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Teaching Note

Farmaid Tractors Limited
FarmAid Tractors Limited (FTL) is a tractor company with a 20% market share and aiming
to be the market leader within five years. The tractor industry in India has become very
competitive, with growth in capacity outstripping the growth in demand. Customer
preferences and demands have changed in the context of the competitive environment. The
role of the dealer and servicing the dealer by the company are recognised by FTL as key
success variables in this business. The key issue of concern is to develop a partnership with
the dealers by bringing in a service focus, through improvements in supply chain
management and outbound logistics. Two critical areas for analysis are to be taken up,
namely (i) order processing and inventory planning and (ii) distribution structure including
stockyard location. The issue that is taken up specifically is of determining optimal
stockyard location for states in India. The state of Gujarat has been given as an example for

Questions for Discussion
1. What are the factors leading to the perceived 'lack of control' and poor delivery
2. What forecasting technique should be used for inventory planning at the plant and
the stockyards?
3. Is there a need for a central dispatch yard? What are the pros and cons?
4. What is a good model for determining optimal location of stockyards and the
associated allocation of dealers to the stockyards in the state of Gujarat?
5. Interpret the implications of the recommended locations versus the existing
locations as given in Exhibit 11.

Lack of Control and Poor Delivery Quality
The present scenario, especially the distribution system needs a detailed discussion
regarding the pros and cons. Currently, all despatches were made from the factory to the
stockyards through a daily allocation process that took into account the unmet demand at
stockyards, ready for despatch inventory and availability of the special-purpose trucks
based on the transporters’ inputs. Once assigned to a transporter, they moved the tractors
to their godowns, since there was no space in the factory for holding finished stocks.
Thus the tractor no longer remained under the control of the company. It was often
noticed that the transporters actually moved the tractors out of their godowns after an
average of two days, primarily because of the non-availability of the intended trucks for
despatch. Transporters tried to hedge against under-utilization of their special-purpose

However. More over the percentage of tractors damaged during transportation is also questionable. The model would also have to incorporate marketing decisions. Given an average sales of 5000 tractors per month. the uniform production plan would have inventory costs because of seasonality. subcontracting. the lowest sales of 4000 tractors were expected in February and the highest sales of 6000 tractors in April. At the dealer level. Transit/storage resulting in repair/replacement/replenishment (70% of tractors received a 'yellow' card on receipt at dealers .trucks by reporting availability of trucks ahead of when they actually were. before finally purchasing a tractor. The remaining sometimes got complicated in 'investigations'. Forecasting Technique for Inventory Planning The key concerns in inventory planning were to enable high service levels to the dealers. although there would be costs because of overtime. it became clear that tracking of potential customers would be a reasonably robust mechanism for assessing demand since a customer went through many predictable stages of the buying process. developing models for the disaggregate level of forecasting would have been difficult.implying not ready for sale.. Inventory Planning: The monthwise sales at an aggregate level could be forecasted with a high level of accuracy. 75% of these were set right in the first week. The demand-driven production plan would have no inventory because of seasonality. resulting in non settlement of claims/dues even upto four years). An important factor is choosing a suitable established forecasting model and to validating the model using standard techniques like Root Mean Squared Error. This not only results in additional inventory carrying cost. (ii) Regional office level: This is required for cross-checking the periodic consolidated dealer forecasts for placing orders from the factory. (iii) Dealer level: This should result in enabling regions to position inventory in the stockyards and place orders from the factory. but also resulted in additional loss of control over the tractors on the part of the company. A policy of production plan can be evaluated that followed the demand versus one that would have a uniform monthly production. and at the plant to respond to seasonality Forecasting: Forecasting can be done at three levels as follows: (i) Company level: This should enable aggregate and seasonality planning. etc. supervision. It was easier to assess the inventory costs of the 2 .

It was the management’s judgement that the cost because of the demand-driven production plan would be higher. the operating costs were governed mostly by the extent of land required for parking the tractors and the real estate costs. Five potential locations for stockyards were considered (the current stockyard location was Ahmedabad). thus offering a net saving of Rs 10 million per year. Central Dispatch Yard The problem of extended period of 'lack of control' and poor delivery quality could be solved by a central despatch yard. This was very good compared with the investment cost of Rs 15 million. while of course giving up the margin on the payment for moving the tractors to their godowns. as was the practice in the industry. It was also felt that the transporters would welcome this move. The stockyard management would be outsourced to a third party. 20 km away from the plant. The volume of 3 . especially since it involved overtime. Mathematical Programming Model for Stockyard Location Analysis Stockyard location analysis can be effectively considered as a typical linear programming transportation problem. which is at the end of the April–May–June peak. The analysis for the economics of a central despatch yard indicates that at an inventory saving of two days per tractor. There were issues as to whether the two days would be entirely saved. Transportation problem deals with optimal transportation and allocation of resources where there are sources with a supply of some commodity is available and destinations where the commodity is demanded. The qualitative benefit of the increased flexibility in allocation and reduction in losses because of being able to inspect the transporting truck were considered significant. The annual operating cost would be Rs 2 million (including the additional transportation cost to move the tractors to the central despatch yard rather than the payment to the transporters to move the tractors to their godowns). As there was no space adjacent to or near the existing plant for such expansion. Exhibit TN-1 (also refer Exhibit 5 of case) gives the inventory because of seasonality under the context of a uniform production plan. which amounted to Rs 790 per tractor.uniform production plan rather than the costs of the demand-driven production plan.4 million. the annual savings would be Rs 12 million. The seasonality inventory would clear towards the end of June. since they would save on the storage space in their godowns. The overall inventory cost because of seasonality was Rs 47. The considerations for a candidate location were (i) the availability of secondary transportation and (ii) proximity to dealers so that service levels to the dealers could be maintained. The application of this model for the state of Gujarat is illustrated. Consequently. just because the allocation would now be made after physically seeing the truck that would transport the tractors. no attempt was made to quantify the costs because of the demand-driven production plan. the possible location of the yard was at a suitable highway location. Further. which often had long-term ‘fixed cost’ implications.

n dealer locations ( j is typically 15–20 in a state). The total Gujarat demand was expected to be 500 tractors per month. . . (ii) stockyard location costs or (iii) ability to service the dealers with appropriate service levels. The mathematical programming model for Gujarat had five zero-one variables to decide on the stockyard locations and 95 zero-one variables to decide on dealer stockyard assignment. . if stockyard i is selected otherwise if dealer j is served via stockyard i otherwise Inputs pi = primary transport cost per tractor km from factory to stockyard i sij = secondary transport cost per tractor km from stockyard i to dealer j di = distance from factory to stockyard i dij = distance from stockyard i to dealer j Dj = demand at dealer j per month Ci = cost of operating stockyard i per month M = large number mi = minimum number of dealers required to be handled by stockyard i Mini = minimum volume required to be handled at stockyard i Maxi = maximum volume that can be handled at stockyard i 4 . Yi =1 =0 Yij =1 =0 s potential stockyard locations (s is typically 4–5 in a state). Data are provided for the five potential stockyard locations. . along with the expected monthly demand and distances from the potential stockyards (Exhibit TN-3. There could be a few additional constraints. also refer Exhibit 7 of case). 2. There were 19 constraints to ensure that each dealer was assigned to a stockyard. In general. . . j = 1. . since volumes were expected to be at levels where the minimum manning at the stockyards would suffice. minimum throughput volumes (for outsourcing) and limitations for control. The objective function optimized the total relevant cost consisting of the primary and secondary transportation costs and the stockyard operating costs.throughput did not influence the cost structure (although such cost structures can be negotiated). depending on stockyard capacities. monthly operating costs (as specified by the third party) and distance from factory (Exhibit TN-2. it would be run whenever there were significant changes in (i) demand patterns within a state. if required for being assigned to a stockyard. this was not expected to occur within say two years. and five constraints to ensure that a stockyard was open. and location of the 19 dealers of the company in Gujarat. etc. also refer Exhibit 6 of case). Since this model facilitated a tactical decision. 2. . Mathematical programming model Variables i = 1.

even with the additional constraints for service 5 . The total relevant cost for the existing location was about Rs 1..000 per month. since Valsad is at the entry point to the state on the highway from the factory. For each of the cost structures.120. say mi.000 per month and with a limit of 350 km. Ten scenarios were considered on the dimensions of cost structure (current and future). + DnYin > vi We can also do maximum dealers. secondary distance limit (none.000 per month because of cost structure alone).. for example for the state of Gujrat. Implication of the Recommendations The model recommended relocation of the stockyard from Ahmedabad to Valsad.. the selection of Valsad by the model as the location or one of the locations (depending on the restriction on the secondary distance) is trivial because of the triangular inequality. the total relevant cost for the existing stockyard location was about Rs 1.. about Rs 180. The minimum number of tractors was taken at zero for the case of the most restrictive secondary distance limit of 350 km. the possible saving was about Rs 230.Formulation of zero-one IP Min Σ Σ (pidi + sijdij) Dj Yij + Σ CiYi ΣYij = 1 for every j (Every dealer must be assigned one stockyard) Σ Yij < M Yi for every i (A stockyard must be opened to be assigned) • • • If no more than 2 stockyards should be selected. It should be noted that for the current cost structure.. we can limit Y1 + Y2 + ..000 per month.. Ys < 2 For minimum number of dealers per stockyard.000 per month was possible by relocating the stockyard to Valsad. Yi1 + Yi2 + . and the minimum number of tractors to be handled at a stockyard (0 and 200).. With the expected future cost structure... The model also gave the allocation of dealers to stockyards for these scenarios. A further saving of about Rs 150. volume. with ‘<’ Exhibit TN-4 (also refer Exhibit 10 of case) gives the results (optimal stockyard locations with total costs) of the analysis based on the mathematical programming model for various scenarios affecting the stockyard location. the existing location scenario was also analysed.000 per month (an automatic saving of Rs 90..030. + Yin > mi For minimum volume by a stockyard.. 350 and 500 km)..000 per month was possible if the stockyards could be located elsewhere. say vi D1Yi1 + D2Yi2 + . With a secondary distance limit of 500 km. A saving of nearly Rs 300.

This was also driven by (i) the convenience of retaining the existing location and (ii) expected opportunities for growth in the markets near Valsad. 6 . Also. When similar models were run for other states.e. This indicates that there is greater emphasis on transportation costs rather than warehousing costs. Of the scenarios considered. Rs 12 million per year. the scenario analysis demonstration prompted the in-company logistics team to carry out a sensitivity analysis by examining marginal violations of desirable parameter values by considering more scenarios by varying parameter values. across the states where stockyard locations were revised. of about Rs 1 million per month.level. The model indicates a shift in the location of the stockyards and the number stockyards. The locations are to be shifted towards Mumbai and the number of stockyards should also be increased. The final recommendations for stockyard locations of the major states. Apart from the specific recommendations. i. the locations at Valsad and Ahmedabad were preferred. one of the greatest benefits of the modeling exercise was in convincing the organization that a variety of factors can be considered for analysis. often leading to counterintuitive solutions. the recommendations yielded a total saving. are given in Exhibit 5. based on the model output and implications in terms of the criteria considered.

000 25.000 5.000 5.100 2.000 5.000 5.Exhibit TN 1: Inventory because of seasonality.000 per tractor and 18% per annum inventory carrying cost) 1317 x 200.000 4.500 5.000 5.000 60.000 5.800 1317 Inventory cost (at Rs 200.000 5000 Inventory due to uniform production 1.000 20.000 4.000 5.700 4.500 5.000 60.000 30.4 million per annum Exhibit TN 2: Inventory Because of Seasonality.100 1.000 x 0.100 2.600 700 0 500 1. with uniform production policy Month Demand Production January February March April May June July August September October November December Total Average per month 5.500 6. operating cost (Ci) and distance from factory (di) Sr No Stockyard Location 1 2 3 4 5 Valsad Surat Vadodara Ahmedabad Rajkot Operating Cost per Month (Rs) 25.000 5.000 5.900 5.000 30.500 2.000 1.600 1.185 = Rs 47.400 5.000 5.000 5. with Uniform Production policy Potential stockyard locations (i).000 4.000 Distance from Thane (Kms) 136 263 448 545 761 7 .100 15.000 5.500 4.500 1.000 5000 5.

8 .Exhibit TN-3: Dealer Location. Demand and Distance 30 25 40 25 20 20 20 35 No of Tractors/ Month 35 20 1 Valsad 633 272 62 163 514 32 2 Surat 566 205 31 96 3 Vadodara 399 38 125 71 4 Ahmedabad 258 73 225 182 200 377 40 5 Rajkot 105 255 492 365 175 560 162 321 304 88 30 45 19 Surendrana gar Rajpipla Porbandar 18 25 20 385 315 424 616 630 293 419 647 491 456 715 204 431 447 109 318 248 357 549 563 226 352 570 424 389 648 141 364 280 266 151 81 185 403 257 238 481 82 200 74 125 412 195 116 255 187 255 111 313 327 52 20 17 Patan Palanpur 16 20 136 79 20 15 30 190 382 396 59 20 14 Morbi 13 Mehsana 12 Nadiad 11 Junagadh 10 Jamnagar 9 Himmatnag ar 8 Godhara 7 Dholka 6 Dharampur 5 Bhavnagar 4 Bharuch 3 Bardoli 2 Anand Dealer Location Amreli 1 292 146 102 234 299 67 371 * All distances are in Kilometers.

73.880 Valsad Ahmedabad Rajkot 9. no of tractors to be serviced by a stockyard: 200/month 875.28.0 Secondary: 3.855 8.454 Secondary distance limit: None Minimum no of tractors to be serviced by a stockyard: 200/month 8.22.5 Secondary: 3.78.0 Current Secondary Distance limit: None 10.484 Ahmedabad Valsad Rajkot Valsad Ahmedabad Valsad Ahmedabad Valsad Ahmedabad 11.Exhibit TN 4: Scenario Analysis for Gujarat: Total Relevant Cost and Stockyard Sites (Rs) Cost/tractor/km Primary: 2.999 8.43.209 8.75.080 Ahmedabad Valsad Valsad Ahmedabad Rajkot Valsad Vadodara Valsad Valsad Vadodara Secondary Secondary distance limit: distance limit: 350 kms 500 kms Secondary distance limit: 500 kms Min.533 8.800 8.5 Primary: 3.99.484 9 .

Exhibit TN 5: Recommendations for Stockyard Locations State Existing Yard(s) Andhra Pradesh Hyderabad Tamil Nadu Chennai Karnataka Bangalore Gujarat Ahmedabad Madhya Pradesh Bhopal Rajasthan Jaipur SriGanganagar Punjab Haryana Jalandhar Karnal Optimal Locations Hyderabad Vijaywada Hosur Trichy Belgaum Davangere Valsad Ahmedabad Indore Raipur Kota Jodhpur SriGanganagar Patiala Gurgaon 10 .