SCM-Agri-1

Logistics & Supply Chain Management

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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 buyers 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;

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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. 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 pre-agreed 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 system, they are processed and finally finished goods are distributed to end customers through a physical distribution system. S U P P L I E R C U S T O M E R

PRODUCTION

DISTRIBUTION

Dominant Flow of Products & services Dominant Flow of Demand & Design Information

There are a number of important factors in supply chains: 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. 5


Supply Chain ConceptsIn 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. 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 companys 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

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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. 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 7


extension of ones 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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Silicon Production

Chip Production

Printed Circuit Board Production

Computer Production

Distributor

Retailer

Customer

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 inventorycarrying costs. To get the most profit, a company must have at least four main objectives: 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.

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Marketings 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. 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: 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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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 demandsupply gap for fresh products. 11


SCM Application in Agribusiness 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. 12


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 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 e-commerce, RFID, bar coding etc.

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3.INVENTORY FUNDAMENTALSInventories 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

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possibility. Its purpose is to prevent disruption in production or deliveries to customers. Safety stock is also called as buffer stock or reserve stock. 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: 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 16


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: 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.

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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: 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: o Capital costs Money invested in inventory is not available for other uses and as such represents a lost opportunity cost. Storage costs Storing inventory requires space, workers, and equipment. As inventory increases, so do the costs. 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.

o

o

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 backorder 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.

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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: Quarter1 Forecast Demand Production Ending Inventory Average Inventory Inventory Cost (dollars) 2000 4000 2000 1000 3000 Quarter2 3000 4000 3000 2500 7500 Quarter3 6000 4000 1000 2000 6000 Quarter4 5000 4000 0 500 1500 18000 Total 16000 16000

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. 19


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 Reduction Rs.4,000,000 in inventory = Rs.6,000,000 Rs.2,000,000 =

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) 20


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 stockkeeping units (SKUs). In controlling inventory, four questions must be answered: 1. What is the importance of inventory item 2. Howe are they to be controlled 3. How much should be ordered at one time 4. 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 Paretos law. As applied to inventories, it is usually found that the relationship between the percentage of items and the percentage of annual dollar usage follows a pattern in which: A About 20% of the items account for about 80% of the dollar usage B About 30% of the items account for about 15% of the dollar usage C 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. 21


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. Determine the annual usage of each item. 2. Multiply the annual usage of each item by its cost to get its total annual dollar usage. 3. List the items according to their annual dollar usage. 4. Calculate the cumulative annual dollar usage and the cumulative percentage items. 5. 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. Calculate the annual dollar usage for each item. b. List the items according to their annual dollar usage c. Calculate the cumulative annual dollar usage and the cumulative percent of items. d. Group items into an A, B, and C classification. Answer 1. Calculate the annual dollar usage for each item. Part number 1 2 3 4 5 Unit Usage 1100 600 100 1300 100 Unit Cost $ 2 40 4 1 60 22 Annual $ usage 2200 24,000 400 1300 6000


6 7 8 9 10 Total

10 100 1500 200 500 5510

25 2 2 2 1

250 200 3000 400 500 $38,250

b., c., and d. Part number 2 5 8 1 4 10 9 3 6 7 Annual $ usage 24000 6000 3000 2200 1300 500 400 400 250 200 Cumulativ e usage 24000 30000 33000 35200 36500 37000 37400 37800 38050 38250 Cumulativ e % usage 62.75 78.43 86.27 92.03 95.42 96.73 97.78 98.82 99.48 100.00 Cumulativ e % of items 10 20 30 40 50 60 70 80 90 10 Class

A A B B B C C C C 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 them when they become extremely important so a supply should always be on hand. For example, order a years 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 23


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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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: 26


Based on ownership 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. Special commodities warehousing It is made to store specific commodities e.g. tobacco, cotton, wool etc due to specific storage requirements. Refrigerators it stores perishable commodities in a temperature controlled environment.

o

o

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. Provide timely customer service 2. Keep track of items so they can be found readily and correctly 3. Minimize the total physical effort and thus the cost of moving goods into and out of storage. 27


4. 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 d. Inspect goods if required 2. Identify the goods: Items are identified with the appropriate stock keeping unit (SKU) number and the quantity received is recorded. 3. Put away: Goods are sorted and moved to the storage locations inside the warehouse, and bin cards are updated. 4. Hold Goods: Goods are kept in storage and under proper protection until needed. 5. Preservation: Depending on nature of commodities, do necessary preservation/fumigation of the goods for preventing any kind of infestation/deterioration. 6. 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. 7. Dispatch the shipment: Orders are packaged, shipping documents are prepared and goods loaded on the right vehicle. 8. 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 28


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 interrelationships 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 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

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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 low-bay 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 working stock can be located more remotely. This allows order picking to occur in a compact area, far more efficiently. 30


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 Agribusiness in

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

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Size ranges from a single 220+/- mt Silo Bag to a 50,000 mt Silo Bag site 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.

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Physical Control and Security 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

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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: 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.

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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 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. 35


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, 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 36


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 StudyKraft 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, 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 37


goods to Krafts 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 Krafts 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 Governments 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 Chinas 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 38


client (with a logistics company), which means there are companies ranked ahead of you, your order might 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. Krafts distribution center consolidation helped in bringing down the companys 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.

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5. Central Warehousing CorporationA 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.

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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 si

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