The AgroTribe ( Section B)_P39069,P39078,P39079,P39074,P39100,P39106

Case Analysis - Bayer CropScience : Science for a better Supply chain

Situation Analysis

Bayers Cropscience as an organization has a well elaborated supply chain and distribution network ready
for farmers; but it is shadowed by many loopholes which makes it susceptible to risk of market failure.
As per the case, Bayer has a network of 2500 distributors and 35000 dealers across 4 zones
(restructured from 6); out of which south zone has highest share of sales. Its product portfolio includes
53 different products which came in over 200 SKUs. It has dominated the forward and backward linkage
because of its 13 production centers, 25 warehouses and high brand recall due to its quality assurance.
This shows the dominance of Bayer as a company in agri input market.

The case revolves around 2 scenarios, which have completely different result of the exactly same
strategy followed by Bayer. The promotional strategy of Bayer states discount based on pesticide stock
quantity for the orders made prior to the start of season. But with the order, the dealers have to pay
some lump sum amount to Bayer on placing the order. Though the promotional strategy seems well, the
problem arises with the clause of reduction on discount percentage on month basis. This clearly shows
the push strategy of the company which induces the problem of portrayal of false demand by the
dealers. In case of Sampath Sen; regional manager of Kaithal, Haryana, and his aim to capture at list 25%
of the market using a 10% discount scheme created a way higher demand than the forecasted figures.
The fulfillment of this huge demand was impossible for the Chandigarh plant alone. Also from the
prospective of profit motive, as a regional manager, he promoted Sherpa Alpha which is a category a
product having 32% gross margin.

But here the fact we shouldn’t forget is that, dealers in Haryana are cash rich. Hence they were able to
arrange the initial lump sum amount, which lead to successful implementation of this promotional
strategy. But on the other hand lead to failure of demand forecasting. But in case of Suresh Babu,
territory manager of Jadcherla, the unavailability of cash & their high dependency on credit worsen the
actual demand scenario. Though based on previous bollworm attack experience, he ordered Spintor as
per 2004 requirement and was positive regarding tackling the probable problem. The cola based spray
solution rumor came as an unexpected external factor, which further declined the sales figure and
forced to return back the product.

While trade promotions were the underlying cause behind the operational failure, what we seemingly
focused on is the forecasting issue. There were other factors contributing to the failure, such as the
absence of traceability while maintaining inventory. Whenever the stocks were redeployed, the SAP did
capture the quantity of stock that have been transferred to nearby locations which were inter or intra
zone. But what it failed to cover was the reason behind the transfer – i.e. was it due to product getting
expired, reaching near expiry or due to the demand or supply scenario of the market. Due to this
information asymmetry the company failed to take any correction based on the past experiences. This
was a major cause of the loss incurred, 85 million rupees which were accounted and 70 million more
which weren’t, as there was no process improvement done to bring down that figure.
 The AgroTribe ( Section B)_P39069,P39078,P39079,P39074,P39100,P39106

Another reason that have stayed in backdrop of the whole situation is the time frame, of filling the
demand estimates that have been kept uniform pan India considering the two main cropping seasons of
- Rabi and Kharif without paying attention to the fact that these seasons do not occur in the exact time
frame in each territory. Thus April and December cannot be correct timing for estimating the national
demand. We need to consider the region specific variability factors and integrate it with SAP.

The overall analysis shows it’s going to be tough decision for Susan D`costa; Planning executive at
logistics and distribution department considering all probable loopholes and typical characteristics of
agri-input market.

Problem statement:

Whether Susan D`Costa should go for the basic fundamentals of existing supply chain and distribution
model of Bayer or not.

Solutions:

Right now in front of Susan, the available three options are; either restructure the existing supply chain
& forecasting model completely or make functional changes or continue with the existing structure.

For complete restructuring, Susan has to be sure that the cause behind the failure is pertaining to supply
chain and forecasting model. Even if she ensures that, forecasting techniques that are currently
practiced acting as bottleneck & there is a need to change them. The agriculture as a domain has both
factors of certainty and factors of uncertainty attached to it. The uncertain factors such as climate
change, pest attack and consumer behavior are most of the cases out of control of any industry. Hence,
an industry where uncertainty is an inherent attribute, any forecasting model will hardly be able to
make the supply chain completely responsive. Also, if Susan will go for restructuring, the magnitude of
changes she has to make in manufacturing & logistic processes will take the organization in a
cumbersome & hectic path of change. It will require a lot of investment, where we are unsure about the
end result.

Also the current scenario of Bayer tells about its stronghold in the current market. Bayer corpscience
have a turnover of 7865 million rupees. When we reach its final figure of profit before interest and tax, it
reaches around 1762 million rupee which is a significant amount and comprises around 22.41% of the
total sales. While expired goods and reprocessing of goods holds very small amount (Table 1) of the total
profit as shown in table one and does the situation is not significant to take a decision like restructuring
based on the profit figures.

Above all these reasoning, we can’t ignore what happened in Jadcherla with spintor brand and use of
cola based sprays as insecticide. BT cotton itself is a completely new concept for farmers. Hence, there is
a great information asymmetry exists between farmers and suppliers. Bayer can start with educating
farmers regarding BT cotton and other crop protection products to avoid unnecessary market failures;
cola affect.
 The AgroTribe ( Section B)_P39069,P39078,P39079,P39074,P39100,P39106

Making functional changes can be a potential right solution. Modifying the supply chain by including
traceability factor will help to know the causes behind inter-zonal transactions. Along with this, the
trade promotion strategy has to be focused upon as it is complicating the demand-supply gap. Above all,
the issue of cash unavailability with dealers makes the promotional strategy ineffective in all regions.
And the promotional strategy made the forecasting model inefficient. Also, due to different agronomic
& climatic conditions in different zones, application of one uniform forecasting model won’t serve the
purpose. Hence, these modifications are necessary for tackling the situation.

The variation for the forecast is more or less within the allowable range, when we consider the data at
national level. But on examining the trend at zonal level, we can see that the variation is very high in
East and South Zone. This suggests that territory level forecasting is the best suited method. Also, the
reasons for the high variability in East and South need to be checked regarding the causes of the
variation; whether due to climatic change or supply chain inefficiency or trade promotion or lack of
education of farmers.

Table 1:

in
Amt. in million in percentage percentage
Particulars rupees of turnover of PBIT
Total turnover 7865
Sales return 267.41 3.40%

Expired goods 85 1.08% 4.82%

Reprocessing cost 70 0.89% 3.97%
Sales Revenue 7442.59 94.63%
5 % losses of loss of sales 393.25 5.00%
Sales 7049.34 89.63%
PBIT (25%) 1762.335 22.41%

List of assumptions
Turnover here means gross sales revenue and margins have been taken as 25% which is the
1 average of margin of category A & B as they reflect the sales plan.
We are assuming that sales return do not include the cost of expired goods and of cost of
2 reprocessing.
3 The opportunity cost of sales due to unavailability is taken at 5% of turnover.