmers to consumers in the process
of food supply chain. The cold chain reduces the spoilage of the food
products and maintains the quality of the post-harvested products.
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Generally, an infrastructure of the cold chain comprises of cold storage facility, pre-cooling system,
refrigerated carriers, warehouse management, technology, traceability, finance and insurance. The
cold chain is one of the important components of the retail food market.
In the current scenario, the market share for the ready to eat food, fast food and frozen food has
increased. There are many kinds of temperature levels like frozen, cold chill, medium chill, and exotic
chill according to the nature of the products. If the food industry fails to maintain suitable
temperature, the product life cycle will shorten, and the product will become unfit for consumption.
The management of cold chain helps in maintaining suitable temperature when the product moves
from the farm to consumer, for example from the farmer in Himachal Pradesh to the consumer in
New York. There are certain governmental norms laid down for food manufacturers and retailers for
maintaining some standard and hygiene. The technology advancement in the electronic tagging is
very useful to monitor the temperature in the cold chain. The food processing industry has to
establish the cold chain facility, in order to deliver quality food product.
Packaging and Labeling System
In recent days, packaging is one of the most important and integral parts of the processed food
supply chain operation and it protects the food products from damage. The package used for
efficient distribution, gives information about the products to the consumers and it helps to develop
the sales of the product in the competitive market. The retail industry plays a vital role in the
selection of the packaging material and designs of the packaging used in the processed food supply
chain. As both consumer package and transport packages are significant to ensure the quality of
product and low cost of distribution, the retail industry pays more attention to these aspects. The
labeling system comprise the indication of various ingredients mixed in the food products, hard
coding, date of expiry, manufacturing date and caloric content that will help the consumers know
about the product in detail.
Distribution Management
Distribution management plays a crucial role in the processed food supply chain operation. In the
distribution of processed food products, there are a number of intermediaries involved in the supply
chain of food products right from farmers/producers to final consumers. There are three important
components involved in the distribution of processed food. They are:



Transport infrastructure, such as roads, vehicles, rail transport, airports and ports.
Food handling technology and regulation, such as refrigeration and storage,
warehousing.
Adequate source and supply logistics, based on demand and need.
All these components should be managed effectively for achieving cost effective supply chain
efficiency.
Food Safety and Hygiene
Food safety is one of the important features of processed food. The primary expectation of
consumers, in the purchase of processed food, is safety as well as quality. The food processing
industry should concentrate on the production and supply of hygienic and quality food products.
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There is a chance for defects occurring at any point in the whole process of food supply chain. The
manufacturer and supplier can adopt the technology and information sharing in order to effectively
manage the supply chain in all stages, right from producer to consumer, for delivering quality food.
Efficient Consumer Response (ECR) and Collaborative Planning Forecasting and Replenishment
(CPRF)
Effective Consumer Response is a consumer product and food industry strategy in which both
supplier and distributor work closely to get consumer value. The ultimate focus of the supplier and
distributors together is on the supply chain efficiency for reducing operation cost and satisfying
customers with minimum resource. The collaborative planning, forecasting and replenishment
(CPRF) is a concept which integrates and enhances the entire food supply chain process. It brings
partners together to share marketplace information to be used to create a market specific plan that
includes forecasts of purchases (and untimely sales), by stock keeping units (SKUs), by week, and in
specific quantities. The supplier can plan their supply chain operation effectively only if he has access
to sales forecasting. He should also have better visibility to plan the replenishment in an effective
manner. The supplier can plan the supply chain operation, based on forecasting and replenishment.
RFID Technology in Processed Food Supply Chain
RFID technology is an advanced technology
than barcodes. It has tremendous impact on
the food supply chain operation, especially
for identifying the food products, tracking
visibility and transparency. The RFID
technology system could optimize the
inventory level, content of food package,
products origin and identify the movement.
By using RFID smart labels and barcode
control system beyond the warehouse, the
supplier can do his work efficiently, quickly
and can remove the defective or spoiled
goods from the supply chain operation.
The RFID technology system uses a wireless system that enables tracking of products’ movement,
items, location and temperature. The RFID tags attached to the products will also help find the
product when one has to detect a single unit.
Key Applications of RFID Technology in the Processed Food Distribution
Efficient Management: The RFID tags and barcodes are the key products that help to effectively
manage and track the food products from origin to consumer in the supply chain.
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Captures Data: The RFID tags automatically capture lot codes, date of expiry and matches those
with the database, enabling accurate, targeted recall management.
Tracking Assets: Bins, tracking pallets and other returnable assets are considered as other
ways to reduce operating cost and safety stock requirements.
Opportunities for Developing Processed Food Supply Chain
Cold Chain Infrastructure
The cold chain is one of the significant infrastructures in the processed food supply chain. The
investment on cold chain infrastructure is significant and will yield slow returns. The cold chain
infrastructure contains warehouse system, coolers, trucks and refrigerated facility, shopping
malls, and carriers.
Third Party Logistics
The supply of food product should ensure temperature suitable to the product life and avoid
manual handling, because it can reduce the life and quality of the food. The supplier can use the
logistics providers with air conditioned trucks, automatic material handling system, trained
manpower to help the entire food supply chain operation. The suppliers and implement the
cross docking for reducing shipment time and inventory.
Food Processing Industry
The Government of India provides many incentives to start food processing industries in both
Agri-Export Zone and other areas. It also gives 100% FDI. The sourcing of raw material is very
easy if the industry is built in agri-Export Zone, because there are participants with knowledge
about food processing.
Retail
The retail sector seems to be going through transition phase in India. Around 75% of the food
precuts are sold by retail stores. There are 12 million retail stores selling food products and
other related items. The retail sector comprises push carts, wet markets and kirana stores. Most
of them face a capital crunch and lack sopping variety. A well developed retail sector can boost
up agriculture and food processing industries and other industries. Such a development will help
India compete with global market.
The Future Outlook
The food supply chain is a major part of the food processing industry. It should be managed
efficiently in order to make profit, supply quality food products to consumer, and maintain food
safety and time. The effective management of various food supply chain operations like
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procurement and sourcing, inventory management, warehouse management, packaging and
labeling system, distribution management will help the food processing industry to play well in
the competitive environment. The food product manufacturer can use Efficient Consumer
Response (ECR) for reducing the operation cost and get maximum benefit with minimum
resource. The implementation of collaborative planning forecasting and replenishment (CPRF)
concept can be used for planning about the entire supply chain operation effectively from
farmers to consumers. The adoption of technology like RFID will help the food manufacturer to
track the food product, its location, right from origin to the end of the supply chain. The food
manufacturer can also use the available opportunities for developing the processed food supply
chain.
Case Study: Nikora Ltd., a Success Story
Nikora, Ltd. began operations in 1998 under the direction of Mr. Vasil Sukhiashvili and has grown to
a 2002 sales year projection of 8,400,000 Lari. The owner has overcome one of the primary
constraints identified by almost all agribusinesses, financing, by utilizing his own investment from
income as an expatriate worker for eight years in Russia, utilizing creative financing from suppliers
and distributors, and managing growth and operations to control cash flow.
Mr. Sukhiashvili noted a lack of high quality processed meats in Tbilisi. In spite of the poor economic
conditions, he thought the people in Tbilisi would buy quality-processed meats if they were priced
competitively with other processed meats. Although he did not conduct a formal market research
study, he had eight years experience in the processed meat business in Moscow, and a sense of
what created ‘value’. Nikora was founded with $150,000 of seed money from his own savings, that
of his family, and a partner from Moscow for whom he had been working; the partner’s ownership
was 15 percent. No money was borrowed; the machinery purchased was old machinery from
locations in Tbilisi. Potential investment partners were contacted; however, all were looking for a
large return on investment and very rapid growth. Mr. Sukhiashvili knew that the meat business was
competitive and the margins were relatively low, so he focused on controlling the cost of production
and reinvesting earnings for expansion.
In the first months of operation, the company almost failed by attempting to ‘buy’ market share and
operate in a traditional manner of purchasing raw materials and processing them for inventory. One
of his first creative moves was to establish two traders as his ‘suppliers’, he entered into a long-term
fixed price supply relationship with them, and required each to provide a $5000 bond to be used to
purchase product on the import or spot market if they were unable to supply him at any time during
the year. He quickly learned the importance of marketing and market chains. Sales on consignment
were quickly depleting his cash flow and products were frequently not merchandised properly since
the shop owner had no risk or exposure if the products did not sell.
He opened his own shops to control this process and increase his control of the presentation of his
product. He knew that high quality products must be presented in a high quality way. After opening
his first shops, he was approached by investors interested in opening similar shops to sell his
products and other complimentary products. He realized that franchising the shops eliminated his
need for capital and inventory financing. The franchise owner receives 10 percent of the gross
revenue to cover his operating costs and provide a profit. The shop owner is not responsible for the
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cost of product, which is provided by Nikora. Nikora collects the money from the shops daily and
holds it until the end of the month, thus he was no longer financing consignment inventories for long
periods, but recovering cash flow on a daily basis. The result from the first investors encouraged
other investors to ask for similar franchises.
For distribution outside Tbilisi and outside his own shops, Mr. Sukhiashvili had been working with a
number of distributors. These distributors were often creating more competition for him than they
were supporting his products. He selected one distributor, agreed to help finance him, and
borrowed money for refrigerated trucks and equipment. The distributor received five percent of the
gross sales price, but Nikora collected the money daily to improve cash flow. Mr. Sukhiashvili uses a
written business and marketing plan, and maintains a sophisticated budget, production tracking, and
accounting program to help determine the results of each week’s operations.
In order to improve performance, he has transferred 30 percent of the company (from his 85
percent ownership) to the employees, making them partners as well as employees. He now
produces 70 products; up from 15 produced initially, and has recently started exporting to Armenia
and Azerbaijan. He now employees 250 people, up from 30 at the end of the first year. He believes
that most businesses in Georgia are too focused on rapid profit and are unwilling to grow their
business by reinvestment.
Following lessons can be learnt from this case study:
 Have a written business and marketing plan, identify constraints as an opportunity and find
the solution to the constraint that result in a competitive advantage.
 Know the prices of products produced in the market, and be competitive.
 Manage raw material supplies, prices and quality to assure they do not have a detrimental
impact on the business.
 Manage cash flow carefully, growth creates cash flow problems for companies whether in
Georgia or in other developing countries like India, and reinvest earnings.
 Buying “toys” must wait.
 Borrow carefully; it is a substantial cost to the business.
 Look for win-win solutions.
 Don’t be afraid to “think out of the box.”
This is an example of the kind of entrepreneur and company that SAVE hopes to identify and work
with as clients throughout the project to generate employment growth.
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11. Corporate Farm Supply Chain Initiatives in Agribusiness
The Government of India new agricultural policy envisages that "private sector participation will be
promoted through contract farming and land leasing agreements to allow accelerated technology
transfer, capital inflows and assured market for crop production, especially of oilseeds cotton and
horticultural crop", following this announcements a number of innovative agribusiness models have
come up. Indian corporate and rural India has entered into collaborative partnership through vertical
co-ordination. The common thread among all these initiates have been integrating and tightening
the supply chain. Mahindra's Shubhlabh services Tata Kisan Kendra, ITC e-Choupal, Godrej Aadhar
and DSCL Haryali have emerged as new agribusiness supply chain models.
This vertically coordinated supply chains are supposed to eliminate the inefficiencies in agricultural
marketing which arises due to multilayer intermediaries sucking away a large chunk of the margins
and leaving nothing for the farmer on the one hand and lack of basic availability of infrastructure as
well as technology on the other. These vertical coordination supply chain models are common in
agriculture worldwide. In India, land ceiling laws limited such vertical coordination. Corporate
farming, captive farming or contract farming were only allowed in plantations, degraded or waste
lands and so on.
With the government's change in stand regarding contract farming, a stage is set for such vertical
coordination in Indian agriculture. This chapter evaluates three such attempts by corporate India i.e.
 PepsiCo’s contract farming in Punjab
 ITC's e-Choupal and
 Mahindra Shubhlabh services.
PepsiCo Contract Farming
Vertical co-ordination has emerged as a viable model for food processing industry as well as agricommodity markets in India. These firms face problems of regular supplies and also face the risk of
poor quality products. The new structure in agribusiness supply chain is to move away from deals to
relationship. Neither buyer nor vendor can take each other for granted. Relationships are becoming
mutually independent. Firms are contracting to farmers to plant the contractor's crop on his land.
Farmer harvests and delivers to the firm, a quantum of produce, based upon anticipated yield and
contracted acreage. This is at a pre-agreed price. The relationship between firms can take any form,
just a deal to buy the produce to one where lots of cost sharing and support are provided to the
farmers. In the Indian context despite a restriction on contract farming some exception were
provided to firm on case-to-case basis.
Like farmers all over the world, Indian farmers too are happy with existing contract farming
arrangement in the country. Hindustan Lever Limited, Nijjer and Pepsi are involved in contracts,
where tomato, potato and chillies are procured under contracts and processed into value added
food products for domestic and export markets. Market fed a farmer’s co-operative in Punjab, is
engaged in contract farming in mustard. Rallis and HLL are into wheat, Dynamix dairy in milk, ACE in
floriculture and horticulture. Number of firms engaged in contract farming is increasing every day.
However, the company has sold off its tomato plant to HLL since tomatoes were not fitting into
Pepsi’s export oriented policies. It is still into machine intensive nursery operations. It has almost
wrapped up chilies and its tomato operating is limited by the extent to which it buys from the
contracted farms and open market. In fact as of now Pepsi is concentrating on Basmati and other
varieties of rice.
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PepsiCo has done a wonderful job in Sangrur, district of Punjab. Farmers
are expected to harvest and deliver to the contractor, a quantum of
produce, based upon anticipated yield at an agreed price. Towards
these ends, farmers may or may not supply the farmer with selected
inputs. But, Pepsi went a step further and in their contract farming
model, they involved farmer as a partner. Their model actually is a mix
of technology transfer of an integrated spectrum of horticultural
services with a focus on farmer economics and competing crops.
Pepsi collaborated with Punjab agricultural university who provided the knowledge of horticulture
with special focus on Punjab. Punjab agro Industries Corporation provided the extension support and
PepsiCo pooled in its international research experience and marketing and commercial skills. This
partnership led towards the building block of the business. There were three component of the
building block, they are:



R and D activities
Technology transfer
Commercialization of agriculture
A core team of scientists and research specialists were assembled. Punjab Agriculture University
seconded key personnel to the project i.e. a vegetable breeder, a soil scientist, a plant pathologist,
an agronomist and an entomologist. PepsiCo provided the full-time services of three overseas
consultants-experts on the growing of tomato and Frito-Lay expertise on potato. Infrastructure and
facilities for R and D activities were put in place. There is evaluation of varieties from sources in the
world; they are then adapted to local conditions. Extension personnel are selected from among the
farmers themselves. They are responsible for the contact with the farmers; they help in diffusion of
technology from lab to field. They use various means of communication to disseminate knowledge
and monitor crops from nursery to procurement.
Farmers find help in terms of land preparation, crop monitoring during growing period and also help
in terms of harvesting, transportation and logistics. Finally, farmers are paid promptly and the
agreed price. The net impact of this was dramatic; Tomato yields increased dramatically from 16 to
52 MT per hectares and 6 MT to 18 MT per hectare respectively. With increased increase in
productivity prices of these cropped declined but farm incomes increased by more than 2.5 times.
This happened after three years. Contract farming transformed the economy of Sangrur and
exposed them to world class farming, as well as remunerative and assured market.
This was the company well thought out relationship building exercise with their suppliers.
Literatures on supplier buyer relationships are proof enough that relationship centered business
models bring very high incremental operating margins. PepsiCo gained by receiving uninterrupted
and regular flow of quality raw materials. Protection from fluctuations in market pricing they could
plan for the long run. This experiment in corporate farming led to long run commitment and hence
assured Pepsi of a dedicated supplier base. PepsiCo generated goodwill for itself. Sadly, PepsiCo has
sold off its tomato project to HLL.
Mahindra Shubhlabh
A wholly-owned subsidiary of tractor major Mahindra Shubhlabh came into existence to provide
total farm solution to the Indian farmers. There were two aspects to the business, one was the
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commodity trading and second one was to provide one stop shop to the farmers for all his needs.
This is like providing total solution to almost all the problems of Indian farmers. The constituent of
the Shubhlabh model was to provide:
1. Arrange all agri-inputs such as seeds, fertilizers, and pesticides and so on to farmer
2. Rent out farm machinery like tractors, transplanters and other special machinery that helps
to reduce the cost to the farmer
3. Provide commercial agricultural extension by bi-weekly visits to the farms
4. Offer crop spraying, harvesting and post harvesting services
5. Provide commodity trading in final produce of the farmers.
Initially both these aspects of business were supposed to be highly IT driven. Based on a white paper
by a leading consulting giant, Mahindra and Mahindra identified provision of total farm solution to
Indian farmers a great opportunity. Both commodity and farm solution were suppose to be highly
Information technology driven models. In order to increase its reach to remote off villages, it
adopted a hub and spoke model.
The first total farm solution shop was opened by MSSl in Madurai. Tamil Nadu was favored to other
states as spillover effects in case of a problem were expected to be less. It was also an ideal selection
because MSSL wanted to begin its work in paddy. Mammoth investments were made at Madurai
(the first center). The super market for farmers should have a good area, a place in the outskirt of
Madurai was identified, some material placed. Tie-up with the input companies was not difficult on
account of the Mahindra brand name and the fact that this was an experiment. Investment in IT was
also made.
Initially, hub and the spokes were to be operated with the help of franchises. Franchises were
expected to make huge investments, and pay a non-refundable sign up fees. Franchises were to
reach the villages. The initials model’s project was approximately 1 crore rupees. This included
almost everything, the cost of property equipments land for carrying out agri R&D, computers,
tractors, other implements office space and working capital required. The sign-up fees were rupees
5 lakhs. This fee was non refundable. Mahindra also had to invest to set up systems and procedures.
Mahindra expected a lot of sign up by prospective dealers (franchises), the belief was that the
franchises was getting:
 Definite sale through registered farmers, and also the products recommended by
Mahindra's for farming. They were obviously of high quality and had relatively better
margins.
 Money will be made through farm consultancy fee that the farmers will pay.
 The franchises were getting the distributorship of sorts of various companies in one shot
without paying deposits.
 He would earn money through equipment rental.
Theoretically, it sounds good; such models of total farm solution operating in western economies
ignore the ground realities of the Indian agricultural economy. The non-refundable sign-up fees
came as a major stumbling block, most dealers in agri-input industry have to give only security
deposits against which they either get a fixed deposit interest or get materials worth that amount
immediately. Many of the dealers, which had the capability to invest, were already one-stop shop
themselves dealing with a whole host of input companies as distributors, giving farmers advice
informally from their shops and doing farming themselves. They also had field assistants and
contract employees from companies like BASF, Bayer and other agrochemical majors who do field
trials demonstration too.
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The input industry is a highly credit driven industry. The credit given in this industry is quite high and
often span from 90 days to 180 days. The dealers rotate five lakhs and can do a business worth a
crore. Any new business model should provide that opportunity. MSSL seemed to be firm on their
business model and believed that they were creating value for the franchises. Instead of educating
and developing dealers, they relied on their brand equity and were taken aback when there was not
a single sign up in the first phase. In just eight months the sign up fees was brought down to 47 lacks,
though the sign up fees was maintained at Rs 5 lacks. During the same period IT model was
abandoned, as they realized that franchises viewed it as a useless investment.
After two years MSSL was at around 5 to 8 percent of its projected revenue. Only five centers were
operational against the projected forty. In the third year of its existence, the e-agri the commodity
trading where nothing was going right was shut down. The separate offices were shut down and the
staff was told to share the offices of Mahindra and Mahindra tractors.
With the lowering of the project costs at the end of the third year there were around 12 centers
operating. Four of them were joint ventures in Kota, Madurai, Miralguda and one more. There were
around 8 sign-ups in all and turnover was around Rs. 6 crores. It had a total manpower of 65. At the
end of the third year, the business model was redefined once again. MSSL brought down the signup
fee from Rs.5 lakhs to Rs.3 lakhs. Project cost was brought down from 47 lakhs to 27 lakhs; with an
inbuilt flexibility of it being brought down further to facilitate new sign-ups.
Having shut e-agri, the fund released was used for business development of MSSL. The company
expanded again to other territories viz., Gujarat, Madhya Pradesh, Maharashtra and Chattisgarh.
While these sign-ups were taking place, the old centers with higher investments were expecting high
services and were getting impatient. This led to many legal cases and closures of centers. The model
was tinkered once again and the sign-up fees were brought down to Rs.1 lakh and that, too, it was
refundable. The sub franchises were given only one tehsil as against one district earlier.
Mahindra Subhlabh is now trying to rework both operational and strategic intent of the model so
that Farmer’s appreciation of farm solution and the entire process improves.
ITC e-Choupal
The Big Picture:
ITC’s Agri Business Division, one of India’s largest
exporters of agricultural commodities, has conceived eChoupal as a more efficient supply chain aimed at
delivering value to its customers around the world on a
sustainable basis.
The e-Choupal model has been specifically designed to
tackle the challenges posed by the unique features of
Indian agriculture, characterized by fragmented farms,
weak infrastructure and the involvement of numerous
intermediaries, among others.
The Value Chain - Farm to Factory Gate:
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‘e-Choupal’ also unshackles the potential of Indian farmer who has been trapped in a vicious cycle of
low risk taking ability -> low investment -> low productivity -> weak market orientation -> low value
addition -> low margin -> low risk taking ability. This made him and Indian agribusiness sector
globally uncompetitive, despite rich & abundant natural resources.
Such a market-led business model can enhance the competitiveness of Indian agriculture and trigger
a virtuous cycle of higher productivity, higher incomes, and enlarged capacity for farmer risk
management, larger investments and higher quality and productivity.
Further, a growth in rural incomes will also unleash the latent demand for industrial goods so
necessary for the continued growth of the Indian economy. This will create another virtuous cycle
propelling the economy into a higher growth trajectory.
The Model in Action:
Appreciating the imperative of intermediaries in the Indian context, ‘e-Choupal’ leverages
Information Technology to virtually cluster all the value chain participants, delivering the same
benefits as vertical integration does in mature agricultural economies like the USA.
‘e-Choupal’ makes use of the physical transmission capabilities of current intermediaries –
aggregation, logistics, counter-party risk and bridge financing –while disintermediating them from
the chain of information flow and market signals.
With a judicious blend of click & mortar capabilities, village internet kiosks managed by farmers –
called sanchalaks – themselves, enable the agricultural community access ready information in their
local language on the weather & market prices, disseminate knowledge on scientific farm practices
& risk management, facilitate the sale of farm inputs (now with embedded knowledge) and purchase
farm produce from the farmers’ doorsteps (decision making is now information-based).
Real-time information and customized knowledge provided by ‘e-Choupal’ enhance the ability of
farmers to take decisions and align their farm output with market demand and secure quality &
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productivity. The aggregation of the demand for farm inputs from individual farmers gives them
access to high quality inputs from established and reputed manufacturers at fair prices. As a direct
marketing channel, virtually linked to the ‘mandi’ system for price discovery, ‘e-Choupal’ eliminates
wasteful intermediation and multiple handling. Thereby it significantly reduces transaction costs.
‘e-Choupal’ ensures world-class quality in delivering all these goods & services through several
product / service specific partnerships with the leaders in the respective fields, in addition to ITC’s
own expertise.
While the farmers benefit through enhanced farm productivity and higher farm gate prices, ITC
benefits from the lower net cost of procurement (despite offering better prices to the farmer) having
eliminated costs in the supply chain that do not add value.
The Status of Execution:
Launched in June 2000, 'e-Choupal', has already become
the largest initiative among all Internet-based
interventions in rural India. 'e-Choupal' services today
reach out to over 4 million farmers growing a range of
crops - soyabean, coffee, wheat, rice, pulses, shrimp - in
over 40,000 villages through nearly 6500 kiosks across ten
states (Madhya Pradesh, Haryana, Uttarakhand, Karnataka,
Andhra Pradesh, Uttar Pradesh, Maharashtra, Rajasthan,
Kerala and Tamil Nadu).
The problems encountered while setting up and managing these ‘e-Choupals’ are primarily of
infrastructural inadequacies, including power supply, telecom connectivity and bandwidth, apart
from the challenge of imparting skills to the first time internet users in remote and inaccessible areas
of rural India.
Several alternative and innovative solutions – some of them
expensive – are being deployed to overcome these
challenges e.g. Power back-up through batteries charged by
Solar panels, upgrading BSNL exchanges with RNS kits,
installation of VSAT equipment, Mobile Choupals, local
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caching of static content on website to stream in the dynamic content more efficiently, 24x7
helpdesk etc.
Going forward, the roadmap includes plans to integrate bulk storage, handling & transportation
facilities to improve logistics efficiencies.
As India’s ‘kissan’ Company, ITC has taken care to involve farmers in the designing and management
of the entire ‘e-Choupal’ initiative. The active participation of farmers in this rural initiative has
created a sense of ownership in the project among the farmers. They see the ‘e-Choupal’ as the new
age cooperative for all practical purposes.
This enthusiastic response from farmers has encouraged ITC to plan for the extension of the ‘eChoupal’ initiative to altogether 15 states across India over the next few years. On the anvil are plans
to channelise other services related to micro-credit, health and education through the same 'eChoupal' infrastructure.
Another path-breaking initiative – the ‘Choupal Pradarshan Khet’, brings the benefits of agricultural
best practices to small and marginal farmers. Backed by intensive research and knowledge, this
initiative provides Agri-extension services which are qualitatively superior and involves pro-active
handholding of farmers to ensure productivity gains. The services are customized to meet local
conditions, ensure timely availability of farm inputs including insurance and credit, and provide a
cluster of farmer schools for capturing indigenous knowledge. This initiative, which currently covers
60,000 hectares, has a multiplier impact and reaches out to 1.4 million farmers.
UNDERSTANDING THE MODELS
The three experiments discussed here can bring out helpful learning’s for future agri-business
vertical coordination. Both market makers like ITC Choupal and Mahindra subhlabh services limited
have a lot to learn from an integrated vertical coordination experiment like PepsiCo. Firms need to
understand that the use of any one method of contract and coordination arises due to variety of
reasons. There can be enormous amount of diversity due to the type of the firms, nature of
contracts and the socioeconomic environment. Socioeconomic environment as well as regulatory
and technological environment shapes the way for the type of the vertical coordination.
ITC e- choupal model has also resulted in some conflicts with the existing traditional channels. There
is a lot more to be done as information provider, to make an e-model successful. ITC has no doubt
brought transparency in the trading processes and farmers too are happy about the same. The
transaction cost is also being reduced and farmers are realizing a better return.
PepsiCo’s contract farming Model seems to have done pretty well. There are few learning’s here too
for making any form of vertical coordination workable and feasible in agriculture. To be successful
the model should collaborate with other agencies as in the case of PepsiCo. This resource provision
contract had in built production management contract as well as market specification contract.
Indian agriculture unlike the developed agriculture does not enjoy the level of development as well
as infrastructure to make market specification, production management contract as well as resource
provision contract to work independently. The business model of both Mahindra shubhlabh and to
some extent ITC might require some changes to work more efficiently in an underdeveloped
agriculture like India. A cost benefit ratio can go haywire and so will the business model, leading to
panic and haphazard experiments in searching right revenue stream.
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THE WAY AHEAD
Agri-initiatives taken by Indian corporate will play an important role in dissemination of right
information as well as knowledge, provide total farm solution and act as buyer of agri-produce as
well as provide the resource for producing these agri-produce. As suggested by MR Banga, the
chairman of Hindustan lever limited these firms have to strive hard to create a win-win situation
both for themselves as well as the farmer. A well thought out collaborative model could help firms
share facility and infrastructure cost on one hand and increase complementarities in their marketing
efforts enhancing customer satisfaction through a partnered customer relationship management
approach. The Three firms can use their resources and can very well form a collaborative agri-service
center. The proposed model has collaboration and partnership as the basis. This partnership
culminates into formation of farmer service center. Farmer service center would be run as a private
enterprise between the food processor and a number of other input providers such as bank,
agrochemical/seed/fertilizer, farm equipment manufacturers, and so, on. Either the agri- input
provider or food processor can take the lead in establishing this model. The benefit of this model is
very significant.
Agri-input would be made available to the farmer directly to the farmer at cheaper rates. Credit and
insurance would be available to the farmer. The farmer service center would provide extension
services. The food processor would access the farm producer directly. Specialized grain-handling
equipment, transport and vertical storage would be installed reducing both costs spillage losses to
pests. Such a model will drive down the cost of agricultural produce. The farmer's efficiencies would
result in increased production and increased off take, and increase his incomes, despite lower prices.
Indeed a win -win situation for both farmers and consumers.
But looking at the uneven development of rural economy, it is important that these businesses build
trust and relationship and manage them. This is true because the Indian farmer like his other
counterparts is becoming aware and has begin to demand better service. The old push system of
input selling will not work in future. Firms need to take up initiative to educate farmers extensively
about precision farming and may be help them to practice it. This will help agri-based food
processing units like HLL, Nijjer and PepsiCo to manage their supplies, reducing both supply and
quality risk, whereas agri input companies can use it purely to enhance value for their business
through better farmer contact programmes. Agri-input companies, who are facing a severe crisis as
farmers in most part of the country have lost faith in them, can leverage on the farmer service
center along with internet to manage their customers better by providing them right kind of support
and information about total farm solution which adds sustainability to the agricultural processes.
In the present day of privatization spree, privatization of farm extension also assumes great
significance. The private extension started as a joint effort of Agri industry like seeds, fertilizer,
irrigation system, bio-tech, farm equipment’s and agro-chemical industry as well as food processing
operating from farmer service center which are networked with the help of internet kiosk will make
rural reach an revolutionary approach and can further enhance the inherent value steams for
partners in collaborations.
The question which these businesses should try to address is "How best to assemble and deploy the
key resources, i.e. human, technological and financial for succeeding in the rural agricultural
economy. Traditional companies need these resources to leverage on the opportunity provided by
the net. It must be realized that strategies for dot.com world are based on the pattern and timing of
resource deployment. Assembling of resources from multiple sources and managing them, as a
dynamic basis is the need of the hour. Agrifirms can put resources together not only to create
Internet kiosk but also the basic helpline centers merged with this internet based operation.
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Given the rates of literacy, both general and the computer literacy, it is but evident that internetbased information kiosk can play an effective role in future only when backed up by good helpline
centres which can use the information critically. This will pave way for a new model of agriculture
extension where all the parties in the business of agriculture will be a partner once the internetbased information kiosk is in place. Being a private venture, the new extension system should focus
attention on providing all the information needs of the forming community, which have not been
addressed by the present system. A committed and systematic approach to organize farmers' groups
and assembling various technologies could prove to be rewarding. The extension personnel should
act as a two-way channel for communicating with the farmers and getting their feedback. These
extension professionals should help farmers with all the necessary information, regarding timely
inputs, marketing, and their entitlement to various governmental programmes and benefits. The
private extension should aim at filling all the gaps found in the present system. An extension officer
and two field assistants should be able to cater to the needs of about 10 villages or an active group
of 1000 farmers who will pay a monthly subscription. The farmers should be convinced that they are
paying for efficient and productive services and supplies. The extension staff should visit the villages
or group of member farmers at a specified time on fixed days of the week. The staff should have
sound knowledge of the various farming enterprises in the region. They should also have hands-on
experience in dealing with field problems such as enhancing production from the farm, valueaddition to the farm produce, post-harvest technology and marketing facilities. Good exposure to
the concepts of Integrated Intensive Farming Systems (IIFS) and recycling of farm residues will prove
advantageous.
The extension personnel should be able to co-ordinate the efforts of farmers and tie up with an
efficient transport and marketing network and provide solutions to field problems. To retain the
youth in farming, agriculture has to be not only economically rewarding but also intellectually
stimulating and challenging. The educated youth crave for information, which will enrich their
knowledge and fetch more dividends. The challenge before the private extensions lies in constantly
feeding useful information of economic value. The concept of "precision farming", which is backed
by "knowledge-intensive" farming practices will provide an ideal platform for launching the private
extension. Once the farmers realize that they are able to reap more from their farms because of
timely information or a new technology, they would appreciate the efforts of the private extension
and support it. The private extension service will then become an integral component of the farming
communities.
However, it is not easy to set in motion a proactive private extension machinery to complement the
efforts of the present extension system. The task is to win the confidence of the farmers through
regular interaction and liberal exchange of information on technologies and markets. The farmers
should become partners in this effort, and they may be encouraged to actively participate and
contribute with conviction. The subscription should not be taken as initial payment at the time of
enrolling members. Instead, it should follow the "use now and pay later" concept. It has been a
general experience that farmers do not hesitate to pay a fee for any additional returns they get at
the time of harvest. For, it is always "harvesting is believing" for them. A blueprint of such private
extension system, underscoring, the economic returns from such a venture, has established a good
linkage between various on farm and non-farming enterprises at the village level.
The private extension should not be misconstrued as competitors to Government extension
programme. It should be taken as a complementary effort. With the private extension in place, the
governmental agency will naturally be fine-tuned to meet the supply and services demand of the
enlightened farming community. This healthy trend will facilitate free information flow in rural
areas, and make agriculture more productive and profitable. Once farming becomes a paying
proposition, there will be more and more educated youth getting into active participation. The spin91
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off of this process will generate more jobs in a healthy environment and also contribute to reversing
the trend of rural-urban migration. A private agricultural extension will become a focal point and
active platform to promote rural marketing of various consumer products. It can also effectively
serve as a forum for consumer protection and redressal. Rural marketing and advertising is emerging
as a new thrust area for several commercial firms in the country. If properly designed and run, the
private agricultural extension can also take advantage of the opportunities springing from rural
marketing and advertising efforts making these helpline centers financially viable in the future. It
remains to be seen whether Indian firms understand the power of collaboration and put their act
together.
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12. Purchasing
Purchasing is the “process of buying”. Many assume purchasing is solely the responsibility of
purchasing department. However the function is much broader and, if it is carried out effectively, all
departments in the company are involved. Obtaining the right material, in the right quantities, with
the right delivery (time and place), from the light source, and at the right price are all purchasing
functions.
Choosing the right material requires input from the marketing, engineering, manufacturing, and
purchasing departments. Quantities and delivery of finished goods are established by the needs of
the marketplace. However, manufacturing planning & control (MPC) must decide when to order
which raw materials so that marketplace demands can be satisfied. Purchasing is then responsible
for placing the orders and for ensuring that the goods arrive on time.
The purchasing department has the major responsibility for locating suitable sources of supply and
for negotiating prices. Input from other departments is required in finding and evaluating sources of
supply and to help the purchasing department in price negotiation.
Purchasing and Profit Leverage
On an average, manufacturing firms spend about 50% of their sales value in the purchase of raw
materials, components and supplies. This gives purchasing function tremendous potential to
increase profits. As an example, suppose a firm spends 50% of its revenue on purchased goods and
shows a net profit before taxes of 10%. For every Rs.100 of sales, they receive Rs.10 of profit and
spend $50 on purchases. Other expenses are Rs.40. For the moment, assume that all costs vary with
sales. These figures are shown in the following as a simplified statement:
Income Statement
Sales
Rs100
Cost of goods sold
Purchases
Rs.50
Other exps
Rs.40
Profit before tax
Rs.90
Rs.10
To increase profits by Re.1, a 10% increase in profits, sales must be increased to Rs.10. Purchases
and other expenses will increase to Rs.55 & Rs.44. The following modified income statement shows
these figures:
Sales
Rs.110
Cost of goods sold
Purchases
Rs.55
Other exps
Rs.44
Profit before tax
Rs.99
Rs.11
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However, if the firm can reduce the cost of purchases from Rs.50 to Rs.49, a 2% reduction, it would
gain the same 10% increase in profits. In this particular example, a 2% reduction in purchase cost has
the same impact on profit as a 10% increase in sales.
Sales
Rs.100
Cost of goods sold
Purchases
Rs.49
Other exps
Rs.40
Profit before tax
Rs.89
Rs.11
Purchasing Objectives:
Purchasing is responsible for establishing the flow of materials into the firm, following up with the
supplier, and expediting delivery. Missed deliveries can create havoc for manufacturing and sales,
but purchasing can reduce problems for both areas, further adding to the profit. The objectives of
Purchasing can be divided into four categories:




Obtaining goods and services of the required quantity and quality.
Obtaining goods and services at the lowest cost.
Ensuring the best possible service and prompt delivery by the supplier.
Developing and maintaining good supplier relations and developing potential suppliers.
To satisfy these objectives, some basic functions must be performed:




Determining purchasing specifications: right quality, right quantity and right delivery (time
and place).
Selecting supplier (right source).
Negotiating terms and conditions of purchase (right price)
Issuing and administration of purchase orders.
Purchasing Cycle:
The purchasing cycle consists of the following steps:
1. Receiving and analyzing purchase requisitions
2. Selecting suppliers. Finding potential suppliers, issuing requests for quotations, receiving and
analyzing quotations, and selecting the right supplier.
3. Determining the right price.
4. Issuing purchase orders.
5. Following up to assure delivery dates are met.
6. Receiving and accepting goods.
7. Approving supplier’s invoice for payment.
Receiving and analyzing purchase requisitions: Purchase requisitions start with the department or
person who will be the ultimate user. In the material requirements planning environment, the
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planner releases a planned order authorizing the purchasing department to go ahead and process a
purchase order. At a minimum, the purchase requisition contains the following information:




Identity of the originator, signed approval, and account to which cost is assigned.
Material specification – There are two major sources of specifications – Buyer specifications
and Standard specifications. The specifications are supposed to include:
o Quantity Requirements & unit of measure
o Price requirements – The economic value placed on the item must relate to the use
of the item and its anticipated selling price.
o Functional specifications & Quality
 Physical & chemical characteristics
 Material and method of manufacture
 Performance
Required delivery date and place
Any other supplemental information needed.
Selecting Suppliers: Identifying and selecting supplier are important responsibilities of the
purchasing department. For routine items or those that have not been purchased before, a list of
approved suppliers is kept. If the item has not been purchased before or there is no acceptable
supplier on file, a search must be made. If the order is of small value or for standard items, a supplier
can probably be found in a catalogue, trade journal or directory. The information obtained from the
salespeople of the buyer firm can also be used in identifying suppliers. There are three types of
sourcing:
1. Sole sourcing implies that only one supplier is available because of patents, technical
specifications, raw material, location and so forth.
2. Multiple sourcing – is the use of more than one supplier for an item. The potential
advantages of multiple sourcing are that competition will result in lower price and better
service and that there will be a continuity of supply.
3. Single sourcing is a planned decision by the organization to select one supplier for an item
when several sources are available. It is intended to produce a long term partnership.
Factors in Selecting Suppliers:






Technical ability
Manufacturing capability
Reliability
After sales service
Supplier location
Other considerations – such as credit terms, reciprocal business and willingness of the
supplier to hold inventory for the buyer etc.
 Price – The supplier should be able to provide competitive prices.
Requesting Quotations: For major items, it is usually desirable to issue a request for quotation. This
is a written inquiry that is sent to enough suppliers to be sure competitive and reliable quotations
are received. It is not a sales order. After the suppliers have completed and returned the quotations
to the buyer, the quotations are analyzed for price, compliance to specification, terms and
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conditions of sale, delivery and payment terms. For items where specifications can be accurately
written, the choice is probably made on price, delivery and terms of sale. For items where
specifications cannot be accurately written, the items quoted will vary. The quotations must be
evaluated for technical suitability. The final choice is a compromise between technical factors and
price. Usually, both the issuing and purchasing departments are involved in the decision.
Determining the right price: This is responsibility of the purchasing department and is closely tied to
the selection of suppliers. The purchasing department is also responsible for price negotiation and
will try to obtain the best price from the supplier.
Prices can be negotiated if the buyer has the knowledge and the clout to do so. A small retailer
probably has little of the latter, but a large buyer may have much. Through negotiation, the buyer
and seller try to resolve conditions of purchase to the mutual benefit of both parties. Skill and
careful planning are required for the negotiation to be successful. It also takes a great deal of time
and effort, so the potential profit must justify the expense. One important factor in the approach to
negotiation is the type of product. There are four categories:
1. Commodities: Are materials such as copper, coal, wheat, meat and metals. Price is set by
market supply and demand and can fluctuate widely. Negotiation is concerned with contract
for future prices.
2. Standard Products: These items are provided by many suppliers. Since the items are
standard and the choice of suppliers large, prices are determined on the basis of listed
catalog prices. There is not much room for negotiation except for large purchases.
3. Items of small value: These are items such as maintenance or cleaning supplies and
represent purchases of such small value that price negotiation is of little purpose. The price
objective should be to keep the cost of ordering low. Firms will negotiate a contract with a
supplier that can supply many items and set up a simple ordering system that reduces the
cost of ordering.
4. Made-to-order items: This category includes items made to specification or on which
quotations from several sources are received. These can generally be negotiated.
Selecting the right supplier: Some factors in evaluating potential suppliers are quantitative, for
example Price which can be easily assessed. While there are other factors which are Qualitative and
hence require some judgment to determine them. The supplier’s technical competence might be an
example. The challenge is in finding some method to combine these factors that will enable a buyer
to pick the best supplier. One method is ranking method:
1. Select those factors that must be considered in evaluating potential suppliers.
2. Assign a weight to each factor. The weight determines the importance of the factor in
relation to other factors. Usually a scale of one to ten is used.
3. Rate the suppliers for each factor.
4. Rank the suppliers – For each supplier, the weight of each factor is multiplied by the supplier
rating for that factor to produce a total ranking. The suppliers can then be listed by total
ranking and the supplier with the highest ranking chosen.
Factor
Weight Rating of suppliers
Ranking of suppliers
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Suppliers
A
B
C
D
A
B
C
D
Function
10
8
10
6
6
80
100
60
60
Cost
8
3
5
9
10
24
40
72
80
Service
8
9
4
5
7
72
32
40
56
Technical Asst. 5
7
9
4
2
35
45
20
10
Credit terms
4
3
6
8
8
6
12
16
219
223
204
222
2
Total (rank of suppliers)
Issuing a purchase order: A purchase order is a legal offer to purchase. Once accepted by the
supplier, it becomes a legal contract for delivery of the goods according to the terms and conditions
specified in the purchase agreement. The purchase order is prepared from the purchase requisition
or the quotations and from any other additional information needed. A copy is sent to the supplier,
copies are retained by purchasing and are also sent to other departments such as accounting, the
originating department and receiving.
Following up and delivery: The supplier is responsible for delivering the items ordered on time. The
purchasing department is responsible for ensuring that suppliers to deliver on time. If there is doubt
that delivery dates can be met, purchasing must find out in time to take corrective action. This might
involve expediting transportation, alternate sources of supply, working with the supplier to solve its
problems, or rescheduling production.
The purchasing department is also responsible for working with the supplier on any changes in
delivery requirements. Demand for items changes with time, and it may be necessary to expedite
certain items or push delivery back on some others. The buyer must keep the supplier informed of
the true requirements so that the supplier is able to provide what is wanted and when.
Receiving and accepting goods: When the goods are received, the receiving department inspects
the goods to be sure the correct ones have been sent, are in the right quantity and has not been
damaged in transit. Using their copy of the purchase order and the bill of lading supplied by the
carrier, the receiving department then accepts the goods and writes up a receiving report noting any
variance. If further inspection is required, such as by quality control, the goods are sent to quality
control or held for inspection. If the goods are received damaged, the receiving department will
advise the purchasing department and hold the goods for further action. Provided the goods are in
order and require no further inspection, they will be send to the originating department or to
inventory.
A copy of the receiving report is then sent to the purchasing department noting any variance or
discrepancy from the purchase order. If the order is considered complete, the receiving department
closes out its copy of the purchase order and advises the purchasing department. If it is not, the
purchase order is held open awaiting completion. If the goods have also been inspected by the
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quality control department, they too, will advise the purchasing department whether the goods
have been accepted or not.
Approving supplier’s invoice for payment: When the supplier’s invoice is received, there are three
pieces of information that should agree: the purchase order, the receiving report, and the invoice.
The items and the quantities should be the same on all; the prices and extensions to prices, should
be the same on the purchase order and the invoice. All discounts and terms of the original purchase
order must be checked and the invoice. It is the job of the purchasing department to verify these
and to resolve any differences. Once approved, the invoice is sent to accounts payable for payment.
Supplier responsiveness and reliability
Contract buying: it assures suppliers a given amount of business and commits them to allocating
that amount of their capacity to the customer. Suppliers are more responsive to customer needs and
can react quickly to changes in schedules because customers know the capacity will be available
when needed, they can delay ordering until they are surer of their requirements.
Close relationship with suppliers: Contract buying and the need for supplier flexibility and reliability
men the buyer-supplier relationship must be close and cooperative. There must be excellent twoway communication, cooperation, and teamwork. Both parties have to understand their own and
the other’s operations and problems.
Electronic data interchange (EDI): It enables customers and suppliers to electronically exchange
transaction information such as purchase orders, invoices and material requirements planning
information. This eliminates time consuming paper work and facilitates easy communication
between planner/buyers and suppliers.
Vendor Managed Inventory (VMI): In recent years there has been a growth in the purchasing
approach know as vendor managed inventory. In this concept, a supplier maintains an inventory of
certain items in the customer facility. The supplier “owns” the inventory until the customer actually
withdraws it for use, after which the customer then pays for that use. The customer does not have
to order any of the inventory, as the supplier is responsible for maintaining an adequate supply in
the facility for customer use. This approach is most commonly used for lower-value products that
have a relatively standard design, such as fasteners, standard electrical equipment etc.
Internet: Internet technology has become the most quickly accepted communications medium ever.
There are three variations of networks used: Internet, intranet and extranet. The Internet is most
commonly used and is open to the general public. The intranet is an internal net that is normally
used within the boundaries of a company. It may stretch across many manufacturing sites or even
countries. Much of the data shared in this environment is considered sensitive and therefore access
is usually limited to people within the company. Extranet is an intranet shared by two or more
companies. Each participating company moves certain data outside of a private intranet to the
extranet, making it available only to the companies sharing the extranet.
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Case Study - Cuatro Pinos Cooperative Union
INTRODUCTION
Cuatro Pinos Cooperative Union is a Guatemalan firm that exports fresh vegetables, mainly to the
United States of America and the United Kingdom. The products which it processes and markets
come from two sources:
i) The members, who supply between 80 percent and 90 percent of the raw material, and
ii) Intermediaries who supply between 10 percent and 20 percent. The cooperative members are
small farmers, whose cultivated land under vegetables averages one manzana, with a minimum of
three and a maximum of 16 to 20 cuerdas.
DISCUSSION
The Cooperative arranges production contracts with its members at sowing time, when it sells them
imported seeds of the planned varieties in the quantities stipulated in the signed contract.
Once the vegetables have been harvested, they are sent to one of eight local stockpiling centres
(one in each of the communities participating in the Cooperative), where the products are
preselected, weighed and stored.
The collection centres are managed by a Cooperative employee, together with two or three
assistants. In coordination with the Cooperative’s head office, the manager plans transportation of
the products to the processing plant in sealed, non-refrigerated trucks.
Once the products are in the processing plant, they are subjected to a series of post-harvest
processes including: acceptance, pre-cooling, selection, cleaning, grading and storage at a
temperature of at least 4°C, with a relative humidity of between 80 percent and 90 percent.
Following treatment, the products are transported to the shipping ports in 30 000-pound capacity
refrigerated trucks.
CONCLUSION
The Cooperative owes its success to efficient production planning in both its farms and agroindustrial units, to optimum management of logistical operations throughout the chain and to good
administrative management. This has enabled the Cooperative to fulfill its pre-sale contracts with
customers in the United States of America and the United Kingdom.
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NOTES
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13. Forecasting
Forecasting is a prelude to planning. Before making plans, an estimate must be made of what
conditions will exist over some future period. How estimates are made, and with what accuracy, is
another matter, but little can be done without some form of estimation.
Why forecast? There are many circumstances and reasons, but forecasting is inevitable in developing
plans to satisfy future demand. Most firms cannot wait until orders are actually received before they
start to plan what to produce. Customers usually demand delivery in reasonable time, and
manufacturers must anticipate future demand for products or services and plan to provide the capacity
and resources to meet the demand. Firms that make standard products need to have saleable goods
immediately available or at least to have materials and subassemblies available to shorten the delivery
time. Firms that make to order cannot begin making a product before a customer places an order but
must have the resources of labor and equipment available to meet demand.
Many factors influence the demand for a firm’s products and services. Although, it is not possible to
identify all of them, or their effect on demand, it is helpful to consider some major factors.




General business and economic conditions
Competitive factors
Market trends such as changing demand
The firm’s own plans for advertising, promotion, pricing and product changes.
Demand Management
Is the function of recognizing and managing all demands for products. It occurs in the short, medium,
and long term. In the long term, demand projections are needed for strategic business planning of such
things as facilities. In the medium term, the purpose of demand management is to project aggregate
demand for production planning. In the short run, demand management is needed for items and is
associated with master production scheduling. We are most concerned with the latter.
If material and capacity resources are to be planned effectively, all sources of demand must be
identified. These include domestic and foreign customers, other plants in the same corporation, branch
warehouses, service parts and requirements, promotions, distribution inventory and consigned
inventory in customers’ activities. Demand management includes four major activities:




Forecasting
Order processing
Making delivery promises
Interfacing between manufacturing planning and control and the marketplace
Demand Forecasting
Forecasts depend upon what is to be done. They must be made for the strategic business plan, the
production plan and the master production schedule.
The strategic business plan is concerned with overall markets and the direction of the economy over
the next two to ten years or more. Its purpose is to provide time to plan for those things that take long
to change. For production, the strategic business plan should provide sufficient plan for resource
planning; plant expansion, capital equipment purchase, and anything requiring a long lead time to
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purchase. The level of detail is not high, and nits, sales usually forecasts are in sales units, sales value
or capacity. Forecasts and planning will probably be reviewed quarterly or yearly.
Production planning is concerned with manufacturing activity for the next one to three years. For
manufacturing, it means forecasting those items needed for production planning, such as budgets,
labor planning, long lead time, procurement items, and overall inventory levels. Forecasts are made
for groups or families of products rather than specific end items. Forecasts and plans will probably be
reviewed monthly.
Master production scheduling is concerned with production activity from the present to a few months
ahead. Forecasts are made for individual items, as found on a master production schedule, individual
item inventory levels, raw materials and component parts, labor planning, and so forth. Forecasts and
plans will probably be reviewed weekly.
Characteristics of Demand
Before discussing forecasting principles and techniques, it is best to look at some characteristics of
demand that influence the forecast and the particular techniques used.
Demand Patterns: If historical data for demand are plotted against a time scale, they will show any
shapes or consistent patterns that exist. A pattern is the general shape of a time series. Although, some
individual data points will not fall exactly on the pattern, they tend to cluster around it. There are four
reasons for this: Trend, seasonality, random variation and cycle.
Trend - shows that demand is increasing in a steady pattern of demand from year to year.
Seasonality - The demand pattern shows each year’s demand fluctuating depending on the time
of year. This fluctuation may be the result of the weather, holiday seasons, or particular events
that take place on a seasonal basis. Seasonality is usually thought of as occurring on a yearly
basis, but it can also occur on a weekly or even daily basis. A restaurant’s demand varies with the
hour of the day, and supermarket sales vary with the day of the week.
Random Variation – occurs where many factors affect demand during specific periods and
occurs on a random basis. The variation may be small, with actual demand falling close to the
pattern, or it may be large, with the points widely scattered.
Cycle – Over a span of several years, wavelike increases and decreases in the economy influence
demand. However, forecasting of cycles is a job for economists and is beyond the scope of this
text.
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Trend
Principles of Forecasting
Forecasts have four major characteristics or principles.
1. Forecasts are usually wrong: Forecasts attempt to look into the unknown future and, except
by sheer luck, will be wrong to some degree. Errors are inevitable and must be expected.
2. Every forecast should include an estimate of error: Since forecasts are expected to be wrong,
the real question, is “by how much”. Every forecast should include an estimate of error often
expressed as a percentage (plus and minus) of the forecast or as a range between maximum
and minimum values. Estimates of this error can be made statistically by studying the
variability of demand about the average demand.
3. Forecasts are more accurate for families or groups: The behavior of individual items in a
group is random, even when the group has very stable characteristics. For example, marks of
a student in a class are more difficult to forecast accurately than the class average.
4. Forecasts are more accurate for nearer time periods: The near future holds less uncertainty
than the far future. Most people are more confident in forecasting what they will be doing
over the next week than a year from now. Hence, demand for the near term is easier for a
company to forecast than for a time in the distant future.
Collection & Preparation of Data
Forecasts are usually based on historical data manipulated in some way using either judgment or a
statistical technique. Thus, the forecast is only as good as the data on which it is based. To get good
data, three principles of data collection are important:
1. Record data in same terms as needed for the forecast – There are three dimensions to this:
a. If the purpose is to forecast demand on production, data based on demand, not
shipments are needed. Shipments show when goods were shipped and not necessarily
when the customer wanted them. Thus shipments do not necessarily give a true
indication of demand.
b. The forecast period, in weeks, months or quarters, should be the same as the schedule
period. If schedules are weekly, the forecast should be for the same time interval.
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c. The items forecast should be the same as those controlled by manufacturing. For
example, if there are a variety of options that can be supplied with a particular
product, the demand for the product and for each option should be forecast.
2. Record the circumstances relating to the data – Demand is influenced by particular events,
and these should be recorded along with the demand data. For instance, artificial bumps in
demand can be caused by sales promotions, price changes, changes in the weather, or a strike
at a competitor’s factory. It is vital that these factors be related to the demand history so they
may be included or removed for future conditions.
3. Record the demand separately for different customer groups – Many firms distribute their
good through different channels of distribution, each having its own demand characteristics.
For example, a firm may sell to a number of wholesalers that order relatively small quantities
regularly and also sell to a major retailer that buys a large lot twice a year. Forecasts of
average demand would be meaningless, and each set of demands should be forecast
separately.
Forecasting Techniques
There are many forecasting methods, but they can usually be classified into three categories:
qualitative, extrinsic and intrinsic.
Qualitative Technique
Qualitative Techniques are projections based on judgment, intuition, and informed opinions. By their
nature, they are subjective. Such techniques are used to forecast general trends and the potential
demand for large families of products over an extended period of time. As such, they are used mainly
by senior management.
When attempting to forecast the demand for a new product, there is no history on which to base a
forecast. In these cases, the techniques of market research and historical analogy might be used.
Market research is a systematic, formal and conscious procedure for testing to determine customer
opinion or intention. Historical analogy is based on a comparative analysis of the introduction and
growth of similar products in the hope that the new product behaves in a similar fashion. Another
method is to test market a product. There are several other methods of qualitative forecasting. One,
called the Delphi method, uses a panel of experts to give their opinion on what is likely to happen.
Extrinsic Techniques
Extrinsic Forecasting Techniques are projections based on external indicators which relate to the
demand for a company’s products. Examples of such data would be housing starts, birth rates, and
disposable income. The theory is that the demand for a product group is directly proportional, or
correlates to activity in another field. Examples of correlation are:


Sales of bricks are proportional to housing starts.
Sales of automobile tires are proportional to gasoline consumption.
Housing starts and gasoline consumption are called economic indicators. They describe economic
conditions prevailing during a given time period. Some commonly used economic indicators are
construction contract awards, automobile production, farm income, steel production and gross
national income. Data of this kind are compiled and published by various government departments,
financial papers and magazines, trade associations and banks.
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Extrinsic forecasting is most useful in forecasting the total demand for a firm’s products or the
demand for families of products. As such, it is used most often in business and production planning
rather than the forecasting of individual end items.
Intrinsic Techniques
Intrinsic Forecasting Techniques use historical data to forecast. These data are usually recorded in the
company and are readily available. Intrinsic forecasting techniques are based on the assumption that
what happened in the past will happen in the future. This assumption has been likened to driving a car
by looking out the rear view mirror. While there is some truth to this, it is also true that lacking any
other “crystal ball”, the best guide to the future is what has happened in the past. There are various
intrinsic techniques available:
Moving Averages: One simple way to forecast is to take the average demand for, say, the last
three or six periods and use that figure as the forecast for the next period. At the end of next
period, the first period demand is dropped and the latest period demand added to determine a
new average to be used as a forecast. The forecast would always be based on the average of
the actual demand over the specified period.
Figure-A
January
92
July
84
February
83
August
81
March
66
September
75
April
74
October
63
May
75
November
91
June
84
December
84
For example, suppose it was decided to use a three month moving average on the data shown
above. Our forecast for January, based on demand in October, November & December would
be:
(63+91+84)/3 = 79
Now suppose that January demand turned out to be 90 instead of 79, the forecast for February
would be calculated as:
(91+84+90)/3 = 88
Example Problem:
Demand over the past three months has been 120, 135 and 114 units. Using a three month
moving average, calculate the forecast for the fourth month.
Answer:
Forecast for the month 4 = (120+135+114)/3 = 123
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Actual demand for the fourth month turned out to be 129. Calculate the forecast for the fifth
month.
Forecast for month 5 = (135+114+129)/3 = 126
Moving averages are best used for forecasting products with stable demand where there is
little trend or seasonality. Moving averages are also useful to filter out random fluctuations.
This has some common sense since periods of high demand are often followed by periods of
low demand.
Exponential Smoothing:
It is not necessary to keep months of history to get a moving average because the previously
calculated forecast has already allowed for this history. Therefore, the forecast can be based
on the old calculated forecast and the new data.
Using the data in Figure-A, suppose an average of the demand of the last six months (80
units) is used to forecast January demand. If at the end of January, actual demand is 90 units,
we must drop July’s demand and pick up January’s demand to determine the new forecast.
However, if an average of the old forecast (80) and the actual demand for January (90) is
taken, the new forecast for February is 85 Units. The formula puts as much weight on the
most recent month as on the old forecast (all previous months). If this does not seem suitable,
less weight could be put on the latest actual demand and more weight on the old forecast.
Perhaps putting only 10% of the weight on the latest month’s demand and 90% of the weight
on the old forecast would be better. In this case:
February forecast = 0.1(90) + 0.9(80) = 81
Notice that this forecast did not rise as much rise as our previous calculation in which the old
forecast and the latest actual demand were given the same weight. One advantage to
exponential smoothing is that the new data can be given any weight wanted.
The weight given to latest actual demand is called smoothing constant and is represented by
Greek letter alpha (α). It is always expressed as a decimal from 0 to 1.0. in general formula
for calculating the new forecast is:
New forecast = (α)(latest demand) + (1-α)(previous forecast)
Example Problem:
The oldest forecast for May was 230 and the actual demand for May was 200. If alpha (α) is
0.15, calculate the forecast for June. If June demand turns out to be 228, calculate the forecast
for July.
Answer:
June Forecast = (0.15)(200) + (1-0.15)(230) = 225.5
July Forecast = (0.15)(228) + (0.85)(225.5) = 225.9
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Exponential smoothing provides a routine method for regularly updating item forecasts. If
works quite well when dealing with stable items. Generally, it has been found satisfactory for
short-range forecasting. It is not satisfactory where the demand is low or intermittent.
Exponential smoothing will detect trends, although the forecast will lag actual demand if a
definite trend exists. Figure-B shows a graph of the exponentially smoothed forecast lagging
the actual demand where a positive trend exists. Notice the forecast with the larger α follows
actual demand more closely.
A problem exists in selecting the best α factor. If a low factor such as 0.1 is used, the old
forecast will be heavily weighted, and changing trends will not be picked up as quickly as
might be desired. If a larger factor such as 0.4 is used, the forecast will react sharply to
changes in demand and will be erratic if there is a sizable random fluctuation. A good way to
get the best alpha factor is to use computer simulation. Using past actual demand, forecasts
are made with different alpha factors to see which one best suits the historical demand pattern
for particular products.
Figure-B – Exponential forecast where trend exists.
DEMAND
Actual Demand
Forecast α=0.3
Forecast α=0.1
PERIODS
SEASONALITY
Many products have a seasonal or periodic demand pattern. Skis, lawn movers, bathing suits, and
Christmas tree lights are examples. Less obvious are products whose demand varies by the time of
day, week, or month. Examples of these might be electric power usage during the day or grocery
shopping during ht week. Power usage peaks between 4 and 7 PM, and supermarkets are most busy
toward the end of the week or before certain holidays.
Seasonal Index
A useful indication of the degree of seasonal variation for a product is the seasonal index. This index
is an estimate of how much the demand during the season will be above or below the average demand
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for the product. For example, swimsuit demand might average 100 per month, but in July the average
is 175 and in September 35. The index for July demand would be 1.75 for September 0.35. The
formula for seasonal index is:
Seasonal Index = (period average demand / average demand of all periods)
The period can be daily, weekly, monthly or quarterly depending on the basis for the seasonality of
demand.
The average demand for all periods is a value that averages out seasonality. This is called the
deseasonalized demand. The previous equation can be rewritten as:
Seasonal index = (period average demand / deseasonalized demand)
Example problem:
A product that is seasonally based on quarterly demand and the demand for the past three years is
shown in Figure-C below. There is no trend, but there is definite seasonality. Average quarterly
demand is 100 units. Figure-C also shows a graph of actual seasonal demand and average quarterly
demand. The average demand shown is the historical average demand for all periods. Remember, we
forecast average demand, not seasonal demand.
Answer
The seasonal indices can now be calculated as follows:
Seasonal index = (128/100) = 1.28 (quarter 1)
= (102/100) = 1.02 (quarter 2)
= (75/100) = 0.75 (quarter 3)
= (95/100) = 0.95 (quarter 4)
Total of seasonal indices = 4.00
Figure-C – Seasonal Sales History
Year
Quarter
1
2
3
4
Total
1
122
108
81
90
410
2
130
100
73
96
399
3
132
98
71
99
400
Average
128
102
75
95
400
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Average
Demand
Demand
Actual
Demand
Months
Note that total of all seasonal indices, equals the number of periods. This is a good way to check
whether the calculations are correct.
Seasonal Forecasts
The equation for developing seasonal indices is also used to forecast seasonal demand. If a company
forecasts average demand for all periods, the seasonal indices can be used to calculate the seasonal
forecasts. Changing the equation around we get:
Seasonal demand = (seasonal index)(deseasonalized demand)
Example problem:
The company in the previous problem forecasts an annual demand next year of 420 units. Calculate
the forecast for quarterly sales.
Answer:
Forecast average quarterly demand
Expected quarter demand
Expected first quarter demand
Expected second quarter demand
Expected second quarter demand
Expected second quarter demand
Total forecast demand
= 420/4 = 105 units.
= (seasonal index)(forecast quarterly demand)
= 1.28 X 105 = 134.4 units
= 1.02 X105 = 107.1 units
= 0.75 X105 = 78.75 units
= 0.95 X105 = 99.75 units
= 420 units
Deseasonalized Demand
Forecasts do not consider random variation. They are made for average demand, and seasonal demand
is calculated from the average using seasonal indices. Figure-D shows both actual demand and
forecast average demand. The forecast average demand is also the deseasonalized demand. Historical
data are of actual seasonal demand, and they must be deseasonalized before they can be used to
develop a forecast of average demand.
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Also, if comparisons are made between sales in different periods, they are meaningless unless
deseasonalized data are used. For example, a company selling tennis rackets finds demand is usually
largest in the summer. However, some people play indoor tennis, so there is demand in the winter
months as well. If demand in January was 5200 units and in June was 24,000 units, how could
January demand be compared to June demand to see which was the better demand month. If there is
seasonality, comparison of actual demand would be meaningless. Deseasonalized data are needed to
make a comparison.
Figure-D
Forecast
Demand
Demand
Actual
Demand
Quarters
The equation to calculate deseasonalized demand is derived from the previous seasonal equation and
is as follows:
Deseasonalized demand = (Actual seasonal demand / seasonal index)
Example Problem:
A company selling Tennis rackets has a January demand of 5200 units and a July demand of 24000
units. If the seasonal indices for January were 0.5 and for June were 2.5, calculate the deseasonalized
January and July demand. How do the two months compare.
Answer:
Deseasonalized January demand = 5200 / 0.5 = 10,400 units
Deseasonalized June demand = 24000 / 2.5 = 9,600 units
June and January demand can now be compared. On a deseasonalized basis, January demand is
greater than June demand.
Deseasonalized data must be used for forecasting. Forecasts are made for average demand and the
forecast for seasonal demand is calculated from the average demand using the appropriate season
index. The rules for forecasting with seasonality are:
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


Only use deseasonalized data to forecast
Forecast deseasonalized demand not seasonal demand
Calculate the seasonal forecast by applying the seasonal index to the base forecast
Example Problem:
A company uses exponential smoothing to forecast demand for its products. For April, the
deseasonalized forecast was 1000, and the actual seasonal demand was 1250 units. The seasonal index
for April is 1.2 and for May is 0.7. if α is 0.1, calculate:
a) The deseasonalized actual demand for April
b) The deseasonalized May forecast
c) The seasonal forecast for May
Answer:
a) Deseasonalized actual demand for April = 1250 / 1.2 = 1042
b) Deseasonalized May forecast
= α(latest actual) + (1- α)(previous forecast)
= 0.1(1042) + (1- 0.1)(1000) = 1004
c) Seasonal May forecast
= (seasonal index)(deseasonalized forecast)
= 0.7(1004) = 703
Tracking the Forecast
As noted in the discussion on the principles of forecasting, forecasts are usually wrong. There are
several reasons for this, some of which are related to human involvement and others to the behavior of
the economy. If there were a method of determining how good a forecast is, forecasting methods
could be improved and better estimates could be made accounting for the error. There is no point in
continuing with a plan based on poor forecast data. We need to track the forecast. Tracking the
forecast is the process of comparing actual demand with the forecast.
Forecast Error is the difference between actual demand and forecast demand. Error can occur in two
ways: bias and random variation.
Bias: Cumulative actual demand may not be the same as forecast. Consider the data in
Figure-E. Actual demand varies from forecast, and over the six month period, cumulative
demand is 120 units greater than expected.
Bias exists when the cumulative actual demand varies from the cumulative forecast. This
means the forecast average demand has been wrong. In the example in Figure-E, the forecast
average demand was 100, but the actual average demand was 720/6=120 units. Figure-F
shows a graph of cumulative forecast and actual demand.
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Figure-E
Month
Forecast
Actual
Monthly
Cumulative Monthly
Cumulative
1
100
100
110
110
2
100
200
125
235
3
100
300
120
355
4
100
400
125
480
5
100
500
130
610
6
100
600
110
720
Total
600
600
720
720
Bias is a systematic error in which the actual demand is consistently above or below the
demand. When bias exists, the forecast should be changed to improve its accuracy.
forecast
The purpose of tracking the forecast is to be able to react to forecast error by planning around
it or by reducing it. When an unacceptably large error or bias is observed, it should be
investigated to determine the cause.
Often there are exceptional one-time reasons for error. Examples are machine breakdown,
customer shutdown, large one-time orders, and sales promotions. These reasons relate to the
discussion on collection and preparation of data and the need to record the circumstances
relating to the data. On these occasions, the demand history must be adjusted to consider the
exceptional circumstances.
Errors can also occur because of timing. For example, an early or late winter will affect the
timing of demand for snow shovels although the cumulative demand will be the same.
Tracking cumulative demand will confirm timing errors or exceptional one-time events. The
following example illustrates this. Note that in April the cumulative demand is back in a
normal range.
Month
Forecast
Actual
Cumulative Cumulative
Forecast
Actual
January
100
95
100
95
February
100
110
200
205
March*
100
155
300
360
April
100
45
400
405
May
100
90
500
495
Customer foresaw a possible strike and stockpiled.
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Figure-F
Actual
Demand
Forecast
Month
Random Variation
In a given period, actual demand will vary about the average demand. The variability will depend
upon the demand pattern of the product. Some products will have a stable demand, and the variation
will not be large. Others will be unstable and will have a large variation.
Consider the data in Figure-G showing forecast and actual demand. Notice there is much random
variation, but the average error is zero. This shows that the average forecast was correct and there was
no bias. The data are plotted in figure-H.
Figure-G : Forecast and actual sales without bias
Month
Forecast
Actual
Variation
1
100
105
5
2
100
94
-6
3
100
98
-2
4
100
104
4
5
100
203
3
6
100
96
-4
Total
600
600
0
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Figure-H
Forecast
Demand
Actual
Months
Mean Absolute Deviation
Forecast error must be measured before it can be used to revise the forecast or to help in planning.
There are several ways to measure error, but one commonly used is mean absolute deviation (MAD).
Consider the data on variability in Figure-G. Although the total error (variation) is zero, there is still
considerable variation each month. Total error would be useless to measure the variation. One way to
measure the variability is to calculate the total error ignoring the plus and minus signs and take the
average. This is called mean absolute deviation:



Mean implies an average
Absolute means without reference to plus and minus
Deviation refers to the error
MAD = (sum of absolute deviations / number of observations)
Example problem
Given the data shown in Figure-G, calculate the mean absolute deviation.
Answer:
Sum of absolute deviations = 5+6+2+4+3+4=24
MAD = 24/4 = 4
Normal distribution
The mean absolute deviation measures the difference (error) between actual demand and forecast.
Usually, actual demand is close to the forecast but sometimes is not. A graph of the number of times
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(frequency) actual demand is of a particular value products a bell shaped curve. This distribution is
called normal distribution and is shown in Figure-I.
Figure-I : Normal distribution
1%
1%
4%
-3
15%
-2
30%
-1
0
4%
15%
30%
1
2
3
Mean Absolute Deviations
There are two important characteristics to normal curves: the central tendency, or average, and the
dispersion or spread, of the distribution. In Figure-I, the central tendency is the forecast. The
dispersion, the fatness or thinness of the normal curve is measured by the standard deviation. The
greater the dispersion, the larger the standard deviation. This mean absolute deviation is an
approximation of the standard deviation is used because it is easy to calculate and apply.
From statistics we know that the error will be within:
+ 1 MAD of the average about 60% of the time
+ 2 MAD of the average about 90% of the time
+ 3 MAD of the average about 98% of the time
Uses of mean absolute deviation – Mean absolute deviation has several uses. Some of the most
important follow:
Tracking signal: Bias exists when cumulative actual demand varies from forecast. The problem is in
guessing whether the variance is due to random variation or bias. If the variation is due to random
variation, the error will correct itself, and nothing should be done to adjust the forecast. However, if
the error is due to bias, the forecast should be corrected. Using the mean absolute deviation, we can
make some judgment about the reasonableness of the error. Under normal circumstances, the actual
period demand will be within + 3 MAD of the average 98% of the time. If actual period demand
varies from the forecast by more than 3 MAD, we can be about 98% sure the forecast is in error.
A tracking signal can be used to monitor the quality of the forecast. There are several procedures
used, but one of the simpler is based on a comparison of the cumulative sum of the forecast errors to
the mean absolute deviation. Following is the equation:
Tracking signal = (algebraic sum forecast errors / MAD)
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Example problem:
A company uses a trigger of + 4 to decide whether a forecast should be reviewed. Given the following
history, determine in which period the forecast should be reviewed. MAD for the item is 2.
Period
Forecast
Actual
1
100
96
2
100
98
3
100
104
4
100
110
Forecast
Actual
Deviation
Cumulative
Deviation
Tracking
signal
5
2.5
Cumulative
Deviation
Tracking
signal
5
2.5
Answer:
Period
Deviation
1
100
96
-4
1
0.5
2
100
98
-2
-1
-0.5
3
100
104
4
3
1.5
4
100
110
10
13
6.5
The forecast should be reviewed in period 4.
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Case Study - The agribusiness agrohortalizas
INTRODUCTION
The firm Agrohortalizas, located in the Andean mountains of Latin America, had agreed to deliver
two metric tonnes of broccoli and cauliflower per week to one of the country’s most important retail
chains. The first delivery months, which happened to coincide with the rainy season, passed off
without incident.
Although weekly plantings had been planned in different regions in order to cover the required
demand from the supermarket, in its planning process Agrohortalizas had overlooked two details:


25 percent of the cultivated land had no irrigation systems.
15 percent of the cultivated land was in areas prone to frost.
The problems began after six months. The first problem was with the delivery for the second week of
June, owing to harvest losses on the non-irrigated land. To make up the shortfall, the enterprise
decided to buy-in from local suppliers.
One month later, the problem had continued and it was not possible to harvest the expected volume of
crop. The local price for broccoli started to rise, increasing Agrohortalizas’ capital requirements, but
the firm wanted to avoid losing such a good customer at any cost.
By the third week in August, the enterprise was in debt and had received complaints from the
supermarket because the produce it had delivered failed to meet the specifications in the initial
contract (varying sizes and degrees of maturity).
By the end of October, the situation was no longer sustainable, the production deficit was around 30
percent, a frost killed off 10 percent of the crop and the firm was heavily in debt. It found it
impossible to continue delivering products to the customer, who then filed a complaint. On 1
December, Agrohortalizas closed its doors and more than 200 producers found themselves without a
market for their products.
At first sight, the problem might appear to have been caused by climatic conditions or lack of
irrigation. In fact the real problem was poor production planning and a failure to consider foreseeable
situations; an exercise that could have averted many of the problems that were encountered.
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NOTES
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14. Agribusiness in India: Some Facts and Emerging Issues
LEADING AGRIBUSINESS
The Indian Landscape:
 Biggest food grain and oilseed producer
 Largest producer of milk, tea
 Fruits & Vegetable and Sugar– 2nd in the world
 Largest livestock
 Largest tractor market
 Agriculture contributes 22% of GDP
 Vast outreach of bank branches –68000 branches – 47000 rural/ semi urban branches of
ASCBs (Co-operative Bank branches excluded)
Miles to go:
 Only 2% of horticulture produce in India is processed (vis-à-vis more than 40% in other
developing countries like Brazil & Malaysia)
 India’s share in global processed food trade is only 1.5%.
 High proportion of wastages ranging from 22% (potato, cabbage) to over 40% (papaya,
cauliflower)
What ails the Agri supply chain scenario?
 Crop losses due to substandard harvesting & farming techniques, post harvest losses,
storage losses, transportation losses, weight losses and decaying / deterioration.
 Long and fragmented supply chain coupled with lack of modern storage, transportation,
preservation, processing and marketing facilities/infrastructure
The perils of a weak supply chain:
Each constituent of the chain functions independently with little or no overlap and limited
exchange of information:
• No information on prices and hence farmer does not discover the best price
• Quality aspects largely ignored while pricing
• Cannot ensure uninterrupted supply
• Prevents investments for improvement in technology and processes
What is required?
• Integrated supply chain
• Feedback to farmer to ‘grow what sells’
• Better price discovery
• Availability and adoption of best farming and agronomy practices for ensuring good yield
with appropriate quality
• Good post-harvest management/technologies for arresting deterioration
• Reducing leakages and wastages. Besides higher prices due to proper sorting and
grading
• Partial disintermediation by eliminating middlemen
• Prolonged life of commodity and processing/packaging advantages
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FUNDAMENTAL CHANGES OCCURING IN INDIAN AGRICULTURE
Rapid growth in organised retail
• Increased consumer spends, as hypermarkets drive cost down by 35-40%.
• Productivity gains across entire supply chain through disintermediation and superior
technology.
Global shift to sourcing from India across products/ services including food
• High-margin businesses possible in niche areas (e.g. organic foods, herbal products)
• Quality improvement and spill-over to domestic markets, as producers meet stringent
export requirements.
• Investments in cold chain and transport infrastructure.
Government Thrust
• Deregulation & liberalisation
• Amendments to Market Committee (APMC) Act; facilitation for contract farming
• Increased investments – Agri Export Zones, Cold Chains, Warehouses, Infrastructure,
Commodity Exchanges
Increasing corporate interest in agribusiness
• Financial incentives & subsidies
• Variety of players and increasing activity – agri input companies, tractor manufacturers,
trading Companies, exporters, processors
• Different business models being experimented - with (ITC’s e-choupal, Tata Chemicals’
Kisan Kendras, HLL’s Project Shakti; Reliance and Bharti’s Retail Initiatives )
Emerging Opportunities
• Agricultural Marketing
• Wholesale / Terminal Markets
• Perishable Cargo Centres
• Rural Primary Mandis
• Grading, Standardisation
• Labeling and Packaging facilities
• Quality Testing Labs and Quality Control Units
• Warehousing and Storage infrastructure
• Cold storages
Infrastructure
• Green houses
• Micro irrigation equipment
• Minor Irrigation
• Logistics support
• Processing plants and equipment
• Pre cooling facilities
• Milk chilling plants
• Refrigerated vehicles
• ICT networks
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OVERVIEW
The Oxford dictionary defines the word ‘business’ as buying and selling or trade or commercial work.
The word trade or commerce means exchange of goods as a means of livelihood or profit. In our
National Accounts, agro-processing, production of agro-chemicals and farm machinery, and trade
(wholesaling and retailing) are considered as parts of manufacturing (industrial) or service (tertiary)
sector. With structural transformation of the economy, the share of agricultural production
(farming) in the economy is going down, and that of processing, distribution and trade is increasing.
Further, with the increase in backward and forward linkages, the distinction between agriculture and
agro-industry is getting blurred. Farm production, processing, and trade are getting increasingly
coupled. The word ‘supply chain’ is being increasingly talked of and discussed. Supply chain is a
coordinated system of organizations, people, activities, information, and resources involved in
moving a product or service in physical or virtual form from supplier to the customer. Supply chain
activities include transformation of raw material and components into finished products that are
then delivered to the end customers. In the developed countries, agribusiness is defined as the total
output arising from farm production and product processing at both pre- and post farm gate levels.
In developing countries like India, the agribusiness sector encompasses four distinct sub-sectors, viz.
agricultural inputs; agricultural production; agro-processing; and marketing and trade. All these add
value.
Agribusiness is emerging as a specialized branch of knowledge in the field of management sciences.
In this context, agribusiness can be defined as science and practice of activities, with backward and
forward linkages, related to production, processing, marketing, trade, and distribution of raw and
processed food, feed and fibre, including supply of inputs and services for these activities.
Need for Agribusiness Mode
Over the years, while the agricultural marketing and trade scenario has undergone tremendous
changes, it has not changed enough to meet the emerging demand for such services. Some of the
marketing system-related limitations have been as follows:
(i) The market size is already large and is continuously expanding. The farmers’ market linkages
(both backward and forward) have also increased manifold, but the marketing system has
not kept pace.
(ii) Private trade, which handles around 80 per cent of the marketed surplus, did not invest in
marketing infrastructure due to excessive regulatory framework and dominance of
unorganized sector.
(iii) Increased demand for value-added services and geographic expansion of markets require
lengthening of the marketing channel, but this has been hampered by lack of rural
infrastructure.
(iv) Direct marketing by ‘farmers to consumers’ remains negligible. In 85 per cent of the 27,294
rural periodic markets, where small and marginal farmers come in contact with the formal
economy, facilities for efficient trade are still almost absent.
(v) Food processing industry has a high multiplier effect and employment potential. But in India,
the value addition to food production has been only around 7 per cent.
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(vi) Due to lack of proper handling (cleaning, sorting, grading and packaging) at the farm gate or
village level, about 7 per cent of grains, 30 per cent of fruits and vegetables, and 10 per cent
of seed spices are lost before reaching the market.
(vii)An estimated Rs 50,000 crores are lost annually in the marketing chain due to
poorly developed marketing infrastructure and inefficient system of marketing
activities.
(viii)The State Agricultural Produce Markets Regulation (APMR) legislation has
hampered the contract farming initiatives, which otherwise can be highly
beneficial to develop linkages of farmers with the markets.
(ix)Farmers, shifting to higher-value crops, face increased risks of fluctuations in
yield, price and income. Whether it is increasing the incomes of farmers,
saving the national loss of farm products along the traditional supply chain or
creating more employment opportunities, sound development of agribusiness
provides a new frontier by creating an environment of much needed
investment in agricultural marketing and trade.
The Expert Committee on Agricultural Marketing, appointed by the Ministry of Agriculture,
Government of India, in December 2000, estimated the investment requirement of Rs 2687 billion in
agricultural marketing (Government of India, 2001). This includes possible investment of Rs 1364
billion by the private sector. The Working Group on Agricultural Marketing and Trade, appointed by
the Planning Commission, has estimated the total investment requirement of Rs 643 billion during
the XI Five-Year Plan, which includes a possible private sector investment of Rs 306 billion (Planning
Commission, 2007). It is now absolutely clear that the needs for infusion of new technologies, and
increasing the economies of scale in marketing for improving the efficiency of entire marketing chain
can be met through higher level of investment in value addition and marketing system. Development
and promotion of agribusiness sector, which has strong linkages with the agricultural production,
agro-processing, and service sectors, is capable of influencing each one of them through adequate
investment in marketing activities. This can make a valuable contribution in terms of creating
additional employment in the non-farm sector. Promotion of the agribusiness can also substantially
augment the availability of farm products.
An international wheat expert was recently asked to suggest ways of augmenting the production of
wheat in India by 25 million tonnes. He inter alia suggested that 5 million tonnes of wheat could be
added to the food basket by saving post-harvest losses occurring due to insects, weevils, rodents and
monsoon damage. Already, there is a considerable income diversification in the rural areas.
A recent study by NCAP (Birthal et al., 2007) has revealed that out of the total income of farm
households, around one-fourth (24.4 per cent) is contributed by non-farm business. For submarginal and marginal farmers, it is considerably higher at 33.9 per cent and 27.4 per cent,
respectively. It is in this context that a transformation from ‘agriculture’ to ‘agribusiness’ is being
advocated and espoused. The basic philosophy of promoting agribusiness lies in the statement “Eat
what you can and CAN what you cannot”.
SIZE OF INDIAN AGRIBUSINESS
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The size of agribusiness can be analyzed from the following different angles:
(i) The value of agricultural products marketed at the first point of sale during 2004-05 was Rs
5053 billion, which included Rs 3323 billion of crop products, Rs 1387 billion of livestock
products and Rs 343 billion of fisheries products.
(ii) The value of farm inputs marketed during 2004-05 was Rs 727 billion, which included seeds,
fertilizers, pesticides/insecticides, repair and maintenance services, livestock feed/fodder,
organic manure, and electricity/diesel.
(iii) The value of agro-processed products during the year 2004-05 was Rs 4169 billion, in which
Rs 2960 billion was from registered manufacturing units and Rs 1209 billion from
unregistered manufacturing establishments. These included processed dairy products, meat
and fish, fruits and vegetables, edible oils, grain milling products, beverages, tobacco and
leather products.
(iv) Considering all these segments (primary agricultural products, farm inputs and processed
products), total value of agribusiness was arrived at Rs 9949 billion.
(v) These apart, value addition takes place during the marketing system. During 2004-05, value
addition from trade and hotels and restaurant activities (GDP) has been estimated as Rs
4178 billion and Rs 416 billion, respectively. If at least 20 per cent of value addition in trade
is considered on agriculture related-products (and 100 per cent in hotels and restaurants),
these activities are worth Rs 1251 billion.
(vi) Agribusiness also includes trade and sales of imported agricultural products. Total value of
imported agricultural or processed products in 2004-05 was Rs 228 billion, which included Rs
111 billion worth of edible oils.
(vii) Thus, the total Indian agribusiness is worth at least Rs 11.43 trillion or Rs
11,43,000 crores. The size of agribusiness can also be looked at from
the angles of structure of agribusiness, as discussed below:
a. The primary producing units are around 121 million operational holdings, of which
63 per cent (76 million) are of less than one hectare in operating size, on an average,
0.4 hectare of land. Assembling of farm products from such a large number of small
production units is a huge task.
b. There are around 5 million wholesale traders and 11.2 million retailers of
agricultural and other commodities. Out of 11.2 million retail outlets, 3.7 million are
estimated to be food retail outlets.
c. Agro-industries include both organized and unorganized sector units. There are 17.0
million units in the unorganized sector, of which 13.91 million are agro-based. Out of
13.91 million agro-industrial units in the unorganized sector, 12.32 million are own
account manufacturing establishments (OAME), 1.2 million are non-directory
manufacturing establishments (NDME) and 0.39 million are directory manufacturing
establishments (DME).
d. There are 5.11 million food processing units in the unorganized sector, of which 4.62
million are OAMEs, 0.36 million are NDMEs and 0.13 million are DMEs.
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e. The units in the organized sector are few in number but account for a bulk of the
total gross value addition. There are 35,000 modern rice mills, 20,000 pulse mills,
5198 fruit and vegetable processing units, and 400 fish processing units. There are
426 sugar mills, and 3619 grinning and pressing units.
f.
Most of the food processing units are in the unorganized sector and Indian food
market continues to be dominated by the fresh food segment. According to one
estimate, Indian food market comprises 10 per cent processed segment, 15 per cent
semi-processed segment and 75 per cent as fresh food segment. Processing is
reported to be around 2 per cent in fruits and vegetables, 37 per cent in milk, 21 per
cent in meat, 6 per cent in poultry and 11 per cent in marine fish. Fruit and
vegetable processing is projected to go up to 10 per cent by 2010, taking the food
processing segment to 32 per cent of the total food market. The overall value
addition in food products, which is currently 8 per cent, is likely to increase to 35 per
cent by 2025.
EMERGING AREAS IN AGRIBUSINESS
1. Agribusiness Opportunities - As already mentioned,
for improving the efficiency of the marketing system,
there is a need of substantial investment in
marketing infrastructure, both physical and
institutional.
The
investment
needs
and
opportunities for investors exist in the following
broad areas:
(i) Production
• Production of high-yielding seeds
• Production of high-quality planting
material, including use of tissue culture methods of micro-propagation
• Nurseries, including hardening nurseries 414 Agricultural Economics Research
Review Vol. 20 (Conf. Issue) 2007
• Organic farming
• Production of microbial cultures and vermicompost, and
• Floriculture
(ii) Processing
• Fruit and vegetable processing, including dehydration, canning, aseptic packaging,
processing of underutilized fruits, and processing for other products like grape raisin,
osmo air-dried fruits, fruit toffee, bleached dry ginger and spices’ powders
• Processing of maize for starch and feed through improved mini/ small mills and dry
milling plants
• Processing of millets for various purposes, including malt from finger millets and RTE
(Ready-to-Eat) products
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•
Processing of sugarcane for various jaggery products like spiced jaggery, powdered
jaggery, and jaggery cubes
• Processing of herbal and medicinal plants
• Processing of dairy products
• Processing for poultry products, including poultry dressing, and
• Processing of livestock products and livestock wastes
(iii) Infrastructure
• Cool chain infrastructure, including cold stores
• Storage and warehousing
• Specialized transport services
• Packaging infrastructure, including pack houses, and
• Agri-clinics and service centres
(iv) Trade and Others
• Procurement through contract arrangements, including contract farming
• Retailing
• Supply chain management, and
• Capacity building, including human resource development in agribusiness. Many of
these activities can be taken up by small and micro enterprises (SMEs). The
employment potential of SME sector is very high. It already employs 67 million
people and has grown at a rate of 4.4 per cent per annum during the 10th Five-Year
Plan.
 These apart, several companies and food chains are now sourcing agricultural
products from India to feed their outlets across the world. Further, our exports in
several agricultural sub-sectors are increasing. For example, India now is a net
exporter of livestock products. During the triennium ending (TE) 2006, our exports
were valued at US$ 676 million, which included US$ 441 million worth of bovine
meat. The food miles (the distance food travels) are increasing due to developments
in food technology, transport technology, ICT and biotechnology. The India’s food
companies are also globalizing. India’s food industry transnationality index had
increased from 59 in 1990 to 79 in 1999, and is the highest among all the industries.
Transnationality index is the degree to which a company is internationalized and is
measured by comparing the company’s assets, employment and sales at home and
abroad. Thus, there are considerable opportunities
for agribusiness entrepreneurs in all these areas.
2. India’s Retail Sector
As already mentioned, there are around 11.2 million retail outlets
of which nearly one-third are food retail outlets and two-thirds
are non-food outlets. Indian retail sector is estimated to be worth
US$ 330 billion or Rs 13.2 trillion. It is projected to increase to
US$ 427 billion by 2010 and to US$ 637 billion by 2015. Given this
rate of growth, it is increasingly attracting the attention of corporate, both domestic and foreign.
At present, the organized retailing constitutes only 2 per cent of the total retail sales but is
expected to go to 10 per cent. Organized retailing in India was first started by the textile mills by
opening their own retail outlets. Later, pure organized retailers (other than manufacturers) also
entered. The old belief that organized sector retail shops are more expensive is now giving way.
In India, food is the largest segment of retail industry. There are around 3.7 million food retail
outlets with an estimated turnover of Rs 7400 billion. Food retailing in India is, by and large,
unorganized, highly fragmented and predominantly small, family owned businesses (Singh,
2007). About 78 per cent of these outlets function with only family labour. Nearly 96 per cent of
the food outlets are small with less than 500 sq ft area.
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Unorganized food retail segment consists of kirana shops, selling dry food products, and
fruit/vegetable shops and hawkers (pushcart walas) selling wet food products. As the
unorganized retail outlets are under-capitalized, these are not able to cater to the consumer
demand for value-added services, thus providing the edge to the organized retail sector.
Organized food retailing, which till recently accounted for only around 2 per cent of the total
food retail sales, is expected to increase significantly in next couple of years. Food retail sector is
reported to employ about 21 million people. Organized retailing takes place under different
formats. Globally, there are six retail chain formats, viz. hyper markets, super markets, super
centres, warehouse clubs, discount stores, convenience stores and pop and mom stores. In
India, 14 companies run departmental stores and several others are regularly entering the retail
segment in different formats. Organized sector players are also doing assembling, storage and
sales to other retailers. Some Indian super markets are ‘Food World’, ‘Nilgiris’, ‘Subhiksha’, ‘Fab
Mall’, ‘Giant’, Aditya Birla Retail, Spencers etc. Super markets consider fruits and vegetables as
destination category of goods to attract more customers. Some other agricultural retail chains
are: ‘E-Choupals’ and ‘E-Sagars’ (ITC), ‘Krishi Vihars’ (M&M), ‘Aadhaars’ (Godrej Agro), ‘Kisan
Sansars’ (Tata) and ‘Reliance Fresh/Reliance Retail’.
‘Food World’ was the first super market started in Bangalore and it is now considered as one of
the largest food chain in India. For each city, it follows a hub and spoke model and employs a
large number of women to perform various operations in the supply chain. Super markets use
various channels to manage supplies. Some of these are:
(i) Direct, uncontracted purchases from farmers at individual super markets
(ii) Purchases from wholesalers, who either work directly with farmers or through
wholesale markets
(iii) Purchases through independent procurement companies (dedicated suppliers) who
often work with farmers approved by super market chains
(iv) Purchases through government-sponsored distribution centres
(v) Purchases through informal farmers’ groups, farmers’ associations or cooperatives
(vi) Purchases through large individual farmers who often sub-contract part of the supply to
smaller farmers
(vii) Leasing of space within the store on a commission basis to traders, farmers and
cooperatives.
3. Contract Farming
The organized sector is using contract farming model for
meeting its requirements for retailing, processing or export
purposes. Despite several advantages of contract farming, the
coverage continues to be limited. As per the statement of
Union Minister of State for Rural Development in the
Parliament on September 3, 2007, the total area under
contract farming was 4.26 lakh hectares, most of which was in
three states of Tamil Nadu (2.37 lakh ha), Punjab (1.21 lakh ha) and Orissa (0.60 lakh ha). There
are 18 companies/organizations that are involved in contract farming. These are Hindustan
Unilever, WIMCO, Pepsi, Food Pro, NDDB, Maxworth Orchards, Cadbury India, BILT, ITC, JK
Paper, AV Thomas, Reliance Agrotech, Godrej Agro, United Breweries, DCM Sriram, Markfed,
L&T, and Escorts. Contract farming has been traditionally a common practice for the paper
industry, match stick manufacturers, and now in seed production. Contract farming lowers
transaction cost for the company and reduces market risks for the farmer. It is certainly a viable
alternative to corporate farming. Some sort of contract farming is also prevalent in sugarcane
and dairying, but it is not treated as a formal format of contract farming in the common
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parlance. The studies show that the experience with contract farming has been a mixed one.
Contract purchaser becomes a sort of monopsonist with all the associated disadvantages. Also,
there is an evidence of tendency of exclusion of small and marginal farmers on the part of
contracting companies.
Nevertheless, it has been found to be successful in several cases, including gherkins (no local
market) and basmati rice (for exporting firms). With adequate hassle free safeguards, advance
contract between the farmer and buyer can be an important pathway for minimizing farmers’
marketing risks and increasing their incomes.
4. Recent Initiatives
For the promotion of agribusiness, several initiatives have been taken during the past five years,
which have created a favorable environment for the growth of agribusiness. Several marketingrelated restrictions have been withdrawn or replaced. Amendments in State Agricultural
Produce Markets Regulation Acts are being made to facilitate setting up of private markets,
direct purchases of farmers’ produce and contract farming arrangements. Several monetary
concessions have been announced by the central and state governments. These include 100 per
cent excise exemption for 10 years, 100 per cent income tax exemption for five years (later
withdrawal in phases), and capital investment subsidy of 15 per cent (upto Rs 30 lakh).
Keeping in view the growing importance of agri-exports in improving farmers’ incomes, the
government has set up several agri export zones (AEZs). Further, to help exporters in meeting
phytosanitary requirements, several initiatives have been put in place. Regulatory authorities at
the state level have been notified. The quality standards have been harmonized and publicized
and requirements of necessary documents have been specified. Every exporter is required to
obtain an IEC (Import-Export Code) from the Director General of Foreign Trade and then get
registered with APEDA. Those who plan to export some products can either register themselves
or contact registered export houses, whose names and details are available on websites of
APEDA and Indian Trade Promotion Organization. While Indian companies are increasingly
entering the retail business, foreign direct investment (FDI) in retail is not allowed. It is allowed
in franchising and commission agent services. It is also allowed in wholesale business with case
by case approval from the Reserve Bank of India. However, foreign retailers can operate in India
through joint ventures (where Indian partner is an export house), franchising/local
manufacturing/sourcing from small scale sector (e.g. McDonalds), and through cash and carry
operations (e.g. Metro in Bangalore).
Considering that traditional supply chain is fragmented, there is presence of a large number of
intermediaries, and the existing market yards are dominated by the association of a few traders,
the growth of organized retail (through India’s corporate sector or FDI) provides several
advantages. It brings in new technical know-how in marketing and reduces inefficiency in the
supply chain. It improves quality of services to the consumers and creates employment for the
youth. It also helps in achieving international quality standards and thus boosts exports, leading
to increase in farmers’ incomes.
SOME EMERGING ISSUES
1. The Concern
The issues that are emerging relate to the need for change in the paradigm of functioning of
agricultural systems. What is needed is improvement in the existing marketing system that
reduces cost by saving the losses in the marketing chain, increasing the competition thereby
reducing undue profits of some intermediaries and creating the additional employment
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opportunities in the agricultural marketing system. This would help farmers, consumers as well
as unemployed youth.
There is considerable potential of creating more lucrative and attractive jobs for the youth in
agribusiness activities. Super markets and retail chains will need many times more young
business graduates. It needs to be noted that already between 2000 and 2005, India created 1.1
million jobs per year, which is the highest among BRIC (Brazil, Russia, India, and China) countries.
However, the changes in agri-food systems have significant implications for growth, poverty and
food security. On the positive side, agribusiness is responding to the strong consumer demand
for high-value commodities, processed products and pre-prepared foods. There is in fact
expansion of demand for farm products. It provides new opportunities to farmers for value
addition, while agro-processing firms provide them crucial inputs and services and also cover a
part of their risk. If properly used and understood, it should turn out to be bonanza for the
farmers. Investment is flowing thick in agribusiness, and agribusiness and super market retail
boom is a new mantra. Many companies have already invested billions either directly or through
local partnerships. There is likelihood of agribusiness firms with all their managerial abilities,
finding new ways to use the demand opportunities. However, fears are being expressed that, by
virtue of their capital and scale operations, these firms may space out small traders, processors
and retailers.
In this context, two most important issues today relate to
a) Expansion of organized retail segment, and
b) Entry of global players in the retail sector. Our focus here is on agricultural commodities,
including food products.
2. Retail Sector Issues — Modern Retail Outlets
Agriculture and retail sectors are the two largest employers in India. The entry of organized
sector in retail business brings with it more investment in marketing and creates millions of jobs,
but may also displace the existing self-employed people. The basic question is whether we need
more relatively high profile jobs or continue with a scenario where many families take out a
living through microscopically small one person or one family enterprise. There is a demand for
organized retailing services. It is not only the high-end consumers but also the middle class and
lower-middle class consumers that are going to the organized retail stores for lower price, better
service and shopping comfort, particularly when these are available in the neighborhood. Apart
from the fears of partial displacement of the existing informal retail outlets, the main issue
relates to the nature of market structure that may emerge when the market share of modern
retail outlets goes up. The tendency of increased consolidation (both horizontal and vertical) of
agribusiness firms may lead to a situation of monopsony/monopoly or at the most
monopsonistic/monopolistic competition that may not be more perfect than the existing
imperfections in the market.
In some parts of the country, there have been protests from traders’ and vendors’ groups
against the emerging modern retail sector. Some state governments have asked the companies
to close their outlets in the interest of maintenance of law and order. However, the central
government has asked the states to ensure trouble free business by retail chains. The argument
for protests is that the corporate buy directly from the farmers, save transaction costs and sell at
lower prices to the consumers; thus the existing traders are losing their business. The fact is that
the existing players are now facing stiff competition from the organized retail outlets. The
protests have been mainly in the states of Uttar Pradesh, Madhya Pradesh, Jharkhand, West
Bengal, Kerala, and Orissa, and recently in Mumbai too. Consequently, some organized retailers
have decided to roll out from the fruit and vegetable business in areas where they have faced
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opposition and hostility. The opposition to modern retail outlets has been mostly in those states
where farmers are relatively more marginalized. A noteworthy aspect has been that farmers in
general are favorably placed with modern retail outlets and the central government has asked
the states to ensure trouble free business by the retail chains.
There is no comparable large and diverse economy anywhere in the world that has such a
primitive distribution system for the basic commodities of daily needs as we have in India. If the
government and the industry do not nip this growing tide against the modern retail sector, the
impact can be more disastrous for the agricultural sector as a whole, rather than for the business
houses who have announced ambitious plans to enter the sector. All big players are diversified
business houses. They can very easily afford to shelve their plans and divert resources to other
exciting opportunities in India and abroad.
a. The losers in the process could be millions of middle and lower income Indians who
would have potentially benefited from the competition and efficiency induced lower
prices, better quality, superior service and shopping comfort.
b. The losers could also be millions of farmers who would be constrained to continue to sell
to the middlemen that have no qualms in creating scarcity when it suits them, only to
raise the final price for the consumers, even as the farmers continue to receive low
prices.
c. The losers could also be millions of average men and women who could have found
better jobs (sales and supply chain) with their otherwise nearly unemployable situation.
d. The losers could also be state governments who would have otherwise gained from
better tax compliance at the retail end.
Considering the wider importance of modern retail stores and emerging organized supply chains,
and keeping in view the arguments against these, there is a need for initiatives and measures
that would help in taking care of the possible negative impact on some sections.
 First, as in Bangladesh, nongovernmental organizations (NGOs) in the rural areas should
become active in organizing farmers for increasing their bargaining power.
 Second, the existing traders and retailers should be provided with liberal loan facilities
so that if they so desire, can enter in setting up their own retail outlets and supply
chains.
 Third, major retailers and supply chains should be persuaded or facilitated to use the
existing traders or commission agents as their sourcing agents and vendors as their sale
outlets, as is being successfully done by some companies.
 Fourth, agribusiness models (whether modern retail chains or otherwise) can be set up
in the public-private partnership format. A very successful case is of Uttarakhand State
Seeds and Tarai Development Corporation. The stakeholders or partners are state
government (30 per cent), Government of India (21 per cent), State Agricultural
University (15 per cent) and farmers (34 per cent). The Corporation is using private
companies for sale of seeds and is also involved in the export of seeds. Further, quite a
few modern retail outlets launched by farmers’ groups/cooperatives/companies or
consumer organizations are working successfully at many places in the country.
 Fifth, possible unfair trade practices of agribusiness firms can be regulated by
a) Enforcing transparency in contracts and procurement;
b) Strengthening of farmers’ cooperatives or self-help groups;
c) Providing for public scrutiny of acquisitions and mergers; and
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d) Strict social or public auditing of food and trade flows.
e) And sixth, prudent regulation of corporate retailers as has been done by several
countries may be put in place. For example, there is enforced zoning for mega
retailers in Japan and Thailand. In the USA, some states have put in city limits for
the organized retailers. In France, there is regulation for retailers with larger
than specified carpet area. We should devise our own regulatory system.
3. Entry of Global Agribusiness Firms
The other equally important issue relates to the entry of global agribusiness firms in the Indian
market for trade, particularly the retail sector. No doubt, global firms bring with them
technology, capital and managerial skills, but there are several other aspects that need to be
kept in view while allowing foreign direct investment in the retail sector. First, global firms, by
their very strategy, maximize their profits by procuring or purchasing from globally cheapest
markets/areas/countries and indulge in dumping, leading to pricing out of domestic producers
and local small retailers. Second, global agricultural trade is highly asymmetric in the sense that
there are a large number of producers, very few traders and a large number of consumers. It has
been reported that top 10 companies’ control on global trade is 84 per cent in agrochemicals, 51
per cent in seeds, 24 per cent in food retail, and more than 90 per cent in foodgrains trade
(CENTAD, 2007). Third, owing to the concentration of trading power among few companies,
international decline in basic commodity prices has not resulted in cheaper food in importing
countries. And fourth, global firms indulge in lobbying to influence the national and international
policies in their favour. It is in this context that the option of allowing entry of global firms and
FDI in the retail sector needs to be carefully analyzed. China has restricted foreign holding only
up to 49 per cent in the retail sector. Philippines has imposed sourcing and reciprocity
requirement on foreign retailers. India will also need to put in place adequate safeguards in this
area.
CONCLUDING OBSERVATIONS
Despite several forms of government intervention and a number of marketing development
programmes, the marketing system for farm products has continued to suffer from several
weaknesses. The farmers have borne the brunt of these weaknesses. The private sector, for
long, did not invest or shied away from investment in the agricultural marketing activities. It is
only during the past five years or so, i.e. the second phase of liberalization, that the agricultural
marketing reforms were initiated. One of the outcomes of these initiatives has been the entry of
private sector in agribusiness activities on a substantial scale.
A shift from ‘agriculture’ to ‘agribusinesses’ is being viewed as an essential pathway to revitalize
Indian agriculture. While the share of pure agriculture in GDP may decline, the share of
agribusiness will not and is bound to go up with the demand for value addition continuously
increasing. It is in this context that it has long been argued for redefining agriculture as ‘the
science of activities relating to production, processing, marketing, distribution and trade of food,
feed and fibre’. Implicit in this definition are two ideas. One is that while planning and macro
managing the agricultural sector, the focus should now shift from ‘only production’ to
‘production plus all other associated activities’ that constitute agribusiness. And second is the
shift from production to innovation, which is the specific requirement of entrepreneurship.
Essentially, entrepreneurs are innovators. Innovation has been the key to success of every
entrepreneur, be it a farmer or trader. Entrepreneurs strive to compete with others through
innovations. Through innovations small farmers or small enterprises are able to counter the
disadvantages of size and scale. Finding the balance between development potential arising out
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of investment by the private sector and implications of these developments for employment of a
considerable section of society is one of the major challenges of policymakers today. While some
issues are only apprehensions, the others are real. There is a need for ex ante assessment of the
outcomes of the current wave already underway. Whether agribusiness and retail food chains
help improve the agricultural marketing efficiency. While the new firms will carve out market
space for them, they would also need to realize returns for their investments. In this context,
how much benefits of the reduced marketing cost would they transfer to the farmers and
consumers? Food chain owners consider working with small and marginal farmers a
cumbersome and costlier proposition. Will they encourage farmers’ organizations to assist in
sourcing the farm products? To what extent, these firms will be able to use the expertise and
experience of the existing traders and vendors? What is going to be the overall employment
scenario? Can the entry of organized retail chains help India become more internationally
competitive? Further, given the advantages of hawkers and street corner shops and the
purchasing habits/behavior of a large number of consumers, what is the upper limit of the
market share that the modern food retailers can capture? The most important issue, of course,
relates to the legal and regulatory framework that is put in place, which will determine whether
or not adequate private investment flows in these activities and the market structure that
ultimately emerges is more or less perfect than what we have today.
We are at the crossroads of agricultural marketing development in the country. Unless we are
careful, we may commit either type 1 or type 2 error. We may move along the road where we
should not be moving or we may not move along the road where, in fact, we should be moving.
The policy analysts, agricultural economists and marketing specialists have a great challenge in
advising the country, i.e. policymakers, businessmen and farmers, in selecting the road which,
while takes the country forward on a higher growth path, will help our farmers and farm women
increase their incomes. Our scientific analysis should lead to carving out a path out of poverty,
food insecurity and malnutrition for all those who have waited enough, in the shortest possible
time.
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