A STUDY OF SUPPLY CHAIN MANAGEMENT

IN FOOD INDUSTRY

A
THESIS
SUBMITTED FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY
IN
MANAGEMENT
TO
JIWAJI UNIVERSITY, GWALIOR

Supervisor

Dr SANJEEV GUPTA
Professor
M. L. B. Govt. College of Excellence
Gwalior

Research Scholar

BRIGADIER J MATTA (RETD)

2014

Research Centre

INSTITUTE OF COMMERCE AND MANAGEMENT

JIWAJI UNIVERSITY, GWALIOR (MP)
 CERTIFICATE OF THE SUPERVISOR (PARA 12-C)

1. This is to certify that the work entitled, “A STUDY OF SUPPLY CHAIN

MANAGEMENT IN FOOD INDUSTRY,” is a piece of research work done by,

Brigadier Jitender Matta (Retd), under my guidance and supervision for the
degree of Doctor of Philosophy at the Institute of Commerce and Management,
Jiwaji University, Gwalior (MP) India. The candidate has put in attendance of more
than 200 days with me.
2. To the best of my knowledge and belief the thesis:
(a) Embodies the work of candidate himself.
(b) Has been duly completed.
(c) Fulfils the requirements of the ordinance relating to the Ph.D. degree of the
University; and
(d) Is up to the standard both in respect of contents and language for being
referred to the examiner.

Signature of the Supervisor

Professor (Dr) Sanjeev Gupta

Forwarded
Signature of Head UTD/ Principal
 DECELARATION BY THE CANDIDATE (PARA 12-B)

I, Brigadier Jitender Matta (Retired), hereby declare that the thesis

entitled, “A STUDY OF SUPPLY CHAIN MANAGEMENT IN FOOD

INDUSTRY,” is my own work conducted under the supervision of

Professor (Dr) Sanjeev Gupta at the Institute of Commerce and
Management, Jiwaji University, Gwalior (MP) India, which has already
been approved by Research Degree Committee. I have put in more than
200 days of attendance with the Supervisor at the Centre.

I further declare that to the best of my knowledge, the thesis does not
contain any work, which has been submitted for the award of any
degree either in this University / deemed University without proper
citation.

Signature of the Candidate

Signature of the Supervisor

Forwarded
Signature of Head UTD/ Principal
 ACKNOWLEDGEMENTS

I wish to record my sincere, heartfelt gratitude to my Research Supervisor,

Professor (Dr) Sanjeev Gupta, Professor, M.L.B. Government College of Excellence,
Gwalior, for his candid support, excellent guidance, valuable advice and
encouragement, besides finding solutions to projected problems. The indefatigable
stamina and livewire approach reflected to ensure my knowledge enhancement has
been great motivating and inspirational factor to complete my work.

I also wish to express my deep gratitude to Professor (Dr) P S Bisen, former Vice
Chancellor, Jiwaji University, Gwalior and former Director, MITS, Gwalior, M.P. for
his guidance and motivation to take on the challenge for research. I am also
indebted to Professor (Dr) B K Bahinipati, Director ASET, AMITY University, M. P. for
his guidance and for providing me with galaxy of study material. I also wish to put on
record my gratitude to Mr Alok Jain, Professor, ASET, AMITY University for guiding
me through mathematical juggles.

I wish to thank my daughter Ms Gulmohar and my son Major (Dr) Ankur Matta
for helping me in preparing and compilation of my research work. I am also grateful
to Mr Ram Pratap Kuchya for helping me in preparing diagrams, compilation and
printing of the thesis.

I am grateful from the core of my heart to “The Almighty God” for

showering his grace and blessings, which led me to sound advice, creative guidance
and internal strength to reach to logical conclusion.

Brigadier J Matta (Retd)

 INDEX
Acknowledgements
Page No.
Figures / Appendices iii
Acronyms v

PAGE NO
SECTION CONTENTS
FROM TO
1.0 INTRODUCTION 1 15
1.1 Perspective 2 3
1.2 Historical Aspects 4 6
1.3 Supply Chain Management (SCM) Today 7 9
1.4 S C M Tomorrow 10 10
1.5 Challenges in S C M 11 11
1.6 Consumer Service Focus 12 13
1.7 Information Technology (IT) in S C M 14 15

2.0 SCOPE OF SCM IN FOOD INDUSTRY 16 25

2.1 Supply Chain Issues in Food Industry 17 19
2.2 Coordination Problems 20 22
2.3 Principles of S C M 23 25

3.0 REVIEW OF MATERIAL AND PROBLEM ANALYSIS 26 103

3.1 Challenges 27 30
3.2 Concept of S C M 31 36
3.3 Strategic Decisions 37 42
3.4 S C M Approaches 43 53
3.5 Inventory Management 54 66
3.6 Warehousing 67 80
3.7 Manufacturing Resource Planning 81 84
3.8 Facilities Management 85 93
3.9 Documents in S C M 94 96
3.10 Integrated Logistics Support 97 103
 ii

PAGE NO
SECTION CONTENTS
FROM TO
4.0 RESEARCH GAPS 104 143
4.1 Concept of SCM in Food Industry 105 113
4.2 Analysis of Indian Food Industry 114 125
4.3 Household Selection Scenario 126 129
4.4 Purchasing 130 132
4.5 SCM of Food Supplies: Indian Perspective 133 143

5.0 RESEARCH FRAMEWORK 144 225

5.1 Food Supply Chain Management (FSCM) Model Criteria 145 154
5.2 Quantitative FSCM 155 161
5.3 System Dynamics Model for FSCM 162 173
5.4 Mathematics Model Development 174 177
5.5 Proposed Model 178 183
5.6 Integrated FSCM Model 184 221
5.7 Model Validation and Findings 222 225

6.0 FINDINGS AND CONCLUSION 226 234

6.1 Findings 227 229
6.2 Conclusion 231 234

7.0 REFRENCES 235 239

 iii
LIST OF FIGURES / TABLES / APPENDICES

Ser No Type & No Details of Figures / Tables / Appendices Page No

1. Figure 3.21 Key SCM Concepts 31

2. Figure 3.22 Logistics Supply Chain 35
3. Figure 3.23 Disciplines of Food Supply Chain 36
4. Figure 3.31 S C M Solution Map 41
5. Figure 3.41 Information Flow for Purchasing 44
6. Figure 3.42 Vendor Selection 47
7. Figure 3.43 Traditional Links Inventory Management 53
8. Figure 3.51 Inventory Management by Functions 56
9. Figure 3.81 Facilities Maintenance Considerations 87
10. Figure 3.82 Management and Planning 91
11. Figure 3.83 Processes, Players Issues involved in FM 92
12. Figure 4.11 Food Supply Chain 110
13. Figure 4.21 Food Processing Chain 117
14. Figure 5.11 Interdependence of Supply Chain 148
15. Figure 5.12 Integrated Demand Supply 150
16. Figure 5.13 Integrating Processes in Supply Chain 151
17. Figure 5.14 SCM Framework Pyramid 152
18. Figure 5.21 Logistical Key Issues And Modeling Challenges 156
19. Figure 5.31 Single Echelon Inventory Systems 166
20. Figure 5.32 Closed Loop Single Echelon Inventory System 168
21. Figure 5.33 Three Echelon Inventory System 170
22. Figure 5.34 Alternative Capacity Expansion Strategies 171
23. Figure 5.35 Capacity Planning Decision Structure 172
24. Figure 5.6.1 Disciplines of Food Supply Chain 185
25. Figure 5.6.2 IFSCM Two Way Model 190
 iv

Ser No Type & No Details of Figures / Tables / Appendices Page No

26. Figure 5.6.3 Inbound Model 205
27. Figure 5.6.4 Goods and Information Flow 210
28. Figure 5.6.5 Order Forecast Horizon 212
29. Figure 5.6.6 Outbound SCM 215
30. Figure 5.6.7 Sources of Uncertainties and Improvement Principles 216
31. Figure 5.6.8 Process Flow Analysis 218
32. Figure 5.6.9 Improvement Principles 219
33. Figure 5.6.10 Inventory Levels in Distribution Centers 220
34. Figure 5.6.11 Results of Pilot Study 221
35. Figure 5.7.1 Comparison of Results 222
36. Figure 5.7.2 Changes Effected by Altered Delivery Frequencies 223
 v
ACRONYMS
ASRS Automated Storage and Retrieval System
AEZ Agriculture Export Zone
BS Business Strategy
B2B Business to Business
BOL Bill of Loading
CAP Cover and Plinth
CWC Central Warehousing Corporation
DC Distribution Center
EDI Electronic Data Interchange
EDP Electronic Data Processing
ERP Enterprise Resource Planning
EU European Union
E- Com Electronic Commerce
E – Proc Electronic Procurement
FCI Food Corporation of India
FDI Foreign Direct Investment
FM Facilities Management
FIFO First In First Out
FSCM Food Supply Chain Management
GST Goods and Service Tax
GPS Global Positioning System
IFSCM Integrated Food Supply Chain Management
IS Information System
ISO International Standers Organization
IT Information Technology
ILS Integrated Logistics Support
JIT Just in Time
 vi

LSA Logistics Support Area

LIFO Last In First Out
LTL Less-than-Truckload
MRP Material Resource Planning/ Management Resource Planning
MNC Multi National Company
MOD Ministry of Defense
OEM Original Equipment Manufacturer
R&D Research and Development
SCM Supply Chain Management
SFSCM Sustainable Food Supply System
SWC State Warehousing Corporation
TQM Total Quality Management
UN United Nations
UT Union Territories
VAS Vapour Absorption System
VAT Value Added Tax
VMI Vendor Managed Inventory
VMS Vendor Managed System
VRM Vendor Relationship Management
WHO World Health Organization
WMS Warehousing Management System
INTRODUCTION
 2

1.1 PERESPECTIVE.
1.1.1 Supply Chain Management (SCM) in simple words can be described as a network of
facilities and distribution options. Wherein SCM involves functions such as material
procurement, transformation of the material into intermediate and finished products, and
then distribution of the finished product to consumer. Supply chains are found to exist in
both service and manufacturing sectors, although the complexity of the supply chain may
vary vastly from industry to industry and firm to firm, however it represents a logical
advance in our evolving understanding of business performance (Smith and Budress, 2005).

1.1.2 A very simple example of supply chain can be explained involving a single product.
The chain involves procurement of raw material from vendors, transformed into finished
goods in a single step, then transported to distribution centers and ultimately to consumer.
Realistically supply chains are always very complex having multiple end products with
shared components, facilities and capacities. The flow of materials is not always along a
simple network, various modes of transportation gets involved and the cost of material for
the end items may become exorbitant (Bertodo, 2002).

1.1.3 In any organizational setup the supply chain refers to a wide range of functional
areas which include SCM-related activities, such as inbound and outbound transportation,
warehousing, inventory control, sourcing, procurement, supply management, forecasting,
production planning & scheduling, order processing, and customer service are all part of the
same aspect including the information systems which is necessary to monitor all of these
activities. Thus it can be simply stated that, "The supply chain encompasses all of those
activities associated with moving goods from the raw-materials stage through to the end
user."

1.1.4 Traditionally planning, procurement, manufacturing, marketing and the distribution

set ups in the organizations along the supply chain operate independently having their own
objectives and generally these are conflicting. Marketing objective of high consumer service
and attainment of maximum sales output, always conflicts with manufacturing and
distribution goals. Many manufacturing operations are designed to maximize output and
lower costs with little consideration for the impact on inventory levels and distribution
capabilities. Purchasing contracts are often negotiated with very little information beyond
historical buying patterns. The resultant of these factors is creation of a void with respect to
an integrated plan in the organization. There is a definite need for a system through which
these different functions can be coordinated and integrated together (Bertodo 2002) and
SCM is a strategy through which such integration can be achieved .
 3

1.1.5 Management experts for this business process realized that significant productivity
enhancement could only come from managing relationships, information and material flow
across enterprise borders. One of the best definitions of SCM offered to date comes from
Bernard J. (Bud) LaLonde, Professor emeritus of SCM at Ohio State University. SCM has been
defined as, "The delivery of enhanced customer and economic value through synchronized
management of the flow of physical goods and associated information from sourcing to
consumption.” The aspect, "from sourcing to consumption" last part of the definition
suggests, though achieving the real potential of SCM requires integration not only of these
entities within the organization, but also of the external partners. The latter include the
suppliers, distributors, carriers, customers, and even the ultimate consumers. All are central
players in what James E. Morehouse of A.T. Kearney calls the extended supply chain. "The
goal of the extended enterprise is to do a better job of serving the ultimate consumer,”
Superior service, he continues, leads to increased market share. Increased share, in turn,
brings with it competitive advantages such as lower warehousing and transportation costs,
reduced inventory levels and lower transaction costs.

1.1.6 The customer ultimately is the key to both quantifying and communicating the
supply chain's value as stated by, Mr Shrawan Singh, Vice President of Integrated SCM at
Xerox. "If you can start measuring customer satisfaction associated with what a supply
chain can do and also link customer satisfaction in terms of profit or revenue growth, then
you can attach customer values to profit & loss and also to the balance sheet." The best
companies around the world are discovering a powerful new source of competitive
advantage. It is called SCM and it encompasses all of those integrated activities that brings
product to market and creates satisfaction among customers. The SCM integrates
manufacturing operations, purchasing, transportation, and physical distribution into a
unified program. Successful SCM then coordinates and integrates all of these activities into
a seamless process. It embraces and links all of the partners in the chain. In addition to the
departments within the organization, these partners include vendors, carriers, third party
companies, and information systems providers.
 4

1.2 HISTORICAL ASPECTS.

1.2.1 Backdrop. In an endeavour to be able to compete in the global market and
networked economy the organizations increasingly find that they must rely on effective
supply chains or such like effective networks. In the recent past globalization, culture of
outsourcing and Information Technology (IT) have enabled many organizations to
successfully operate collaborative supply networks in which each specialized business
partner focus on only a few key strategic activities. Traditionally, companies in a supply
chain network concentrate on the inputs and outputs of the processes, with little concern
for the internal management and working of other individual players. The choice of an
internal management control structure therefore is known to impact local firm
performance.
1.2.2 Inception & Progress. The changes in business environment have also contributed to
the development of supply chain networks. The basic reasons identified are globalization,
proliferation of multinational companies, joint ventures, strategic alliances and business
partnerships. Significant factors identified were such as, “Just in Time” (JIT), "Lean
manufacturing", "Agile manufacturing" etc. Technological changes, particularly reduction in
information communication costs has also led to changes in coordination among the
members of the supply chain network. The six movements (Movahedi et al., 2009)
attributed for its evolution are as listed below:-
(a) Creation Era. The term SCM was first coined by an Industry Consultant in the
early 1980s. However, the concept of SCM was of great importance since early 20th
century, especially with the creation of the assembly lines. The characteristics of
this era of SCM include the need for large-scale changes, re-engineering,
downsizing driven by cost reduction programs, and widespread attention to the
Japanese practice of management.

(b) Integration Era. This era of SCM studies was highlighted with the
development of Electronic Data Interchange (EDI) systems in the 1960s and
developed through the 1990s by the introduction of Enterprise Resource Planning
(ERP) systems. This era has continued to develop into the 21st century with the
expansion of internet-based collaborative systems. This era of supply chain
evolution is characterized by both increasing value-adding and cost reductions
through integration. In fact a supply chain has been classified as Stage 1, 2 or 3 of
network. In Stage 1 of supply chain, various systems such as make, storage,
distribution, material control, etc. are not linked and are independent of each
other. In a Stage 2 of supply chain, these are integrated under one plan and are
ERP enabled. Stage 3 of supply chain is one in which vertical integration with the
suppliers in upstream direction and customers in downstream direction are
achieved. An example of this kind of supply chain is Tesco.
 5

(c) Globalization Era. The third movement of SCM development is the

globalization era and can be characterized by the attention given to global systems
of supplier relationships, as well as the expansion of supply chains over national
boundaries and into other continents. Although the use of global sources in the
supply chain of organizations can be traced back several decades (e.g., in the oil
industry), it was not until the late 1980s that a considerable number of
organizations started to integrate global sources into their core business. This era is
characterized by the globalization of SCM in organizations with the goal of
increasing their competitive advantage, value-adding, and reducing costs through
global sourcing.

(d) Specialization Era (Phase I): Outsourced Manufacturing and Distribution. In

the 1990s, industries began to focus on “core competencies” and adopted a
specialization model. Companies abandoned vertical integration, sold off non-core
operations, and outsourced those functions to other companies. This changed
management requirements by extending the supply chain well beyond company
walls and distributing management across specialized supply chain partnerships.
This transition also re-focused the fundamental perspectives of each respective
organization. Original Equipment Manufacturers (OEMs) became brand owners
that needed deep visibility into their supply base, as they had to control the entire
supply chain from above instead from within. Contract manufacturers had to
manage bills of material with different part numbering schemes from multiple
OEMs and support customer requests for work -in-process visibility and Vendor-
Managed Inventory (VMI). The specialization model creates manufacturing and
distribution networks composed of multiple as well as individual supply chains
specific to products, suppliers, and customers, who work together to design,
manufacture, distribute, market, sell, and service a product.

(e) Specialization Era (Phase II): SCM as a Service. Specialization within the
supply chain began in the 1980s with the inception of transportation brokerages,
warehouse management, and non-asset-based carriers. It has matured beyond
transportation and logistics into aspects of supply planning, collaboration,
execution and performance management. The market forces at any given moment
could demand changes from suppliers, logistics providers, locations and customers
and from any number of these specialized participants as components of supply
chain network. This variability has significant effects on the supply chain
infrastructure, from the foundation layers of establishing and managing the
electronic communication between the trading
 6

partners to more complex requirements including the configuration of the

processes and work flows that are essential to the management of the network
itself. Supply chain specialization enables companies to improve their overall
competencies in the same way that outsourced manufacturing and distribution has
done; it allows them to focus on their core competencies and assemble networks of
specific, best-in-class partners to contribute to the overall value chain itself,
thereby increasing overall performance and efficiency. The ability to quickly obtain
and deploy this domain-specific supply chain expertise without developing and
maintaining an entirely unique and complex competency in house is the leading
reason why supply chain specialization is gaining popularity.

(f) SCM 2.0. Building on globalization/ specialization, the term SCM 2.0 has been
coined to describe both the changes within the supply chain itself as well as the
evolution of the processes, methods and tools that manage it in this new "era".
Web 2.0 is defined as a trend in the use of the World Wide Web that is meant to
increase creativity, information sharing, and collaboration among users. The
common attribute that Web 2.0 brings is to help navigate the vast amount of
information available on the Web in order to find what is being sought. It is the
pathway to SCM results, a combination of the processes, methodologies, tools and
delivery options to guide companies to their results quickly as the complexity and
speed of the supply chain increase due to the effects of global competition, rapid
price fluctuations, surging oil prices, short product life cycles, expanded
specialization, near/far- and off-shoring, and talent scarcity. SCM 2.0 provides
proven solutions designed to rapidly deliver results and with the ability to quickly
manage future change for continuous flexibility, value and success deployment
model.
 7
1.3 SCM TODAY.
1.3.1 General. The logistics or the SCM industry in India has been receiving greater
attention in the last few years. In-spite of its huge potential the growth of the sector has not
kept pace with India’s wider economy, thereby being a threat to our future competitiveness.
The acceleration in industrial production and changes in consumption patterns have
resulted in a high demand for basic and specialized logistics management, both at the local
and cross-border levels. A recent study report suggests that the Indian logistics industry is
likely to grow at 10-15 per cent per annum between now and 2015 and by which point it is
likely to be worth $385 billion.

1.3.2 Growth Drivers. There are two major reasons for this growth. Firstly the demand
has been fuelled by the growth in industries that tend to outsource such as automobiles,
consumer packaged goods, hi-tech, telecom and retail, among others. The movement of
basic commodities domestically and globally, has also led to an increase in so-called ‘multi-
nodal’ and bulk transportation due to the emergence of many new ports and port-related
service providers. This growth should be driven further by the impending change in the
Indian tax system from state-level Value added Tax (VAT) to a national and uniform Goods
and Services tax (GST), which will help create a national market for many goods and
services. The logistics sector is likely to respond by making more use of hub-and-spoke
systems, large-scale warehousing and specialized services. A gradual opening up of key
sectors such as retail, aviation, defense, etc, will also help drive expansion. Secondly the
entry of Multinational Companies (MNCs) in sourcing, manufacturing and distributing can
be attributed as the other growth driver.

1.3.3 Hurdles. Challenges persist that threaten this growth trajectory. However it is
estimated that India currently spends around 12 per cent of its GDP on logistics despite the
huge scale of industrial base that has been built up. The SCM industry as a whole is very
fragmented and disorganized. The inefficiency of Indian logistics acts as another challenge
versus its international peers. Presently approximately 57 per cent of the freight in India still
moves on the road network. The main reason for this heavy dependence on a mode which is
in many ways inefficient and has high carbon intensity is the lack of a railway system
capable of responding to the needs of the industry. This puts a real strain on our
infrastructure as national highways account for only two per cent of the road network but
transports around 40 per cent of freight tonnage. Lack of coordinated planning, Intra-State
border issues, cumbersome documentation, bureaucracy and corruption leave the average
speed of trucks at only 21 km/hour. In India a truck covers only 300-500 km per day versus
almost double that figure in the developed countries. The capacity and turnaround times in
the ports are well below global benchmarks and logistics parks, warehousing and other
support infrastructure are also at an primitive development stage.
 8
1.3.4 Policy Priorities. To ensure development of Indian logistics system into a modern
and of world-class standard though, will be tough but by no means an impossible task. The
World Economic Forums, Global Agenda Council on Logistics & Supply Chain helps identify
policy priorities that lead to meaningful improvements on an international scale. In India
there are three policy priorities:-

(a) Firstly the government needs to draw up a comprehensive national logistics

policy. Currently various components of logistics (surface transport, railways,
shipping, air, commerce, finance) are all separate entities. There is a need to drive
the policy in a synchronized manner.

(b) Second national priority should be focused on investment in logistics

infrastructure. This means direct investment into alternative traffic modes to road,
particularly rail and coastal shipping in order to ease traffic congestion, bring down
costs and minimize carbon emission.

(c) Thirdly there is a need to invest more in our people with the growing
complexity of supply chains; we need more skilled people to manage supply chains.
There is a clear need for both the government and private entities to create well
focused and sustained skills and training programmes.

(d) There are several other areas, such as technology adoption and policy
simplification for trade facilitation that are also worthy of attention and focus.
Getting this right, too, will put our country firmly on the right track. It’s time for all
stakeholders to pull in the same direction.

1.3.5 Important Aspects. If we take the view as to what people do for SCM, then it
emerges that SCM has a firm role to be played in all aspects of physical distribution and
materials management. Seventy-five percent or more of respondents included the following
activities as part of their company's SCM department functions:-

(a) Inventory management.

(b) Materials handling.

(c) Transportation Service Management. Procurement, inbound transportation

and transportation operations management.

(d) Warehousing Management. The SCM Department is expected to increase its

range of responsibilities, most often than not in line with the thinking that
sees the order fulfillment process as one co-ordinated set of activities.
 9

(e) Customer service performance monitoring, order processing and customer

service.

(f) SCM Budget Forecasting. There are certain important functions which
logically belong to SCM; however some companies feel that these may be in
domain of other departments. The aspects difficult to bring under the
umbrella of SCM are:-

(i) Third party invoice payment/audit.

(ii) Sales forecasting.

(iii) Master production planning.

(g) Operational Analysis and Design Materials Handling.

(h) Distribution Strategy, Operational Improvements and Distribution

Management.

(i) I T. Computer Systems and Computer Simulation.

(j) Warehouse Design Project Management.

(k) Operational Commissioning.

(l) Technical seminars in SCM.

 10

1.4 SCM TOMORROW.

1.4.1 Prospects. India is a highly attractive market for multinational companies and to
successfully source or sell products, there is a need to realize that conditions may differ
greatly from the more developed economies; this is especially true when it comes to the
supply chain. The framework offered can help companies pursue the right supply chain
strategy to advance their business goals. Supply chain challenge, enhancement of various
components of logistics and growth of SCM activities and innovations can take place in the
following:-

(a) The sea mode is one of the most eco friendly modes of transport with vast water
bodies available, the sea mode of transport can be developed and used
effectively.

(b) A modern highway infrastructure with tracking technologies like Global

Positioning System (GPS), techniques such as cross docking, and state-of-the-art
container ports have all become the norm for supply chains in the developed
world. They are far from the norm, however, in the lesser developed countries of
the world.

(c) The focus is essentially required to be on supply chain conditions in the emerging
economy that has enormous long-term growth opportunity. In addition to a
rapidly growing market India possesses a workforce that is considerably younger
and larger than more developed regions like Europe and North America. These
factors have prompted multinationals to seriously consider India both as a source
for manufacturing and as a market for their goods.

1.4.2 Challenges. Doing business in India brings its own set of challenges, a slow and
cumbersome bureaucracy and infrastructural constraints such as shortages in electricity and
skilled labour, and road and port congestion are among them. Particularly with respect to
supply chains, what may be taken for granted in developed economies is often the
exception rather than the rule in India. Shipments by road that can be completed in three
days in the U.S., for example, could take as long as nine days in India. Similarly ships can
wait up to five days to dock at an Indian port, compared to little or no wait time in Europe.
Further, there are few logistics firms in India with a fleet size larger than 100 trucks.
Moreover, very few trucks are fitted with a GPS tracking device, thereby preventing any
real-time tracking of shipments.
 11

1.5 CHALLENGES IN SCM.

1.5.1 The world has become like a global village with barriers falling apart because of
global movement of goods and labour. In today’s global economy a computer chip may be
designed in America, fabricated in Europe, and finally assembled and packaged in Asia, to be
sold again in America. Currently the various components of logistics such as surface
transport, railways, shipping, air, commerce, finance are all separate entities. The Indian
consumer today has access to fruit grown in Australia and China, which was unheard off
even two decades ago. Even within individual countries there is far more extensive
movement of goods and labor than before. The modern food supply industry also has a
global “Supply Chain,” which brings along a new set of challenges, particularly in India. For
example, every day, a food supply company operating here has to deal with volatile fuel
prices, increasing raw material costs, and mounting price pressure, and ensuring that
materials are delivered to the factory for production and then products are sent to the
customers on time. Ensuring with prompt and economical delivery of products is a challenge
in India. Unlike European or other Asian countries, we have limited number of cost-effective
and quick alternatives.

1.5.2 Coastal waterway systems in India are still in a primitive stage. The wide Indian rail
network is still unable to provide effective service to industry. The government’s initiative to
invest in the development of arterial roads connecting major parts of the country has
resulted in strengthening of the road network every passing year, and so things are
improving, although they are still far from optimal. The challenges in the supply chain are to
achieve global optimization for conflicting objectives in the complex network of facilities and
to minimize the system variations over time. The term SCM has been coined to describe the
changes within SCM itself as well as the evolution of the processes, methods and tools that
manage it in this new "era".
 12

1.6 CONSUMER SERVICE FOCUS.

1.6.1 Transportation. Transportation generally refers to the movement of practically

everything from raw material to finished goods between different facilities in a supply chain.
In transportation the trade-off between responsiveness and efficiency is manifested in the
choice of transport mode. Fast modes of transport such as airplanes are very responsive but
are also more expensive. Slower modes such as ships and railways are very cost effective
but not as responsive. Since transportation costs can be as much as a third of the operating
cost of a supply chain, decisions made with respect to transport are very important. There
are six basic modes of transport that a company can choose from:-

(a) Waterways (Ships). It is very cost effective but is also the slowest mode of transport.
It is limited to use between locations that are situated next to navigable waterways
and have facilities such as harbours and canals.

(b) Railways (Trains). It is also very cost efficient but can be slow. This mode is also
restricted for use between locations that are served by rail lines.

(c) Pipelines. These can be very efficient but are restricted to commodities such as
liquids or gases such as water, oil, and natural gas.

(d) Roadways (Trucks). Trucks can go almost anywhere and hence are relatively quick
and thus provide a very flexible mode of transportation. The cost of this mode is
prone to fluctuations with the variations in the cost of fuel and also depends on the
condition of roads.

(e) Airways (Airplanes). This is a very fast mode of transport and are very responsive.
This is also the most expensive mode and it is somewhat limited by the availability of
appropriate airport facilities.

(f) Electronic Transport. It is the fastest mode of transport and it is very flexible and
cost efficient. However, it can only be used for movement of certain types of
products such as electric energy, data, and products composed of data such as
music, pictures, and text. Someday technology allowing us to convert matter to
energy and back to matter again may completely rewrite the theory and practice of
SCM.
 13

1.6.2 Transport Industry. The freight transportation industry has undergone revolutionary
changes during the last decade. Deregulation has spread to all modes of transport and the
number of surviving companies has declined considerably. Carriers unprotected by
regulations discovered that they could not differentiate themselves from the competition
on price alone. Successful transportation companies also need to provide prompt pickup,
excellent customer service, swift, complete and damage-free delivery. The motor carrier
industry forges a critical link in a multimodal SCM system and must compete against time
and service to stay in business. Shippers move cargo over whatever mode provides the best
service. Less-than-truckload (LTL) motor carriers find their competition particularly stiff.
Parcel carriers constantly increase their maximum shipment weight while truck load carriers
now accept partial trailer loads as small as 500 Kgs. Shorter cycle times mean better service.
Customer’s needs have also changed. The growth of JIT and Quick Response inventory
management and third-party SCM requires all participants in the SCM chain to consider
shorter cycle time as a competitive advantage.
 14

1.7 INFORMATION TECHNOLOGY IN SCM.

1.7.1 Information Technology (IT). Manufacturers, distributors, and some carriers

effectively use IT to reduce cycle time and improve the quality of freight handling. Package
handlers use the technology to great competitive advantage. Less than Truckload (LTL)
carriers are beginning to adapt their information systems to provide on-line, real time data
on the movement of freight through their systems. Successful use of IT to speed the
movement of freight is only possible if these carriers have low cost methods to accurately
gather and disseminate data. Bar code and radio frequency technologies provide the tools
for LTL carriers to survive and thrive as discussed below:-

(a) Bar Codes. Traditional bar codes uniquely identify every package in the
pipeline. Scanning the packages positively confirms custody transfer from shipper to
carrier to consignee. Two dimensional bar codes on shipping documents record the
entire Bill of Loading. Scanners in drivers’ hands provide error-free entry of the Bill
of Loading in less than a second. Radio communication from the truck cab to central
operations/ control centre immediately informs dispatchers of incoming freight.
Similar scanning during delivery shortens the billing cycle and provides positive
confirmation of delivery. IT enhances the information speeds of cargo movement
through every phase of LTL operations. Dock management systems speed cross
docking operations.

(b) Combination. A combination of radio communication and bar code scanning

enhances delivery of control information to people who need it. The information is
required by the dispatcher, fork operators and the recipient are every effected
member of the dock team who receives immediate information where they work.
The system efficiently tracks all packages from inbound docks through staging to
outbound docks. No package waits for information. Yard management systems
ensure the delivery of the right equipment to the right location at the right time.
Radio communication to yard tractors keeps shuttle drivers working on the highest
priority tasks. Real-time communication between yard drivers, hub managers, and
information support systems provides positive control of all moving stock.
Consistent application of appropriate IT throughout the SCM pipeline results in
shortened cycle times and lowered effort. Immediate, reliable information allows
managers to optimize their physical and human resources. While maximum benefit
comes to those carriers who implement a consistent information strategy
throughout their operations, segmentation of the problem allows carriers to phase in
their transformation. Each phase provides immediate economic benefits, while
improving the strategic position of the carrier.
 15

1.7.2 Coordinating Multiple Initiatives through IT. The SCM Model of LTL carries the
greatest advantage and the fundamental vulnerability of the mode. City terminals break
bulk consolidation and other cargo transfer techniques allow LTL carriers to sell economies
of scale to transporters with small cargo consignments. However, the same process requires
multiple handling and offers frequent opportunities for delays, incorrect transportation, and
cargo damage. Effective use of IT maximizes the advantages and minimizes the risks
inherent in LTL transportation, as each package needs to be positively identified every time
it is handled. Information about every destination must be checked and double checked to
maximize cargo speed while minimizing empty trailer kilometers. Implementation of
competitive IT begins wherever carriers feel they need the most assistance and for many,
dock management represents a logical starting point. Positive tracking of every package in
and out of every hub drastically reduces the possibility of cargo delays and damage.
Automatic optimization techniques simultaneously reduce handling expenses and allow
some trailers to bypass consolidation hubs entirely. When carriers augment a dock
management system with yard management support, the two projects amplify each other's
advantages. Yard management initiatives closely control the movement of trailers and
drivers based on information provided by the dock management system. The dock
management system in turn profits from data provided by pickup and delivery automation.
In case where load information from city drivers flows to the hubs, support systems and
supervisors, they can well anticipate future requirements. Incoming cargo stays in motion
because dock managers already know what is on each inbound truck. If pickup and delivery
systems are not immediately automated, carriers can implement intermediate systems to
efficiently feed information to hub management support projects. Dockside data collection
allows operators to enter all data about an inbound truck's cargo at the dock even as
operators strip the cargo for consolidation. Dockside data collection becomes more
efficient when carriers encourage their shippers to produce scan-able bills of loading,
printers with specialized software. A two-dimensional bar code encodes all necessary
shipment information. In less than one second, a dockside scanner captures an entire bill of
loading. The same scan-able documents can be used when the carrier later implements a
pickup and delivery management system. Effective SCM may be the best way to achieve
reduced order-to delivery cycle time. Instead of treating each function as consisting of
discrete activities, SCM considers all functions to be linked and interdependent. As a result,
SCM can reveal the cumulative effect of problems anywhere in the chain, not just within
SCM areas of responsibility.
SCOPE OF SCM
IN
FOOD INDUSTRY
 17

2.1 SUPPLY CHAIN ISSUES IN FOOD INDUSTRY.

2.1.1 General. SCM has become an important management paradigm. In SCM a key issue
emerges and that is to develop mechanisms that can align the objectives and coordinate
their activities so as to optimize the system performance. There is also a need to review
coordination mechanisms of supply chain systems in a framework that is based on supply
chain decision structure and nature of demand. This framework discussed highlights the
behavioral aspects and information required in the coordination of a supply chain. The
identification of these issues also points out towards the direction of future research in this
area. One of the important issues in SCM is the coordination between manufacturers and
multi-buyer. A single manufacturer supplying a product to single buyer is rare to be found in
today's business environment. Present day business environment is increasingly becoming
aware that the opportunity to have a competitive edge in business can come through
efficient and effective supply chain. In the case of companies operating on global scale,
supply chain strategies drive operational efficiencies and affect the bottom line. Unlike
technology or other core areas affecting business, Supply chain is always in a dynamic
mode. Project managers who head supply chain projects are often faced with numerous
challenges and issues to be overcome. There is a need to understand impending practical
problems, issues effecting SCM and likely hurdles encountered while implementing the
operations of Global supply chain projects. The relevant issues are discussed in succeeding
paragraphs.

2.1.2 Project Scale. Multinational projects are planned and implemented on globalised
scales, involving multiple countries and locations with all sites scheduled to become
operational around same timelines. The Project managers/ company management are
normally located in one country and thus it becomes impossible for project managers to
keep running to various locations and be available to concentrate on all sites, thus to
obviate problems project teams are formed at regional/ country level. However if the
project planning, design and control lies with one office or a single person or a team, the
rest of the project teams would become enablers and implementers resulting in the dilution
of energy and focus. The core project team resources cannot spread themselves and thin
out to attend to all sites thereby the biggest or the most important locations get attention
while others suffer due to lack of focus. Supply chain projects involve technology
implementation including infrastructure and software and also involve multiple logistical
modules, viz. transportation, freight, warehousing etc.
 18

2.1.3 Span of Control. Span of control over project implementation is an important facet,
more so in case of logistics projects involving multiple channels as well as external and
internal agencies. Project managers at best can concentrate on rolling out the project in one
country depending upon the number of sites and the logistical components involved. If the
project involves setting up of distribution centers or warehouse, then there is all the reason
that the roll out should be limited to country level.

2.1.4 Technology. Adoption of right technology and its implementation often faces
roadblocks in managing global supply chain projects. Projects roll out common process to be
followed across all countries and locations involving use of technology to drive the process.
Many issues concerning technology faced in a project are as follows:-

(a) Technology Solutions. Generally multinational companies find that their

supply chain operations across the world are managed not on one application or a set
of applications, but each location and country would have implemented either legacy
systems or stand alone systems to manage individual local logistics activities. Once
implemented, it becomes difficult to isolate such applications and shift them to one
common platform, without which common processes and standardization cannot be
driven across locations. Secondly any software solution would require to be
customized to suit local conditions and country requirements. One solution does not
fit all situations, while one solution may work in one country with bigger volumes and
size of supply chain network and warehouses, the same software may not be suitable
to be implemented in a small country with one location. Cost of Technology
Absorption then becomes an issue.

(b) Cost of Technology Absorption. Implementation of technology calls for the IT

teams to move to all locations, implement the setup, train the people and stabilize the
sites post their setup. The cost of implementation in these cases can be very high and
all countries may not be able to bear the cost of such implementation.

(c) Availability of Technology Infrastructure. Technology infrastructure

availability is different from country to country and also within the country. Internet
connectivity and bandwidth may not be same across all locations, thus it may hinder
implementation of an internet based technology application. Normally if the project is
driven at a global level, the local infrastructure issues of many countries do not figure
while considering the suitability of IT platform for implementation.
 19

(d) Internal & External Resource Capability. Supply chain projects involve
multiple locations, as well as cross functional departments and teams within the
organization, besides they also include multiple external agencies who manage the
logistics. Driving projects through various country managements requires enormous
internal selling to be done. The projects also call for external selling with the service
providers. Local country managements as well as the service provider country
managements may or may not have the same interest and commitment to the
project, as much as, the global project leadership would have. These are soft
challenges faced by Project Managers, to be able to sell the idea and get commitment
from all stake holders. The availability of quality resources, both internally and
externally in all locations is critical to the implementation of the project and is often a
challenge which can hold up implementations and training.
 20

2.2 COORDINATION PROBLEMS.

2.2.1 General. Supply chain coordination has become a critical success factor for SCM and
effectively improving the performance of organizations in various industries. Coordination
refers to the integration of different setups of an organization or different parts of
organizations in supply chain, formulated to accomplish a collective set of tasks as well as
achieve mutual benefits. Let us consider the concept of Construction Supply Chain of a
Mega Project as an example with special emphasis as regards to construction SCM. The
coordination of inter organizations and decision making in construction supply chain along
with the integration of key construction business processes is done by key members
involved in construction supply chain. Research and practice indicate that there are many
problems in construction setups and most of them are related to supply chain problems
mostly related to procurement and supply of construction material required at the site. The
research analyses the problems in construction supply chain and in order to resolve these
problems as well as improving the performance of construction, an agent-based framework
for construction supply chain coordination is designed based on the agent technology and
multi-attribute negotiation and multi-attribute utility theory. The framework, which
integrates the construction organizations in construction supply chain and multi-attribute
negotiation model, into a multi agent system, provides a solution for supply chain
coordination in construction through multi attribute negotiation mechanism on the
Internet. Finally, the prototype of the framework is developed and tentatively run based on
an imaginary construction project. The trial run reveals the feasibility to implement the
agent-based framework for coordination in construction. We review developments in
fundamental research on coordination in SCM. The review explicitly addresses new trends in
SCM, namely, the consideration of multi-tier value-added processes, the coordination of
multi-sourcing/customer relationships and the handling of complex bill-of-materials
structures. The contribution is the segmentation of the existing approaches, employing a
general framework and leading to insights for the future direction of research are as
follows:-

(a) Points out areas where further research is necessary.

(b) Analyze coordination problems which can be addressed by the models viz.
how to structure supply chains/roles of supply chain partners they can
assume.

(c) Research Potentials: Firstly emphasis is laid on approaches that apply to

multi-tier production and logistic networks. Secondly attention also should be
paid to the problem of resource coordination in networks.
 21

2.2.2 Coordination. Coordination is defined as a “Process to bring into a common

action, movement or conditions or to act together in a smooth concerted way”, (Merriam
– Webster, 2003). Coordination leads to more formal relationships and an understanding of
compatible missions among supply chain members. A supply chain may be integrated in
terms of information and processes so that it is coordinated. Coordination in supply chain is
concerned with aligning all decisions to achieve global system objectives. It can be achieved
through proper integration of three important disciplines, viz; Business Strategy (BS),
Business Information System (BIS) and SCM. Coordination issues occur in an organization
mainly due to the nature of interdependency among supply chain members. There is a basic
pattern to the practice of SCM, each supply chain has its own unique set of market demands
and operating challenges and yet the issues remain essentially the same in every case.
Companies involved in supply chain have to make decisions individually and collectively
regarding their actions basically in five areas:-

(a) Procurement and Production.

(b) Inventory Management.

(c) Location and Warehousing.

(d) Transportation.

(e) Information Management.

2.2.3 Procurement. It can be explained as activities involved in ensuring that the requisite
input material is available on time. A major challenge faced by the procurement manager is
in selecting the right vendor(s) for the required material, component, part or product and
determining the quantum of order to be placed to each vendor. The quality of material and
timely supply has a significant impact to meet the aspirations of consumers, accurately and
timely. Selection of desired vendors is dependent on conflicting criteria which spreads from
price quoted, quality of supply, following of delivery time schedule, quality of service
provided, order processing, following up of orders, reliability and rating of vendors based on
past performance.
 22

2.2.4 Inventory Control. Inventory planning and control largely follows vendor selection.
Inventory control decisions focus on the order quantity, quality and supply timings between
the orders. The basic considerations being lead time, ordering cost, inventory carrying cost,
transportation cost, shortage cost, in-transit inventory carrying cost and the level of service
in terms of allowable inventory or shortage. The ultimate objective being on cost cutting
and optimum consumer satisfaction. However as both these aspects are conflicting in
nature there is a need to have economic trade-off between inventory levels and customer
service levels. Inventory control decisions in SCM include stock locations, product mix and
planned inventory strategy which could be either, “Just- in Time (JIT)”, “Push” or “Pull”
methods.

2.2.5 Location and Warehousing. Facilities planning address two major logistics decisions
which are generally made at the initial stages of planning while designing a logistics system,
basically being Facilities Location and Facilities Layout. The location and layout are of
paramount importance in reducing the cost factor of entire logistics system. The location
gains importance as it has a massive impact on land and construction cost, local taxes,
insurance, availability of labour, cost of labour, transportation availability and running costs.
The number, size and location of facilities have a significant impact on inventory related
costs and consumer service levels. The layout of a facility has an impact on intra facility
logistics costs such as material handling costs and the costs of material handling equipment.

2.2.6 Transportation. Transportation involves biggest component of logistics costs.

Transportation includes both inbound movement of stores from sources to warehouses
followed by processing or production stage and outbound movement of finished product to
the consumers directly or through distribution centers. Transportation encompasses a wide
spectrum of planning and operational aspects. Some of the important planning problems
include fleet size, vehicle routes crew planning network design, hub and terminal location.
 23

2.3 PRINCIPLES OF SCM.

2.3.1 Objectives of SCM. The principles always flow out of objectives, thus we need to
analyze the same:-

(a) Analysis reveals the fundamental objective of SCM is to "Add Value". It brings us
to the case example of the “Fish Fingers”, during the SCM conference in the United
Kingdom held in 1998, a participant in a SCM seminar stated, “That total time taken
from fishing dock through manufacturing, distribution, and final sale of frozen
fish fingers for his European grocery-products company was 150 days, whereas
in kitchen their preparation took merely 43 minutes”. This is an eye opener and
lays down an enormous target for supply chain managers, it also needs to be noted
that during all that time company’s capital is almost literally frozen.

(b) What is true for fish fingers is also true of numerous other products. Examining
any extended supply chain and likely to be a long one. James Morehouse, Vice
President of consulting firm A.T. Kearney, reports that the total cycle time for corn
flakes, for example, is close to a year and that the cycle times in the pharmaceutical
industry average 465 days. In fact, James Morehouse argues that if the supply chain,
of what he calls an "extended enterprise," is encompassing everything from initial
supplier to final customer fulfillment, it could be well cut to 30 days that would
provide not only more inventory turns, but fresher product as well as an ability to
customize better and improved customer responsiveness. "All that added value
provides a clear competitive advantage". SCM thus becomes a tool to help
accomplish Corporate Strategic Objectives:

(i) Reduce working capital.

(ii) Taking assets off the balance sheet.

(iii) Accelerate cash-to-cash cycles.

(iv) Enhance inventory turns.

2.3.2 Principles of SCM. If SCM on top management’s agenda becomes, “PRIORITY" then
it needs a doctrine. Accordingly Mr Andersen, MSc, BPR Engineer and Mr S. Zygiaris, BPR
Hellas SA (Consultants INNOREGIO project) propounded the, "Seven Principles" of SCM. If
these principles are consistently and comprehensively followed, the consulting firm claims
that these principles bring a host of competitive advantages as discussed below:-
 24

(a) Segment Customer Based on Service Needs. Companies traditionally have

grouped customers by industry, product, or trade channel and then provided the same
level of service to everyone within a segment. To have effective SCM there is a need
to group customers by distinct service needs, regardless of industry and then tailor the
services for those particular segments accordingly.

(b) Customize the SCM Network. In designing the SCM network, companies need to
focus intensely on the service requirements and profitability of the customer
segments identified. The conventional approach of creating a "monolithic" SCM
network runs counter to successful management. It is important to listen to signals of
market demand and plan accordingly. Sales and operations planning must span the
entire chain to detect early warning signals of changing demand in ordering patterns,
customer promotions, and so forth. This demand-intensive approach leads to more
consistent forecasts and optimal resource allocation.

(c) Differentiate Product Closer to the Customer. Companies today no longer can
afford to stockpile inventory to compensate for possible forecasting errors. Instead,
they need to postpone product differentiation in the manufacturing process closer to
actual consumer demand.

(d) Strategically Manage the Sources of Supply. Companies by working closely with
their key suppliers try to reduce the overall costs of owning materials and services.
SCM enhances margins by gain sharing both for themselves and their suppliers as
beating multiple suppliers over the head for the lowest price is outdated. Andersen
advises that "Gain sharing" is the way in.

(e) Develop Supply-Chain-Wide Technology Strategy. Development of a supply-

chain-wide technology strategy as one of the cornerstones of successful SCM is
possible only if IT supports multiple levels of decision making. It also must provide a
clear view of the flow of products, services, and information.

(f) Adopt Channel-Spanning Performance Measures. Effective supply-chain

measurement systems perform more than just monitor internal functions; they adopt
measures that apply to every link in the supply chain. Importantly, these
measurement systems embrace both service and financial metrics, such as each
account’s true profitability. The principles are not easy to implement as they run
counter to ingrained functionally oriented thinking about how companies organize,
operate, and serve customers. The organizations that do preserve and build a
successful supply chain have proved convincingly that you can please customers and
enjoy growth by doing so.
 25

(g) Methodology of SCM Project. Intense focus on actual customer demand is

important, instead of forcing into the market a product that may or may not sell
quickly and thereby inviting high warehousing costs; ideally there is a need to react to
actual customer demand. The supply-chain leaders by reacting to customer demand
minimize the flow of raw materials, finished product, and packaging materials at every
point in the pipeline. Responding more accurately to actual customer demands and
by keeping inventory levels to the minimum, leading companies have adopted a
number of speed-to-market management techniques. The models which have become
part of the SCM are :-

(i) JIT manufacturing and distribution.

(ii) Quick Response and efficient consumer SCM.

(iii) Vendor Managed Inventory (VMI) and more.

2.3.3 In view of the importance of SCM to be a commercial success, making the right
decision about which system is best is important and before deciding how to develop new
service SCM chain with economical distribution centers, factors to be considered are such
as, required customer service levels, optimum location, stock holding policies and
Electronic Data Processing (EDP) systems. The organizations to make the best decisions,
employs an integrated planning approach, consisting of four steps from planning to
realization as given below:-

(a) Potential analysis.

(b) Concept study.

(c) Detailed planning.

(d) Project or change management.

REVIEW OF MATERIAL
AND
PROBLEM ANALYSIS
 27

3.1 CHALLENGES

3.1.1 SCM System. The SCM as understood so far is the process of procuring, moving, storing
and retrieving of material as well as managing people and information efficiently and
economically. Generally planning, procurement, manufacturing, marketing and the
distribution in any organization along with the supply chain operate independently. These
organizations have their own objectives and more often than not these objectives conflict
with each other. It is also evident that marketing objective of high consumer service and
attainment of maximum sales output, always conflicts with manufacturing and distribution
goals. Invariably manufacturing operations are designed to maximize output and lower the
costs with little consideration for the impact on inventory levels and distribution capabilities.
Purchasing contracts often get negotiated with scarce or minimal information beyond
traditional buying patterns. The net effect of these aspects is generation of voids as regards
to an integrated plan in any organization. There is a definite need for a mechanism through
which these different functions can be coordinated and integrated together which is only
feasible by designing a SCM system which meets the set objectives.

3.1.2 SCM System Design. The formulation of SCM system design arises under two
conditions. Firstly when a new system is being set up or secondly when the existing
system is to be changed and redesigned to accommodate certain imperative changes.
These changes may occur due to changes in requirement of consumers, demands,
product, costs or policy changes as numerated below :-

(a) Consumer service requirements may change due to varying market

competition, service policy, changes in consumer demand or the pattern of consumer
demand.

(b) Change in demand can be a result of shift in population or shift in consumer

attitude resulting in changes to demands by location, time, product etc.

(c) Technological changes also affect the consumer demand pattern, change in
product characteristics such as weight, volume and shape effect packaging, handling,
storage and transportation options.

(d) Changes due to implementation of new taxes or policies, Labour agreements,

development in IT systems, changes in storage and transportation costs can also force
a company to change its pricing policy.

(e) Important steps involved in designing, developing and implementing an

efficient and economical system are discussed in subsequent paragraphs.
 28

3.1.3 Problem Definition. It is imperative to understand the difference between a

symptom and a problem. The problem must be defined at appropriate level. It involves
defining focus areas, system/business objectives and understanding the basic logistics
product and its characteristics. The problems will vary with the type of product,
consumer requirement, marketing area, methods of transportation, cost factors, business
objectives and a wide variety of parameters both tangible and intangible. The definition
must also include the expectations from the new system as the critical issues which need
to be refined / corrected /modified must be understood well. Development of a new
system or redesigning of existing system depends on importance of considering the
complete system or few critical components of the system. A strategic plan will require
a long term macro level problem definition and an operational plan will require a short
term detailed definition of the system. To explain the difference between a strategic
plan and an operational plan, an example of the type of aircraft and its utilization is as
given:

“Determination of the type of aircraft to serve the market to gain profits is

an example of strategic problem, where as assignment of a particular
aircraft for a specific task and on a given day is an example of operational
problem”.

3.1.4 Data Analysis. The second phase of a system design is related to data
collection and its subsequent analysis. It also involves identification of data requirements,
data source, data aggregation, analysis of adequacy and accuracy of available data,
developing methodologies for collecting additional data and developing estimates for
unavailable data. Data requirements are also dependent on the nature of project and
tapping of various data sources depends on the data needs. The problem of vendor
selection as an example, will require data on location of vendors, their capacity,
capability, selling price, quality, lead time required, service quality, mode and cost of
transportation etc. Once the data source is identified it is important to analyse the
adequacy, reliability and accuracy of the data. Comparison of data from various sources
for the same data element may also help validate its accuracy. Data aggregation is helpful
in reducing the problem to manageable size. Development of estimates for unavailable or
missing data may be done by using expert opinion, simple interpolation or simple to
sophisticated forecasting methods. The validity of results from data analysis depends
upon the sample size or the number of data points used in the analysis. The size of
sample increases with the desired level of accuracy.
 29
3.1.5 Problem Analysis. The third phase is analysis of the problem with the available data
or the estimated data. The objective of the analysis is to develop alternative models and
select the best model or alternatives with respect to desired criteria. The type of analysis
may range from basic spreadsheet calculations to sophisticated optimization models.
The tools used for analysis may range from spreadsheet calculations to sophisticated
optimization models. The analysis may be done by using existing software packages or
new software may have to be developed depending on the type of requirement. Some of
the existing tools available for modeling and solving SCM problems discussed are as
given below:-
(a) Mathematical Models. The mathematical models refer to the general collection
of linear, integer and non linear programming models. The models have an objective
function subject to a set of constraints. An analysis using mathematical model involves
modeling and solving. In some cases, the model may be used to solve optimally by
using efficient logarithms and in other cases it may be done by using approximate
procedures. These solutions are optimum or near optimum only for the model and not
for real problem. The effectiveness is measured by speed and accuracy besides
simplicity and ease of understanding. The mathematical models are more suitable for
vendor selection, inventory control, warehouse location and transport planning etc.
(b) Heuristic Models. The Heuristic models are generally used for transport
planning and location modeling. Heuristic models are analytical solution methods based
on intuitive understanding of the problem. A good understanding of relationship
between decision variables, various constraints and objective functioning is required to
formulate Heuristic methods. These are classified as Construction Method,
Improvement Method and a combination of both Construction & Improvement
methods. In construction method a solution is developed from scratch using certain
rules that gear the development toward maximizing or minimizing the objective and
also ensuring the constraints are not neglected. The improvement methods start with a
feasible initial solution and then make changes to the initial solution to seek
improvements, wherein the initial solution may be randomly generated or provided by
the user. In the combination of both, initially the solution is found by construction
method and then improved by improvement method.
(c) Simulation Models. The use of Mathematical and Heuristic models are ideal to
solve problems analytically, however complex real-world problems often require simple
assumptions and in Simulation model the complexities of the problem and the
relationships between various variables are modeled by means of equations. The inputs
for the model are often described by probability distributions. The system is then
simulated over time to analyse the outputs. Simulation is typically used for analyzing
the performance of real world systems over time under various operating procedures
and policies. A good simulation model can also be used as a perspective tool for making
decisions.
 30

(d) Guidelines for Strategy Formulation. Invariably set of guidelines assist in

addressing the problems and finding solutions. However guidelines are more applicable
while formulating high level strategies and analytical tools are required to translate
these strategies into planning or operational procedures. Some of the guidelines for
developing logistics strategies are as given below:-

(i) Total Cost Approach. It is important to consider all relevant costs such as
purchase cost, production cost, inventory carrying cost, storage cost, handling and
transportation cost etc.

(ii) Differentiated Distribution. The basis followed is that not all products require
the same level of consumer service.

(iii) Postponement. The basic philosophy is to delay the procurement /production or

delivery till actual demand occurs.

(iv) Consolidation. The objective is to maximize the benefits of economies of sale by

consolidating in time, location and size.

3.1.6 System Implementation. The fourth phase is implementation of new SCM

system which need to be done timely and accurately after due validation. The key issues
for successful implementation are first validation and sensitivity analysis of the system
performance to inputs and secondly adequate user training and testing, who then can
make optimum use of the system in an ideal manner. The system once implemented
always has a life time period which depends on the factors and issues as discussed above.
It will be more appropriate to state that all systems formulated should be reviewed
periodically and necessary changes be dove tailed to keep the system functional and
effective.
 31

3.2 CONCEPT OF SCM

3.2.1 General. The highly competitive food production environment/ market is

primarily driven by time based competition, where a farmer and producer’s ability/
capability to provide responsive and flexible supply to a costumer define its competitive
edge. These firms recognize that innovative supply and exceptional service is imperative
to retain customer base and to gain new revenue opportunities. To attain this it is
important to structure the supply chains, especially the procurement process to respond
to upside demand and to absorb downsize risks without creating excessive inventory or
capacity. The food supply chain is a series of links and inter-dependencies, from farms
to food consumers’ plates, embracing a wide range of disciplines. The figure below
amplifies the traditional components which act as the key players in the SCM Concept
and how they can be separated to understand the SCM in food Industry.

FIGURE 3.21
 32

3.2.2 Basic Logistics Concept. The practice of SCM is basically guided by logistic
concepts that have been existent over the centuries. Years ago Napoleon a very
successful General had made the famous remark, “An army marches on its stomach”,
Napoleon was a master strategist and a skillful General and this remark clearly indicates
that the importance of logistics system was understood at that time as well, of what we
would now call an efficient SCM. Unless the soldiers are fed and equipped well, the army
cannot move and fight. Along the same lines, there is another saying that goes,
“Amateurs talk strategy and professionals talk logistics”. All sorts of grand strategies
and dashing maneuvers can be planned and discussed however none of that will be
feasible without first working out the day-to-day demands which are to be met, of
providing an army with fuel, spare parts, food, shelter, ammunition etc. These may be
evidently mundane activities of the SCM, but more than often determine an Army’s
success. The term “SCM” was first coined in late 1980s and came into widespread use in
the 1990s. Prior to that time the terms used were “Logistics” and “Operations
Management”. Definitions of SCM by some experts are as given below:-

(a) “A supply chain is the alignment of firms that bring products or services to
market.”— From Lambert, Stock, and Ellram in their book Fundamentals of Logistics
Management (Lambert, Douglas M., James R. Stock, and Lisa M. Ellram, 1998,
Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, Chapter 14).

(b) “A supply chain consists of all stages involved, directly or indirectly, in fulfilling
a customer request. The supply chain not only includes the manufacturer and
suppliers, but also transporters, warehouses, retailers, and customers themselves”,
as described by Chopra and Meindl in their book Supply.

(c) “A supply chain is a network of facilities and distribution options that performs
the functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products
to customers”, as described by Ganeshan and Harrison at Penn State University
published in their article “An Introduction to Supply Chain Management”.

(d) “SCM thus we can say is the coordination of production, inventory, location,
and transportation among the participants in a supply chain to achieve the best mix
of responsiveness and efficiency for the market being served.”
 33

3.2.3 Concept of SCM. There is a subtle difference between the concept of SCM and the
traditional Logistics Concept. Logistics typically refers to activities that occur within the
boundaries of a single organization and supply chains refers to network of companies
that work together and coordinate their actions to deliver a product to the consumer.
Traditionally logistics focuses its attention on activities such as procurement, distribution,
maintenance, and inventory management. Salient aspects are discussed below:

(a) SCM acknowledges all facets of traditional logistics and also includes activities
such as marketing, new product development, finance, and customer service. In the
wider view of supply chain thinking, these additional activities are now seen as part of
the work needed to fulfill consumer requirement.

(b) SCM also views the supply chain and the organizations involved in it as a single
entity. It brings a systems approach to understand and manage the different activities
required to coordinate the flow of products and services to best serve the ultimate
consumer.

(c) The systems approach provides the frame work in which the effort is to provide
best response to the business requirements that seem to be in conflict with each
other. Effective SCM requires simultaneous improvements in both customer service
levels and the internal operating efficiencies of the companies in the supply chain.

(d) If considered individually different supply chains often have conflicting needs,
for instance requirement of maintaining high levels of customer service calls or
maintaining high levels of inventory or to operate efficiently asks for reducing
inventory levels. It is only when these requirements are seen in totality as part of a
larger picture then the ways can be found to balance their different demands.

(e) Effective SCM requires simultaneous improvement in both customer service

levels and the internal operating efficiencies of the companies in the supply chain.
Customer service at its most basic level means consistently high order fill rates, high
on-time delivery rates and a very low rate of products returned by customers which
may be for whatever reason.

(f) Internal efficiency for organizations in a supply chain means that the
organizations get an attractive rate of return on their investments in inventory and
other assets and can find effective ways to lower their operating and sales expenses.
There is a basic pattern to practice SCM and each supply chain has its own unique set
of market demands and operating challenges, yet the issues remain essentially the
same in every case. Companies in any supply chain must make decisions individually or
collectively regarding their actions in following five areas:-
 34

(i) Production. What products does the market want and in what quantity?
Which products should be produced and by when? This activity includes the creation
of master production schedules that takes into account, the plant capacities, workload
balancing, quality control and equipment maintenance.

(ii) Inventory. What inventory should be stocked at each stage of a supply

chain? How much inventory should be held as raw material, semi finished or as
finished goods? The primary purpose of inventory is to act as a buffer against
uncertainty in the supply chain. However, holding inventory can be expensive, so what
are the optimal inventory levels and reorder points?

(iii) Location. Where should the facilities for production and inventory storage
be located? Where are the most cost efficient locations for production and for storage
of inventory? Should existing facilities be used or new ones be built? Once these
decisions are made they determine the possible paths available for products to flow
for delivery to the final consumer.

(iv) Transportation. How should inventory be moved from one supply chain
location to another? Air freight and truck delivery are generally fast and reliable but
they are expensive. Shipping by sea or rail is much less expensive but usually involves
longer transit times and also involves more uncertainty. This uncertainty must be
compensated for by stocking higher levels of inventory. When is it better to use which
mode of transportation becomes critical.

(v) Information. How much data should be collected and how much
information should be shared? Timely and accurate information holds the promise of
better coordination and better decision making. Availability of good information,
ensures people can make effective decisions about what to produce and how much,
about where to locate inventory and how best to transport it.
 35

3.2.4 SCM Functions in Food Industry. SCM in Food Industry brings together a
large number of important disciplines and aims to provide an understanding of the chain,
to support those who manage parts of the chain and to enhance the development of
research activities in the discipline. The overall logistics supply chain can be divided into
three segments: Inbound Logistics, Intra Facility Logistics and Outbound Logistics. Figure
3.22 below shows relationship between various functions within logistics supply chain.

LOGISTICS SUPPLY CHAIN

WAREHOUSE DISTRIBUTION
CENTRE

VENDORS PLANTS CUSTOMERS

Inbound Logistics Intra-Facility Outbound Logistics

Logistics

FIGURE 3.22
 36

3.2.5 Disciplines in Food Industry. A study of SCM in Food Supply Industry is a

detailed analysis of the broad aspects involving the process of planning, organizing and
controlling the flow of materials and services from suppliers to end users or consumers.
The Integrated Logistics incorporates suppliers, supply management, integrated logistics
and operations. It is important to deliberately analyze each and every aspect in detail.
Disciplines of food SCM are as depicted in the figure given below:-

DISCIPLINES OF FOOD SUPPLY CHAIN

FIGURE 3.25
 37

3.3 STRATEGIC DECISIONS

3.3.1 Segments. The process of logistics or as per latest terminology SCM is

essential and applicable to all types of industries and services viz. manufacturing, retail,
health care, service sector, transportation etc. Some of the important functions within
SCM are inventory management, vendor selection, storage and transportation. The
overall logistics or supply chain as discussed earlier is basically divided into three
segments: inbound logistics, intra-facility logistics and outbound logistics. The
processes of planning and operational decisions of one segment have a direct impact on
other segment. The challenges for the logistics decisions are based on total cost approach
as far as the industry is concerned as it gets related to profits and SCM in food supplies
generally gets related to availability of the right item, in right quantity, at right place and
at the right time, so as to meet the requirement of consumers without any damage or
loss of perishable short life items.

3.3.2 Strategy of SCM / Logistics. SCM is typically viewed to lie between fully
vertically integrated firms where the entire material flow is owned by a single firm and
between those where each channel member operates independently. Therefore
coordination between the various players in the chain is an important key for effective
SCM. Cooper and Ellram [1993] very effectively compared SCM to a well-balanced and
well-practiced relay team. A relay team is more effective & competitive when each player
knows how to be prepositioned for the hand-off. The relationships are the strongest
between players who directly pass the baton, but the entire team needs to make a
coordinated effort to win the race. The decisions for SCM can be categorized into two
broad categories, Strategic and Operational. The strategic decisions are made typically
over a longer time horizon as these are closely linked to the corporate strategy and also
guide supply chain policies from a design perspective. The operational decisions are short
term and focus on activities over a day-to-day basis, basically to effectively and efficiently
manage the product flow in the "strategically" planned supply chain.

3.3.3 Strategic Decisions. There are basically four major strategic decision areas in
SCM being location, production, inventory and transportation as briefly discussed below:-
 38

(a) Location. The geographic placement of food production facilities, stocking

points, and sourcing points is the natural first step in creating a supply chain. The
location of facilities involves a commitment of resources to a long-term plan. Once the
size, number, and location of these are determined, so are the possible paths by which
the product flows through to the final consumer. These decisions are of great
significance as they effect the basic strategy for accessing customer markets and will
have a considerable impact on revenue, cost and level of service. These decisions need
to be determined by an optimization routine that considers production costs, taxes,
duties and duty drawback, tariffs, local content, distribution costs, production
limitations, etc. (Arntzen, Brown, Harrison and Trafton [1995]). The decisions with
respect to the location are primarily strategic however these also have implications on
operational level.

(b) Production. The strategic decisions include number of aspects such as, the cycle
of food products to be followed, which areas are best to produce them, allocation of
land for growth, allocation of suppliers to distributers and distributers to consumer
markets. These decisions have a big impact on the revenues, costs and customer
service levels of the firm. These decisions assume the basics for the existence of the
facilities and determine the exact path through which products flow to and from these
facilities. Another critical issue is the capacity of the growth or the production facilities
and this largely depends on the degree of vertical integration within the firm.
Operational decisions basically focus on detailed production scheduling. These
decisions include the construction of the master production schedules, scheduling
production on machines, equipment maintenance and other considerations include
workload balancing and quality control measures at a production facility.

(c) Inventory. Inventories exist at every stage of the supply chain as either raw
material, semi-finished or finished goods, these can also be items in-process between
locations and their primary purpose is to act as a buffer against any uncertainty that
might exist in the supply chain. Since holding of Inventories can cost anywhere between
20 to 40 percent of their value, their efficient management is critical in supply chain
operations. It is strategic in the sense that top management sets goals pertaining to the
means by which inventories are managed. However most researchers have
approached the management of inventory from an operational perspective, these
include deployment strategies (push versus pull), control policies, determination of the
optimal levels of order quantities and reorder points and setting safety stock levels at
each stocking location. Setting up of these levels is critical as they are primary
determinants of customer service levels.
 39

(d) Transportation Decisions. The most strategic decision is the aspect of choice of
mode of transport as it gets closely linked to the inventory decisions. The best choice
of transportation mode is often found by trading-off the cost of using the particular
mode of transport with the indirect cost of inventory associated with that mode. While
air shipments may be fast, reliable, and warrant lesser safety stocks but they are
expensive. Meanwhile shipping by sea or rail may be much cheaper but they
necessitate holding relatively large amounts of inventory to buffer against the inherent
uncertainty associated with the delays. The customer service level and geographic
location always plays vital roles in such decisions. Since transportation involves more
than 30 percent of the logistics costs thus operating it efficiently makes good
economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot),
routing and scheduling of equipment are hub for effective management of the firm's
transport strategy.

3.3.4 SCM Perspectives. The Strategic and Operational levels of decisions require
different perspectives. The strategic decisions are for the most part global or "all
encompassing", in that they try to integrate various aspects of the supply chain. The
operational decisions, meanwhile, address the day to day operations of the supply chain.
Therefore the models that describe them are often very specific in nature and due to
their narrow perspective these models often consider great details and provide very good
if not optimal solutions to the operational decisions. Consequently, the models that
describe these decisions are huge, and require a considerable amount of data. Often due
to the enormity of data requirements and broad scope of decisions these models provide
approximate solutions to the decisions they subscribe. To facilitate a concise review of
the literature, and at the same time attempting to accommodate the above polarity in
modeling, we can divide the modeling approaches into three areas:-

(a) Network Design Method. The Network Design methods for most part provide
normative models more for the strategic decisions. These models typically cover four
major decision areas as described earlier and focus more on the design aspect of the
SCM, establishment of the network and associated flows. These methods determine
the location of production, stocking, and sourcing facilities and paths the product takes
through them. Such methods tend to be large scale and used generally at the
inception of the supply chain.
 40

(b) "Rough cut" Methods. These methods on the other hand, give guiding policies
for the operational decisions. These models typically assume a "single site" i.e., ignore
the network and add supply chain characteristics to it, such as explicitly considering
the site's relation to the others in the network. These models form the bulk of the
supply chain literature and typically deal with the more operational or tactical
decisions. Most of the integrative research from a supply chain context seems to take
on an inventory management perspective.

(c) Simulation Methods. It is a method by which a comprehensive supply chain

model can be analyzed, considering both strategic and operational elements. However
with all simulation models, one can only evaluate the effectiveness of a pre-specified
policy rather than develop new ones. It is the traditional question of "What If?" versus
"What is the Best?”

3.3.5 Effective SCM in Food Industry.

3.3.5.1 Effective SCM is essential for the food industry because of the fact that the food
gets spoiled. The business should take care that the right products reach the right
customer at the right price and at the right time, in right condition and this can be done
only by managing the supply chain effectively thereby improving the customer
satisfaction. The supply chain process involves the two way flow of goods or services and
the information between the manufacturers and the customers. Large number of
companies in the food industry viz. Nestle, Unilever, Magnolia etc., gets their feedback
from the customers and they utilize the suggestions given by the customers in the
development of the products. Globalization has its impact on the supply and demand in
the food industry; globalization of the supply chain means transporting food across the
world to be processed and back again to the country of origin to be sold which
sometimes can make environmental and commercial sense. Ineffective and incompetent
supply chain management can lead to the bankruptcy of the business.
 41

3.3.5.2 The technological changes in the SCM due to improved communication can bring
the significant changes in the relationship between the partners in the supply chain;
enhance the productivity and the profits of the business in the food industry. The study
essentially needs to follow a ‘farm to fork’ structure, involving a variety of aspects such
as, consumers, perceived risks, product safety, procurement, livestock systems, crop
production, food manufacture, retailing, wholesaling and catering. Special consideration
is also given to supermarket supply networks, third party logistics, temperature
controlled supply chains, organic foods and the food supply chain. A final look will also
need to be given at the future for food supply chain management. SCM solution map
given at Figure 3.31 reflects all issues that are encompassed by SCM in Food Industry.
These aspects will have to be kept in mind during model formulation.

S C M SOLUTION MAP

FIGURE 3.31
 42

3.3.5.3 SCM solution map as given above describes information about various planning
levels and other associated issues involved such as, inventory levels, orders, forecasts,
production plans, and other key performance indicators. SCM is tailored to the needs of
specific job roles within a supply chain, from demand planners to warehouse managers.
All roles are launched from customized workplace portals and these also are the portals
of information inputs required for operating any SCM model, which will be discussed
subsequently.

3.3.6 Areas of SCM to be Explored

3.3.6.1 The basic analysis of the aspects as discussed above, amplifies the areas which
need to be explored. These are stated as follows:-

(a) Food Consumer and the Supply Chain.

(b) Perceived Risk and Product Safety in the Food Supply Chain.
(c) Procurement methods in the Food and Drink Industry.
(d) The Livestock System and Crop Production Patterns.
(e) Food Manufacturing.
(f) Food Retail.
(g) Food Wholesaling.
(h) Catering.
(i) Partnerships and Alliances in Supermarket Supply Networks.
(j) New Product Development and Information Technology in Food SCM.
(k) Third Party Logistics in the Food Supply Chain.
(l) Temperature Controlled Supply Chains.
(m) Factors Influencing Supply and Demand for Organic Foods.
(n) Future of the Food Supply Chain Management.

3.3.6.2 The issues given in the paragraph above are the basic pillars of information
required for optimum functioning of any SCM; particularly it will be required for
management of food supply system in a globalised environment.
 43

3.4 SCM APPROACHES

3.4.1 Vendor Selection

3.4.1.1 Prelude. Prior to World War II, the key to success of a firm, was the ability to
procure the right materials and services from the vendors. Preceding 1980 the
organizations faced two major problems; firstly there being international shortage of
almost all basic materials required at that time and consequently increase in prices far
above the norms. This resulted in laying greater emphasis on setting up of a purchase
department for obtaining the required materials from vendors at reasonable and
competitive prices. In 1990’s it became evident that it was imperative to have efficient
and effective purchase system to compete in the domestic and international markets.
Generally as in most business organizations, purchasing management involves people,
processes and technology. There is a need to understand what is purchasing? Purchasing
can be explained as the identification of source, purchasing and delivery of goods or
services that the organization needs, either in its manufacturing and business
management or for stocking so that it can resell at a profit. The field of purchasing which
is a subset of materials management centers on supplier and vendor selection.
Purchasing can also be termed as Supply Management, implying procurements of goods,
raw material etc. for reselling or providing to the consumer. Supply management in its
broadest definition encompasses all such activities of moving goods inwards into the
firm. It can also be described as materials management, inbound logistics, purchasing or
procurement thereby implying, anticipating requirements, sourcing, obtaining supplies
and moving them into the organization.
3.4.1.2 Purchasing and Procurement. The purchasing department is an important part
of any business, as its good management directly impinges on the bottom line.
Purchasing derives its importance in any organization from two sources i.e. cost efficiency
and operational effectiveness. It can also be explained as the activities involved in
ensuring, that the requisite material at the right price is available on due time, so as to
create requisite competitive cost advantage. Purchasing is also expected to ensure supply
to generate profits and reduce expenses. Thus there is a need to have effective
purchasing practices, so as to ensure non- disruption of operations, maintenance of
desired customer levels and good relationships. The efficient acquisition of desired
products and services requires the right materials, in the right quantity, in the right
condition, at the right time, from the right source, with the right service and the right
price. The objectives of purchasing are as given below:-
(a) Provide uninterrupted flow of materials, supplies or services as required by the
firm.
(b) Minimize inventory investment and losses by optimizing the listed requirement.
 44
(c) Maintain adequate quality for maintenance of set standards for quality control.
(d) Develop competent vendors capable of fulfilling desired requirements.

(e) Standardize items bought if possible, as it is a major factor in maintaining

standards.

(f) Purchase required items/ services at the lowest price to maintain good profits.

(g) Accomplish purchasing objectives at the lowest possible level of admin cost.

(h) Improve competitive position of the organizations by working in harmony with

other departments for optimum cost cutting and maximum profits. Type of internal
and external information flow for purchasing is as depicted below:

INFORMATION FLOW FOR PURCHASING

INTERNAL INFORMATION EXTERNAL INFORMATION

Sales Forecasting Market Conditions
Production Control Supply Source
Engineering Supply Capacity
Planning Production Rates
Production Control Labour Conditions
Production Tax Customs
Budgeting Prices & Discounts
Financial Control Transportation Rates
Accounting, PURCHASING Transport Availability
New Products New Product
DEPARTMENT
Inventory Control Information
Quality control Product Information

INFORMATION FLOWING FROM PURCHASING DEPARTMENT

Stores (Orders Placed)
Legal ( Contracts)
Production ( Product Availability, Lead Time, Price and quality )
Engineering ( Source, Product, Price, Information )
General Management ( Economic Conditions )
Product Development ( Product and Price Information )
Marketing ( Competitive Conditions )
Finance ( Budget Commitments )
Accounting ( Costs, Prices Adjustments )

FIGURE 3.41
 45

3.4.1.3 Purchasing and Other Functions. Purchasing has to be closely meshed with
other organizational functions/ departments. Various departments place demands on
purchase department, as they may require purchasing expertise for procurement from
right vendor, as such money saved is money earned. The purchase department acts as a
gateway between various functionaries of the organization and the vendors. Figure 3.41
above shows types of information required by the purchase department which is
imperative for purchasing.

3.4.1.4 Purchasing Strategies. Companies implement purchasing strategies in order to

make cost effective purchasing decisions from a group of efficient vendors, who will
deliver quality goods on time and at mutually agreeable terms. These purchasing
strategies may include such choices, as making procurement savings by using centralized
purchasing which tantamount of concentrating the entire procurement activities within
one principal location. Other option is to decide to undertake a single source
procurement strategy that involves obtaining excellent dedicated service from a single
vendor. These strategies are predominant when sourcing for IT or for indirect purchasing
such as office supplies and cleaning are concerned. Another option is that companies may
use a procurement strategy of using a core purchasing cycle. This is where they order
from a group of regular vendors and use outsourcing procurement for their larger and ad-
hoc purchases. Still others, particularly when they are seeking labour for short-term
projects will use procurement auctions in order to obtain the best pricing levels.
Regardless of the size of the company there is a core group of purchasing strategies that
most of them implement and these are as discussed below:-

(a) Supplier Optimization. The company chooses an optimum mix of vendors who
can provide the best prices and terms. This process usually means that the less able
suppliers who cannot provide a quality service at the terms and prices required are
discarded. This is by far the most common of the various purchasing strategies.

(b) Total Quality Methods (TQM). It requires the vendors to provide an ever
increasing quality service with zero errors. The supplier ensures purchasing best
practices using a number of tools.

(c) Global Sourcing. Large multinational companies see the world as one large
market and source from many vendors.

(d) Risk Management. As more companies obtain their supplies from countries such
as China and India, they are more concerned with the risk management of this supply
chain. While these countries can supply products at very advantageous prices, these
advantages can be soon nullified by unforeseen circumstances such as natural or
human disaster.
 46

(e) Vendor Development. Some companies believe that they are working hand-in-
hand with their vendors, thus they spend some time in developing processes that
assist these vendors. There may also be a situation where a company is dependent
upon just one supplier for their products. If this supplier is unable to perform to the
required standards, the purchaser may assist the vendor in improving their service or
implement processes to improve their procurement cycle.

(g) Green Purchasing. This is one of the most common purchasing strategies for
governments and local administrative setups. This strategy champions the cause for
recycling and purchasing products that have a negative impact on the environment. A
company will choose purchasing strategies that promote their procurement best
practices of minimizing costs, maximizing quality and ensuring that quality products
are delivered on time.

3.4.1.5 Purchasing Process. The purchasing process can be specified firstly as

recognition of needs, followed by identification of suitable vendor, then qualifying and
placing of order on the identified vendor, subsequently monitoring and managing the
delivery process and evaluation of purchase and the supplier. Purchasing or procurement
which ultimately has an impact on the cost factor or cost saving, leading to profit earning,
mainly and most importantly gets related to selection of the right vendor for the required
material, component, part or product and determining the quantum of order to be
placed to each vendor. The quality of material and timely supply also has a significant
impact to meet the aspirations of consumers, accurately and timely. Selection of desired
vendors is dependent on conflicting criteria which spreads from price quoted, quality of
supply, following of delivery time schedule, quality of service provided, order processing,
following up of orders, reliability and rating of vendors based on past performance.
Activities associated with purchasing can be listed as follows:-

(a) Selecting and qualifying the vendors/ suppliers.

(b) Assessment and appropriate rating of Vendor /Supplier performance.
(c) Negotiating Contracts.
(d) Planning and timing the purchases.
(e) Predicting changes in price and demands, also maintaining pulse of the market.
(f) Planning and organizing mode of transportation.
 47

3.4.1.6 Selection of Vendors. Selecting a vendor is probably one of the most nerves
wrecking but critical activity a business must undertake. Vendors will be delivering your
direct purchases particularly those used to produce the products for selling and also
indirect purchases that keep the business running effectively. A major challenge for any
purchase manager in any industry may be manufacturing or service, is identification and
selection of the right vendor who can fulfill and deliver the required products/services.
Selection of vendor involves identification of vendor capability, reliability, quality
assurance and control as the performance of vendor has direct impact on the
productivity, quality and competitiveness of an organization. The importance and
difficulty of selecting suppliers is more complicated in Food Industry due to prevailing
business trends, which include: the increase in production or manufacturing costs due to
import, varied production areas and time, effecting availability of desired quantity,
effects of associated conditions e.g. climate, fertilizers, harvesting conditions and areas of
growth, production policies, monopolistic conditions at times. Selection of vendor based
on quality, price, delivery, service and capacity generally ensures buyers satisfaction as
depicted in the Figure 3.42 below:-

VENDOR SELECTION

VENDOR

QUALITY PRICE CAPACITY DELIVER SERVICE

Y

BUYER SATISFACTION

FIGURE 3.42
 48

3.4.1.7 Vendor Selection Methods. Selection of a potential vendor more a less implies
selecting a business partner who can be trusted to work with, in a professional and
profitable manner. It is important that the company chosen be such, that can supply the
requirements for immediate and near future. Numerous parameters can be applied and
need to be considered while short listing vendors, such as their past performance,
facilities available with them, technical expertise, financial status, reputation,
organization & management, compliance to procedures, communications, labour
relations, political situations, compulsions if any and location of vendors. Keeping these
factors in mind there are numerous methods available to select vendors and determine
quantities to be ordered from the selected vendors. The selection methods can be
classified as Descriptive, Empirical, Optimization and ISO 9000 Series Certification based
approaches:-

(a) Descriptive Method is based on evaluating vendors by evaluating the qualitative

factors related to the vendors such as reputation, expertise, organization and
communications.

(b) Empirical Method is used to evaluate Vendor Characteristics through relative

weighting schemes.

(c) Optimization Methods minimize various costs associated with purchasing to meet
certain requirements in terms of quality, lead time and demand.

(d) ISO 9000 Series Certification. It is a widely used method of screening suppliers
wherein the certification plan was developed in 1987 by International Standards
Organization (ISO), requiring the firm to establish certain processes and document
activities, however it does not ensure quality or customer satisfaction but it does ensure
consistency. Consistency in the process is the key focus, presumably envisaging that
following the same process will allow process improvement and subsequently to better
quality.

(e) Additional Vendor Selection Criteria.

(i) Years in Business. The vendor company is an established one and ready to
service your requirements.

(ii) Ability to Constantly Supply Products or Services. The need of products and
services is on a regular basis. A vendor who has supply issues will affect your ability
to supply the customers and thus is an important factor when selecting a vendor.
 49

(iii) Ability to Supply Required Products. This is particularly necessary when

you are looking for one of business solution e.g. such as a new computer system. You
may also be attempting to rationalize the number of vendors you are dealing with or
wish to purchase a product line from one vendor only. It would be particularly
difficult to obtain good terms if you need to purchase just a small range from
another supplier, because the chosen vendor was unable to supply the complete
range.

(iv) Flexibility to Changes in Orders. All businesses need to change their

orders sometimes, if the vendor heavily penalizes for any changes then he is not the
appropriate vendor.

(v) Substantial Catalogue of Products. This indicates wider range of services as

an established vendor of size, who also provides means of flexibility in ordering.
Once business grows, one can continue with the same vendor.

(vi) Availability of Internal Experts. This is very pertinent if purchase is of a

high value service, there will be need of experts who can answer questions
accordingly.

(vii) Testimonials and References. These are valuable to check that the vendor
is reliable and as they purport to be.

(viii) Sustainability and Financial Stability. The last thing desired is to change
vendors very frequently because one of them has gone out of business.

(ix) Prices. Discounts on the price list are always negotiable, but they are an
important part of selecting a vendor.

(x) Delivery Time. The deliveries be made in time, where and when required.
The number of deliveries per week or month may also be important factor.

(xi) Terms of Business. Payment terms are particularly important as they

impact upon cash flow of any organization.

(xii) Customer Service. An important part of any relationship is the type of

service provided and availability of ordering and helps staff. Are they cordial,
professional and easy to contact.
 50

3.4.1.8 Vendor Evaluation. The selected vendors are subjected to detailed analysis with
respect to their operations. Detailed evaluation is done with respect to suppliers market
credibility, banking and credit references, financial stability, supply capabilities, technical
expertise, quality assurance capability, plant facilities, management style, customer
service levels, and JIT capabilities. The option to have single supplier or multiple
suppliers depends on organization’s requirement. A single supplier may be selected for
priority supply, price and volume discounts, lower costs, better quality control, lower
freight costs and lower inventory cost. It must be kept in mind that single supplier
presents certain risks, such as exposure in time of shortage, fire, strike, supplier
complacency with respect to quality or service and price increase due to monopolistic
attitude. Ideally there is a need to have more than one supplier and their evaluation be
done on the basis of price, quality, service response, delivery etc. The evaluation of
vendors can be done by tabulating their capabilities on a specified scale which may be
formulated by the buyer, so as to compare various factors and then prioritize the vendors
while selecting those who get maximum number of favorable points. Review of vendor
performance should also be done on regular basis to ensure continued good response
and maximum profits. Purchasing is a measurable performance wherein the price
effectiveness, cost savings, workload, administration control, vendor quality, delivery,
material flow control, compliance with regulations, environmental measures, societal
measures, procurement planning, research, competition, inventory and transportation
effectiveness can be gauged against each vendor for analysis and taking decisions for
continuation or change of vendors. The data can also be used for gauging the
effectiveness of purchase department and its role in cost cutting. In case of faulty
procedures the purchase policy can be reviewed and changed accordingly. Other aspects
involving vendor evaluation are discussed as under:-

(a) Purchasing Partnerships. Partnership is a relationship that attempts to build

interdependence, enhance coordination and improve market position. It also involves
sharing benefits and burdens over some agreed upon time horizon. Successful
partnerships exhibit characteristics of joint planning, sharing benefits and burdens,
extendedness, information exchange, operating controls and corporate culture bridge
building.

(b) Materials Sourcing. Sourcing involves buying a product from outside, it may be
physical products or sourcing services, it may be domestically or internationally and it is
normally due to sourcing range, lower costs or better quality.

(c) Outsourcing Risks. The common risks involved in outsourcing are higher
inventory costs, political stability, changing currency rates, payment schedules, quality,
tariffs and duties, legal implications, transportation, language barrier, culture &
customs and location of suppliers.
 51

(d) Outsourcing Services. Outsourcing services being intangible cannot be stored

thus outsourcing becomes more complicated. The services can be transportation,
training, accounting, warehousing and personal.

(e) Just In Time (JIT) Purchasing. It ensures that while minimizing inventory levels,
materials are available for production. It is more applicable to food supplies and food
products mainly due to their short life span. JIT purchasing has its own advantages
such as fewer requirements of labour, warehousing, inventory, administrative work
and also less risks of contract failure, quality drop, strikes, transport problems etc.

3.4.1.9 Vendor Management. It can be defined in number of ways. Some companies

believe that the efficient management of vendors is a must in order to achieve better
prices and terms. Others believe that vendor management is building a relationship with
vendors in order to obtain mutually beneficial interactions. There is also an increasing
prevalence for purchasers to allow vendors to manage the procurement process as in
Vendor Managed Inventory (VMI). In this procurement process, used by many large
retailers, the vendor interfaces with the purchaser’s sales and inventory accounts and
delivers new products on a JIT basis. Vendor management includes deliberations done in
selecting a vendor and then undertaking regular and frequent reviews using detailed
evaluation methods. During this vendor selection process, a period of vendor analysis is
undertaken to find the vendors who will provide quality products at competitive pricing
and advantageous terms. The entire purchasing process and management of several
vendors is assisted by a set of tools, technologies and services, collectively known as
Vendor Relationship Management (VRM). Vendors align themselves with their
customer’s Vendor Management System that builds an efficient and profitable
procurement relationship for both companies. Vendor performance management is
usually measured by service level agreements and alignment to their contractual
obligations. Some companies use a balanced score card methodology. Measurements of
the relationship, account management, quality, delivery and costs are most common. The
companies who hire multiple staff, particularly temporary staff are able to use a Vendor
Management System (VMS) to minimize costs and prices and maximize efficiency. A VMS
is an internet-based application that connects to one or more service providers. Features
include a procurement process, consolidated billing and time sheets. The Purchasing &
Procurement Department provides required information.
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3.4.1.10 Purchasing and Integrated Logistics. Coordination between purchasing and

Integrated Logistics is imperative to ensure continuous flow of products through the
channel of distribution. Purchasing can well be a part of Integrated Logistics or vice versa,
depending on the organizational setup. The coordination of activities between purchasing
and integrated logistics may involve a number of activities, inbound transportation, raw
material and components, warehousing and inventory controls are common to
purchasing and integrated logistics in many organizations. However transportation may
involve a large quantum of costs of inbound materials and is also critical for on- time
delivery in a JIT production environment. Study of purchasing and integrated logistics
when viewed in totality of SCM reflects their total interdependence. “The principle of one
person’s ceiling is another person’s floor becomes applicable”. Salient aspects as given
below help in clarifying and coordinating activities between purchasing and integrated
logistics. The resultant coordination helps to ensure smooth flow of products throughout
the distribution channel. The answers to the following questions address the issues of
transportation, warehousing and inventory control:-

(a) How much material is being purchased? Quantum of purchase affects the
storage space.

(b) When will the purchased material be delivered? Effects availability of storage
space and utilization of out bound transport after unloading.

(c) Who is delivering the purchased items? It helps in coordination of inbound and
out bound transportation.

(d) What is the route of the inbound flow of materials? It assists in coordination/
utilization of transport.

(e) Who controls the freight movement? It will assist in bringing down the cost
factor.
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3.4.1.11 Inventory Control. Inventory planning and control largely follows vendor
selection. Inventory control decisions focus on the order quantity, quality and supply
timings between the orders. The basic considerations being lead time, ordering cost,
inventory carrying cost, transportation cost, shortage cost, in-transit inventory carrying
cost and the level of service in terms of allowable inventory or shortage. The ultimate
objective being cost cutting and optimum consumer satisfaction. However as both these
aspects are conflicting in nature there is a need to have economic trade-off between
inventory levels and customer service levels. Inventory control decisions in SCM includes
stock locations, product mix and planned inventory strategy which could be either, “JIT”,
“Push” or “Pull”. The inventory management also needs to be understood to gain
revenue, traditional links get separated by lack of information and may be due to
inventory management as shown Figure 3.43 below:-

FIGURE 3.43

3.4.1.12 Facilities Planning. Facilities planning are done ab-inito considering two
important logistics designing aspects viz. Facilities location and layout. These two aspects
play a very important role in cost cutting of SCM as location of facilities is effected by
quantum of land and its construction costs, local taxes, labour availability and its cost,
coordination problems and transportation costs. The Layout of a facility has its impact on
intra facility logistics cost e.g. Material handling and material handling equipment.
 54

3.5 INVENTORY MANAGEMENT.

3.5.1 Definition. Inventory can be defined as, ‘Idle stock of physical goods that
contains economic value, and is held in various forms by an organization in its
custody awaiting packing, processing, transformation, use or sale in a future point
of time’. An organization which is into production, trading, sale and service of a product
will necessarily hold stocks of various resources physically for future consumption and
sale. While inventory is a necessary evil of any such business, it may be noted that the
organizations hold inventories for various reasons, which may be due to speculative
stocking, functional reasons, physical necessities etc. Effective inventory management is
all about knowing what is on hand, where it is in use, and how much finished product
results. From the above definition and explanation the following points stand out with
reference to inventory:
(a) All organizations engaged in production or sale of products hold inventories.
(b) Inventory can be in complete state or incomplete state.
(c) Inventory is held to facilitate future consumption, sale or further processing.
(d) All inventoried resources have economic value and can be considered as assets.

3.5.2 Inventory management thus can be said as a process of efficiently overseeing

the constant flow of items/ units into and out of an existing inventory. This process
usually involves controlling the transfer- in of items/ units in order to prevent the
inventory from becoming too high, or dwindling to levels that could put the operation of
the company into jeopardy. Competent inventory management also seeks to control the
costs associated with the inventory, both from the perspective of the total value of the
goods included and the tax burden generated by the cumulative value of the inventory.
Inventory of materials occurs at various stages and departments of an organization. A
manufacturing organization holds inventory of raw materials and consumables required
for production. It also holds inventory of semi-finished goods at various stages in the
plant with various departments. Finished goods inventory is held at plant, stores,
distribution centers etc. Further both raw materials and finished goods which are in
transit at various stages of transportation or at various locations also form a part of
inventory depending upon who owns the inventory at that particular juncture. Finished
goods inventory is held by the organization at various stocking points or with dealers and
stockiest until it reaches the market and end customers.
 55

3.5.3 Concept. Inventory management and SCM are the backbone of any business
operations. With the development of technology and availability of process driven
software applications, inventory management has undergone revolutionary changes. In
the last decade or so we have seen adaptation of enhanced customer service concept on
the part of the manufacturers agreeing to manage and hold inventories at their
customers end and thereby affect JIT deliveries. This concept is the same in essence
however different industries have named the models differently. Manufacturing
companies like computer manufacturing or mobile phone manufacturers call the model
as Vendor Managed Industry (VMI) while automobile industry uses the term JIT, where
as apparel industry calls such a model by name Efficient consumer response (ECR). The
basic underlying model of inventory management remains the same.

3.5.4 Inventory Planning. Inventory planning and control largely follows vendor
selection. Inventory control decisions focus on the order quantity, quality and supply
timings between the orders. The basic considerations being lead time, ordering cost,
inventory carrying cost, transportation cost, shortage cost, in-transit inventory carrying
cost and the level of service in terms of allowable inventory or shortage. The ultimate
objective being on cost cutting and optimum consumer satisfaction. However as both
these aspects are conflicting in nature there is a need to have economic trade-off
between inventory levels and customer service levels. Inventory control decisions in a
SCM include stock locations, product mix and planned inventory strategy which could be
either, “JIT”, “Push” or “Pull”. The inventory management also needs to be understood
to gain revenue; traditional links get separated by lack of information and may be due to
inventory management as discussed below in Figure 3.51.

3.5.5 Different Types of Inventory. Inventory may comprise of raw materials and
finished goods, organizations also may have to hold inventories of spare parts for certain
products so as to service their products. Defective products, defective parts and scrap
also form a part of inventory as long as these items are inventoried in the books of the
organization and have economic value. Inventories can be classified in numerous ways
depending on the type of industry and its requirements. Types of Inventory classified by
function have been reflected in Figure 3.51 given below:
 56

INVENTORY MANAGEMENT BY FUNCTIONS

INPUT PROCESS OUTPUT

Raw Materials Work In Process Finished Goods

Consumables eg : Semi finished production held Finished Goods at Distribution

Fuel, Stationary, with various departments e.g. Centers throughout Supply Chain
Raw material etc. Production, WIP Stores, Final
required in Assembly, Paint Shop, Packing,
manufacturing Outbound Store etc.
Maintenance Production Waste and Scrap Finished Goods in transit
Items/Consumables
Packing Materials Rejections and Defectives Finished Goods with Stockiest

Items for Spare Parts Stocks & Bought Out

production items

Defectives, Rejects and Sales

Returns

Repaired Stock and Parts

Sales Promotion & Sample Stocks

FIGURE 3.51

3.5.6 Procured or Build to Order. This system as applicable to computer industry is based
on VMI and is also applicable to Food Supply Industry. In the computer industry taking
the case of DELL Computer Company as an example, which has manufacturing facilities all
over the world, they follow a concept of Build to Order where in the manufacturing or
assembly of laptops is done only when the customer places a firm order on the web and
confirms payment. Dell buys parts and accessories from various vendors. DELL has also
taken the initiative to work with third party service providers to set up warehouses
preferably adjacent to their plants and manage the inventories on behalf of DELL
suppliers. The third party service provider receives the consignments and holds inventory
of parts on behalf of Dell suppliers. The third party service provider warehouse stores
inventories of all of DELL suppliers which are more than two hundred suppliers. When
DELL receives a confirmed order, the system generates a bill of material, which is
downloaded by the third party service provider, processed and materials arranged in
 57

the cage as per assembly process and delivered to the manufacturing floor directly. At
this point of transfer, recognition of sale happens from the Vendor to Dell, until then the
supplier himself at his own expense holds the inventory. Dell with VMI model has
reduced its inbound supply chain and thereby gets to reduce its logistics and inventory
management costs considerably. The benefit of this model is for both Dell as well as its
suppliers and is listed as follows:-

(a) DELL gets to postpone owning inventory until the time of actual consumption.
Thereby with no inventories DELL has no need for working capital to be invested into
holding inventories.

(b) DELL does not have to set up inventory operations and employ teams for
operations as well as management of inventory functions.

3.5.7 Supplier Benefits. Inventory is a necessary evil that every organization would have to
maintain for various purposes. Optimum inventory management is the goal of every
inventory planner. In both cases over inventory or under inventory cause financial impact
and effect health of the business as well as business opportunities. Inventory holding is
resorted to by organizations as hedge against various external and internal factors, as a
precaution, as an opportunity, as a need and for speculative purposes. Most of the
multinational companies have successfully managed their suppliers and 3PL service
providers to setup VMI throughout their plants all over the world and this model has
become the order of the day. The benefits are:

(a) Supplier gets to establish better relationship and collaboration with DELL with
long-term business prospect.

(b) By agreeing to hold inventories and effect JIT supplies at the door to DELL,
supplier will be in a better position to bargain and get more business from DELL.

(c) With VMI model, supplier gets an opportunity to engage in better value
proposition with his customer DELL.

(d) Supplier gets confirmed forecast for the entire year with commitments from
DELL for the quantity off take.

(e) VMI is managed by the third party service supplier does not have to engage
himself in having to set up and manage inventory operations at DELL’s premise.

(f) The third party service managed VMI holds inventories of all suppliers thereby
charge each supplier on per pallet basis or per sq. ft basis. Supplier thereby gets to pay
on transaction basis without having to marry fixed costs of inventory operations.
 58

3.5.8 Reasons to Maintain Raw Material Inventory. Most of the organizations

have raw material inventory warehouses attached to the production facilities where raw
materials, consumables and packing materials are stored and issue for production on JIT
basis. The reasons for holding inventories can vary from case to case basis, some of the
issues are discussed as below:

(a) Variation in Production Demand. Production plan may change in response to

the sales, estimates, orders and stocking patterns, accordingly the demand for raw
material supply for production varies with the product plan in terms of specific units as
well as batch quantities. Holding of inventories at a nearby warehouse helps issue the
required quantity and item to production JIT.

(b) Cater to Seasonal Demand. Market demand and supplies in certain cases are
seasonal depending upon various factors like seasons, festivals etc. Past sales data help
companies to anticipate the likely surge of demand in the market well in advance.
Accordingly they stock up raw materials and hold inventories to be able to increase
production and rush supplies to the market to meet the increased demand.

(c) Economy in Procurement Scale. Buying raw materials in larger lots and holding
inventory is found to be cheaper for the company, than buying small lots frequently. In
such cases one buys in bulk and holds inventories at the plant warehouse for
subsequent requirement.

(d) Price Increase / Quantity Discounts. If a price increase is expected in few

months down the line due to changes in demand and supply in the national or
International market, impact of taxes and budgets etc, the company tends to buy raw
materials in advance and hold stocks as a hedge against increased costs. In such cases
the savings on account of the discount enjoyed would be substantially higher than that
of inventory carrying cost.

(e) Reduced Transit Cost and Time. In case of raw materials being imported from a
foreign country or from a far away vendor, saving can be done in terms of
transportation cost by buy buying in bulk and transporting as a container load or a full
truck load as part shipments can be costlier. The transit time for full container shipment
or a full truck load is direct and faster unlike part shipment load where the freight
forwarder waits for other loads to fill the container which can take several weeks.
Other factors could be result in shipping delays and transportation too, which can
hamper the supply chain forcing companies to hold safety stock of raw material
inventories.
 59

(e) Long Lead and High Demand Items need to be held in Inventory. Often raw
material supplies from vendors have long lead running into several months, coupled
with this if the particular item is in high demand and short supply then one can expect
disruption of supplies. In such cases it is safer to hold inventories.

3.5.9 Inventory Holding. Inventory holdings help the companies remain

independent and free from vendor dependencies. All manufacturing and marketing
companies hold finished goods inventories in various locations and all through its supply
chain. While finished goods move through the supply chain from the point of
manufacturing until it reaches the end customer, depending upon the sales and delivery
model. The inventories may be owned and held by the company or by intermediaries
associated with the sales channels such as traders, trading partners, stockiest,
distributors and dealers etc. The answer to, why and when do organizations hold finished
goods inventories can be as follows:-

(a) Markets Supply Chain Design. Organizations carry out detailed analysis of the
markets both at national as well as international / global levels and work out the
supply chain strategy with the help of SCM strategists. This is basically to find the ideal
location for setting up production facilities, the network and number of warehouses
required to reach products to the markets within and outside the country as well as
the mode of transportation, inventory holding plan, transit times and order
management lead times etc, keeping in mind the most important parameter being, to
achieve customer satisfaction and demand fulfillment.

(b) Production Strategy Necessitates Inventory Holding. The blue print of the
entire Production strategy is dependent upon the marketing strategy and accordingly
organizations produce the products based on marketing orders. The production is
planned based on Build to stock or Build to Order strategies. While Build to Order
strategy is manufactured against specific orders and does not warrant holding of
stocks other than in transit stocking. Build to Stock production gets inventoried at
various central and forward locations to be able to cater to the market demands.

(c) Market Penetration. Marketing departments of companies frequently run

branding and sales promotion campaigns to increase brand awareness and demand
generation. Aggressive market penetration strategy depends upon availability of
inventory of all products at nearest warehousing location so that product can be made
available at short notice - in terms of number of hours lead time, at all sales locations
throughout the state and city. Non-availability of stock at the point of sale counter will
lead to dip in market demand and sales. Hence holding inventories becomes a
necessity.
 60

(d) Market Size, Location and Supply Design. Supply chain design takes into
account the location of market, market size, demand pattern and the transit lead time
required to reach stocks to the market and determine optimum inventory holding
locations and network to be able to hold inventories at national, regional and local
levels and achieve two major objectives. The first objective would be to ensure correct
product stock is available to service the market. Secondly stocks are held in places
where it is required and avoid unwanted stock build up.

(e) Transportation and Physical Barriers. Market location and the physical terrain
of the market coupled with the local transportation network often demand inventory
holding at nearest locations. Hilly regions for example may require longer lead-time to
service. All kinds of vehicles may not be available and one may have to hire dedicated
containerized vehicles of huge capacities. In such cases they will have to have an
inventory holding plan for such markets. Far away market locations means longer lead
times and transportation delays. Inventory holding policy will take into account these
factors to work out the plan.

(f) Local Taxes and Government Rules. In many countries where General sales Tax
is not implemented, regional state tax rules apply and vary from state to state.
Accordingly while one state may offer a tax rebate for a particular set of product
category, another state may charge higher local taxes and lower interstate taxes. In
such cases the demand for product from the neighboring state may increase than from
the local state. Accordingly inventory holding would have to be planned to cater to the
market fluctuation.

(g) Production Lead Time. Inventory holding becomes necessary in cases where the
lead-time for production is long. Sudden market demand or opportunities in such
cases require inventories to be built up and supplies to be effected.

(h) Speculative Gains. Companies always keep a watch on the economy, annual
state budget, financial environment and international environment and are able to
foresee and estimate situations, which can have an impact on their business and sales.
In cases where they are able to estimate an increase in industry prices, taxes or other
levies which will result in an overall price increase, they tend to buy and hold huge
stocks of raw materials at current prices. They also hold up finished stock in
warehouses in anticipation of an impending sale price increase. All such moves cause
companies to hold inventories at various stages.
 61

3.5.10 Inventory Buildup. A business organization that is engaged in manufacturing,

trading or dealing with products for sale, hold inventories in one form another. Inventory
may be held in the form of raw materials or in the form of salable goods. Since every unit
of inventory item has an economic value and is itemized in the account books of the
company, inventory can be considered to be an asset of the company. Inventory
Management is a critical function performed by planners to balance the inventory
holding so as to ensure that optimum inventory levels are maintained. Excess inventory
will result in incremental costs of maintaining inventory and affects the finances of the
company. As it blocks working capital as well as under inventory on the other hand can
seriously hamper the market share and any customer order that is not fulfilled due to a
lack of stock is not a good sign. Therefore the responsibility of striking a fine balance in
holding lean inventory calls for smart planning and continuous monitoring of the
inventory levels coupled with quick decision-making. Stock buildup can be a result of any
of the following reasons:

(a) It has been noticed that inventory buildup in manufacturing industries is often
a sign of hidden problems, which lie underneath and are not visible at the surface level.
In other words one can say that to cover up inefficiencies in the internal systems,
people build up inventories as safety stocks.

(b) Stock build up can occur as a solution to cover up supplier inefficiencies. If the
vendors are not reliable and the flow of raw materials cannot be ensured, it results into
a trend to hold buffer inventories in the form of raw materials or semi manufactured
work in process inventories.

(c) Inventory buildup can also happen due to poor quality. The inventory cost
increases and resultant inventory storage cost can be attributed to cost of quality. If the
production is not consistent with quality, the goods produced will get rejected leading
to an increase in rejected inventory. Secondly, to make up for the loss due to quality
rejection, one would have to increase production and hold finished goods inventory.

(d) Production delays can lead to buildup of inventories too. Production delays can
be attributed to varied reasons such as bad design of the product, production layout
inefficiencies, production stoppage due to breakdowns, Lengthy process times etc.
Besides these causes, there could be many other problems related to people and
management resulting in slackness on the shop floor, which can add to inventory
holding at various stages.

(e) Inventory build-ups not only block the working capital and increase unnecessary
cost of maintaining and storing the inventories, but also hide the problems which can
cause serious threat to the business. Management should be watchful to identify any
such inventory buildups and investigate into the root cause and solve such problems.
 62

(f) Inventory buildup of raw material side or the finished goods becomes cause of
worry for the finance controllers as any non moving inventory is a cause for concern
because it not only blocks up the funds of the organization but the incremental cost of
holding the inventory keeps increasing over a period of time and affects the bottom
line figures.

(g) Inventory over a period of time is susceptible to losses, theft, pilferage and
shrinkage. It can also become obsolete and deteriorate over a period of time if not used
within the shelf life. Hence inventory levels should always be on the radar of not only
finance controllers, but of the top management as well.

3.5.11 Inventory Demands. It deals essentially with balancing the inventory levels.
Inventory is categorized into two types, based on the demand pattern which creates the
need for inventory. The two types of demand are Independent Demand and Dependant
Demand for inventories.

(a) Independent Demand. An inventory of an item is said to be falling into the

category of independent demand when the demand for such an item is not dependent
upon the demand for another item. Finished goods items, which are ordered by
external customers or manufactured for stock and sale, are called independent demand
items. Independent demands for inventories are based on confirmed customer orders,
forecasts, estimates and past historical data.

(b) Dependant Demand. If the demand for inventory of an item is dependent upon
another item, such demands are categorized as dependant demand. Raw materials and
component inventories are dependent upon the demand for finished goods and hence
can be called as dependant demand inventories. The car for example as finished good
when produced is held in inventory as independent demand item, while the raw
materials and components used in the manufacture of the finished goods - Car derives
its demand from the demand for the Car and hence is characterized as dependant
demand inventory.

(c) Differentiation. This differentiation is necessary because the inventory

management systems and process are different for both categories. While finished
goods inventories which is characterized by Independent demand, are managed with
sales order process and SCM processes and are based on sales forecasts. The
dependant demand for raw materials and components to manufacture the finished
goods is managed through Material Resources Planning (MRP) or Enterprise Resource
Planning (ERP) using models such as JIT and other concepts. MRP as well as ERP
planning depends upon the sales forecast released for finished goods as the starting
point for further action.
 63

3.5.12 Management of Raw Material. Managing raw material inventories is far

more complicated than managing finished goods inventory. This involves analyzing and
coordinating delivery capacity, lead times and delivery schedules of all raw material
suppliers, coupled with the logistical processes and transit timelines involved in
transportation and warehousing of raw materials before they are ready to be supplied to
the production shop floor. Raw material management also involves periodic review of the
inventory holding, inventory counting and audits, followed by detailed analysis of the
reports leading to financial and management decisions.

(a) Inventory planners who are responsible for planning, managing and controlling raw
material inventories have to answer two fundamental questions, which can also be
termed as two basic inventory decisions. Answering the following two questions will
call for a lot of back end work and analysis involving inventory classifications and EOQ
determination coupled with cost analysis.

(i) Inventory planners need to decide how much of quantity of each Item is to be
ordered from Raw Material Suppliers or from other Production Departments within
the Organization.

(ii) When should the orders be placed?

(b) Inventory of raw materials, finished goods as well as intermediate in process

inventory has an economic value and is considered an asset in the books of the
company. Accordingly any asset needs to be managed to ensure it is maintained
properly and is stored in secure environment to avoid pilferage, loss or thefts etc. These
decisions are always taken in co ordination with procurement, logistics and finance
departments.

3.5.13 Importance of Inventory Control. Inventory control assumes significance on

account of many factors as discussed below:

(a) Inventory of raw materials as well as finished goods can run in thousands of
varieties.

(b) Inventory can be held in one location or spread over many locations.

(c) Inventory may be with the company or may be under the custody of a third
party logistics provider. These factors necessitate inventory maintenance mechanisms
to be devised to ensure inventory control.

(d) Inventory control is also required as an operational process requirement.

 64

(e) Inventory has two different dimensions to it, one level involves physical
transactions and movement of inventory while on the other hand, inventory is
recognizable by the book stock and the system stocks maintained. This necessitates
inventory control mechanism to be implemented to ensure the book stocks and the
physical stocks match at all times.

(f) Inventory always moves through supply chain and goes through various
transactions at various places. The number of transactions/ handling that it goes
through from the point of origin to the point of destination is numerous thus it
becomes essential to control inventory having visibility through the pipeline including
transit inventory.

3.5.14 Cycle Counts. Inventory control is exercised through inventory audits and
cycle counts. An inventory audit essentially comprises of auditing the books stocks and
transactions and matching physical stocks with the book stock. Cycle count refers to the
process of counting inventory items available in physical locations and can be carried on
periodically.

(a) Daily Cycle Count: Normally where the number of Stock Keeping Units is very
high coupled with high number of transactions and through put, daily cycle count is
initiated, wherein a certain percentage of locations or Stock Keeping Units are counted
on daily basis and physical stock is compared with system stock. By the end of the
month all of the stocks would have been covered once in cycle count.

(b) Quarterly & Half Yearly Cycle Counts: End of the sales quarter or end of half
yearly sales, finished goods and spare parts are normally covered under inventory audit
and a 100% cycle count is carried out.

(c) Wall to Wall Cycle Count: End of financial year and closing of books entails
doing wall to wall cycle count of all stocks lying in all locations and tallying with books
of account. This is a mandatory audit requirement and until stock figures are
reconciled, certified by auditors and published, New Year books of accounts cannot be
started a fresh.
 65

3.5.15 Manufacturing Uses/Applications. Manufacturers mainly use inventory

management software to create work orders and bills of materials. This facilitates the
manufacturing process by helping manufacturers efficiently assemble the tools and parts
they need to perform specific tasks. In case of more complex manufacturing jobs the
manufacturers can create multilevel work orders and bills of materials, which have a
timeline of processes that need to happen in the proper order to build a final product.
Other work orders that can be created using inventory management software include
reverse work orders and auto work orders. Manufacturers also use inventory
management software for tracking assets, receiving new inventory and additional tasks
businesses. The advantages and disadvantages are as discussed below:-

(a) Advantages. There are several advantages of using inventory management software
in a business setting as discussed below:

(i) Cost Saving. In many cases, a company’s inventory represents one of its largest
investments, along with its workforce and locations. Inventory management software
helps companies cut expenses by minimizing the amount of unnecessary parts and
products in storage. It also helps companies keep lost sales to a minimum by having
enough stock on hand to meet demand.

(ii) Warehouse Organization. Inventory management software can help distributors,

wholesalers, manufacturers and retailers optimize their warehouses. If certain
products are often sold together or are more popular than others, those products can
be grouped together or placed near the delivery area to speed up the process of
picking, packing and shipping to customers.

(iii) Updated Data. Up-to-date data on inventory conditions and levels is also an
advantage which inventory management software gives to the companies. Company
executives can usually access the software through a mobile device, laptop or PC to
check current inventory numbers.

(iv) Time Savings. The aid of restricted user rights enables the company managers to
allow many employees to assist in inventory management. They can grant employees
enough information access to receive products, make orders, transfer products and
do other tasks without compromising company security. This can speed up the
inventory-management process and save managers’ time.
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(b) Disadvantages. The main disadvantages of inventory management software are its
cost and complexity.

(i) Expense. Cost can be a major disadvantage of inventory management

software. Many large companies use inventory management software, but small
businesses can find it difficult to afford it. Barcode readers and other hardware can
compound this problem by adding even more cost to companies. The advantage of
allowing multiple employees to perform inventory-management tasks is tempered
by the cost of additional barcode readers.

(ii) Complexity. Inventory management software is not necessarily simple or

easy to learn. A company’s management team has to dedicate a certain amount of
time to learning a new system including its software and hardware in order to put it
to use. Most inventory management software includes training manuals and other
information available to users. Despite its apparent complexity, inventory
management software offers a degree of stability to companies. For example, if an IT
employee in charge of the system leaves the company, a replacement can be
comparatively inexpensive to train compared to if the company used multiple
programs to store inventory data.
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3.6 WAREHOUSING.
3.6.1 Concept. A warehouse is a commercial building for storage of goods. Warehouses
are used by manufacturers, importers, exporters, wholesalers, transport businesses,
customs, etc. They are usually large plain buildings in industrial areas of cities and towns and
villages. They usually have loading docks to load and unload goods from trucks. Sometimes
warehouses are designed for the loading and unloading of goods directly from railways,
airports, or seaports. They often have cranes and forklifts for moving goods, which are
usually placed on ISO standard pallets loaded into pallet racks. Stored goods can include any
raw materials, packing materials, spare parts, components, or finished goods associated
with agriculture, manufacturing, or commerce. Warehouse is a storage structure
constructed for the protection of the quality and quantity of the stored produce and the
need arises for reasons as explained below:

(a) The need for a warehouse arises due to the time gap between production and
consumption of products. Warehousing or storage refers to the holding and
preservation of goods until they are dispatched to the consumers and by bridging this
gap, storage creates time utility.

(b) There is also a need for storing the goods so as to make them available to
buyers as and when required. Storage enables a firm to carry on production in
anticipation of demand in future.

(c) Warehouses enable the businessmen to carry on production throughout the

year and sell their products, whenever there is adequate demand.

(d) Need for warehouses also arises because some goods are produced only in a
particular season but are demanded throughout the year. Similarly, certain products
are produced throughout the year but demanded only during a particular season.

3.6.2 Warehouse Functions. Historically warehouses were a dominant part of the urban
landscape used from the start of the Industrial Revolution through the 19th century and into
the twentieth century. The buildings remained whereas their original usage changed. The
various types of identifiable warehouses are as follows:

(a) Display of Goods for Sale. These warehouses displayed goods for the home
trade. These normally would be finished goods, such as the latest cotton blouses or
fashion items. Their street frontage was impressive, so they took the look style of
Italianate Palazzos.
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(b) Overseas Warehouses. These warehouses catered for the overseas trade and
these became the meeting places for overseas wholesale buyers, where trade in cloth
both printed and plain could be discussed and ordered.

(c) Packing Warehouses. The main purpose of packing warehouses was the picking,
checking, labeling and packing of goods for export. The packing warehouses: Asia
House, India House and Velvet House along Whitworth Street were some of the tallest
buildings of their time.

(d) Railway Warehouses. Warehouses were built close to the major stations in
railway hubs. The first railway warehouse to be built was opposite the passenger
platform at the terminus of the Liverpool and Manchester Railway. There was an
important group of warehouses around London Road station (now Piccadilly station).

(e) Canal Warehouses. All these warehouse types can trace their origins back to the
canal warehouses which were used for trans-shipment and storage.

(f) Storage Systems. Some of the most common warehouse storage systems are:

(i) Pallet racking including selective, drive-in, drive-thru, double-deep,

pushback, and gravity flow.
(ii) Mezzanine including structural roll formed, racks.
(iii) Vertical Lift Modules.
(iv) Horizontal Carousels.
(v) Vertical Carousels.

(g) Order Selection Process. A piece pick, also known as broken case pick, split-case
pick, each pick, over-pack or pick/pack, is a type of order selection process where
product is picked and handled in individual units and placed in an outer carton, tote or
other container before shipping. Catalog companies and internet retailers are
examples of predominantly piece-pick operations. Their customers rarely order in
pallet or case quantities; instead, they typically order just one or two pieces of one or
two items. According to "PICK THIS”, several elements make up the piece-pick system.
These include the order, the picker, and the pick module, the pick area, handling
equipment, the container, the pick method used and the information technology
used.
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3.6.3 Types of Warehouses.

(a) Private Warehouses. These warehouses are owned and operated by big
manufacturers and merchants to fulfill their own storage needs. Big business
firms which need large storage capacity on a regular basis and who can afford
their construction, maintain their private warehouses. A big manufacturer or
wholesaler may have a network of his own warehouses in different parts of the
country. The private warehouses are licensed to private persons and only for the
goods imported by or on behalf of the licensee are stored in such warehouse.

(b) Public Warehouses. These warehouses are specialized business establishments

that provide storage facilities to the general public for a certain charge. It may
be owned and operated by an individual or a cooperative society. It works under
a license from the government. They are generally located near the junctions of
railways, highways and waterways. They therefore provide excellent facilities for
the easy receipt, dispatch, loading and unloading of goods. They are very
important in the marketing of agricultural products. A public warehouse is also
known as 'duty paid warehouse'. Public warehouses are very useful to the
business community as they can meet their storage needs easily and
economically by making use of the public warehouse, without heavy investment.
Such warehouses provide storage facilities to small manufacturers and traders at
low costs. They provide facilities for the inspection of goods by prospective
buyers. They also permit packaging and trading of goods. The public warehouses
receipts are good collateral securities for borrowings.

(c) Bonded Warehouses. These warehouses are licensed by the Government to

accept imported goods for storage until the payment of customs duty. They are
located near the ports. They are either operated by the Government or work
under the control of customs authorities. The warehouse is required to give an
undertaking or 'Bond' that it will not allow the goods to be removed without the
consent of the custom authorities. The goods are held in bond and cannot be
withdrawn without paying the customs duty. Such warehouses are very helpful
to importers and exporters. If an importer is unable to pay customs duty
immediately after the arrival of goods he can store the goods in a bonded
warehouse. He can withdraw the goods in installments by paying the customs
duty proportionately. Goods lying in a bonded warehouse can be packaged,
graded and branded for the purpose of sale. Central Warehousing Corporation
(CWC) operates 75 Custom Bonded Warehouses with a total operated capacity
of nearly 0.5 million Mts.
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(d) Benefits of Warehousing.
(i) Warehouses enable storage of goods when their supply exceeds demand
and by releasing them when the demand is more than immediate productions.
The method ensures a regular supply of goods in the market and also helps to
stabilize prices by matching supply with demand.
(ii) Warehouses provide for safe custody of goods. The risks to goods can be
minimized from loss, damage, fire, theft etc. Perishable products can be
preserved in cold storage. The goods kept in a warehouse are generally insured.
(iii) A warehouse provides facilities for processing, packing, blending, grading
etc, of the goods for the purpose of sale. The prospective buyers can inspect the
goods kept in a warehouse.
(iv) Warehouses can provide a receipt to the owner of goods for the goods
kept in the warehouse. The owner thus can borrow money against the security
of goods by making an endorsement on the warehouse receipt. The imported
goods when kept in a bonded warehouse can enable a businessman to pay
custom duty in installments.

3.6.4 Government Warehouses. The Government has set up three agencies which are
engaged in building large scale storage/ warehousing:

(a) State Warehousing Corporations (SWCs). Warehousing corporations are also set
up in different states of the country, like Andhra Pradesh State Warehouse
Corporation; Haryana Warehousing Corporation, Kerala State Warehousing
Corporation, etc. The area of operation of the State Warehousing Corporations is at
centers of district importance. The total share capital of the State Warehousing
Corporations is contributed equally by the concerned State Governments and the
Central Warehousing Corporation (CWC). The SWCs are under the dual control of the
State Government and the CWC.

(b) Food Corporation of India (FCI). The FCI was established with an objective of fair
distribution of food grains and to bring about stability in the prices in the country. It
has the provision of scientific storage for the millions of tons of food grains procured
by it. In order to provide easy physical access in remote and inaccessible areas, the FCI
has a network of storage depots strategically located all over India. These depots
include silos, godowns and an indigenous method developed by FCI, called Cover and
Plinth (CAP). CAP storage is a term given to storage of food grains in the open with
adequate precautions such as rat and damp proof plinths, use of dunnage and
covering of stacks with specially fabricated polythene covers etc. FCI thus maintains
the health of the large stock of the tons of food grains in storage through its excellent
storage management.
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(c) Central Warehousing Corporation (CWC). It is a premier warehousing agency in

India and is one of the biggest public warehouse operators in the country offering
logistics services to a diverse group of clients. It is operating more than 490
Warehouses across the country with a storage capacity of approximately 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,
disinfestations services, fumigation services and other ancillary activities. CWC also
offers consultancy services/ training for the construction of warehousing
infrastructure to different agencies.

3.6.5 Cool Warehouses and Cold Storage. Cold storage preserves agricultural products.
“Refrigerated storage helps in eliminating sprouting, rotting and insect damage. Edible
products are generally not stored for more than one year”. Several perishable products
require a storage temperature as low as -25°C. Cold storage helps stabilize market prices
and evenly distribute goods both on demand basis and time basis. The farmers get the
opportunity of producing cash crops to get remunerative prices. The consumers get the
supply of perishable commodities with lower fluctuation of prices. Ammonia and Freon
compressors are commonly used in cold storage warehouses to maintain the temperature.
Ammonia refrigerant is cheaper, easily available and has a high latent heat of evaporation
but it is also highly toxic and can form an explosive mixture when mixed with oil containing
high percentage of carbon. Insulation is also important, to reduce loss of cold and to keep
different sections of the warehouse at different temperatures. There are two main types of
refrigeration system used in cold storage warehouses, a Vapour Absorption System (VAS)
and Vapour Compression System (VCS). VAS, although comparatively costlier, is quite
economical in operation and adequately compensates the higher initial investment.

(a) Temperature. The temperature necessary for preservation depends on the

storage time required and the type of product. In general, there are three groups of
products:-

(i) Food Items that are Alive (e.g. fruits and vegetables).

(ii) Food Items that are No Longer Alive and have been processed in some
form (e.g. meat and fish products).

(iii) Commodities that Benefit from Storage at controlled temperature (e.g.

beer, tobacco).
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(b) Location. It is a very critical aspect for the success of cold storage. It should be in
close proximity of area growing the items requiring cold storage as well as the market
be easily accessible for heavy vehicles and have uninterrupted power supply.

(c) Cold Storage Laws. There are state and local laws which regulate the cold store
industry, requiring safe working conditions for employees, and operational procedures
must be in accordance with these laws. The companies who do their homework and
prepare in advance for inspections and other routine enforcement protocols will be
able to continue operating at full capacity, ensuring greater customer service and
more product flow seven days a week.

(d) Refrigerated Warehouse Industry. Refrigerated warehousing industries make up

approximately one fifth of the market size of general warehousing. Most of the market
is concentrated in the major cities of India and the market continues to grow.

(e) Internet Impact. Internet data based stores do not require physical retail space,
but still require warehouses to store goods. This kind of warehouse fills many small
orders directly from end customers rather than fewer orders of many items from
stores. Having a large and complex supply chain containing many warehouses can be
costly. It may be beneficial for a company to have one large warehouse per continent,
typically located centrally to transportation. At these continental hubs, goods may be
customized for different countries. For example, goods get a price ticket in the
language of the destination country. Small, in-warehouse adjustments to goods are
called value added services.

3.6.6 Warehouse Management System (WMS). Material direction and tracking in a

warehouse can be coordinated by a database driven computer program. Logistics personnel
use the WMS to improve warehouse efficiency by directing pathways and to maintain
accurate inventory by recording warehouse transactions.
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(a) Automation and Optimization. Warehouses can be completely automated and

would require only operators to work and handle all the tasks. Pallets and products
are moved on a system of automated conveyors, cranes and automated storage and
retrieval systems coordinated by programmable logic controllers and computers
running logistics automation software. These systems are often installed in
refrigerated warehouses where temperatures are kept very cold to keep product
from spoiling, especially in electronics warehouse where they require specific
temperature to avoid damaging the food products, and also where land is expensive,
as automated storage systems can use vertical space efficiently. These high-bay
storage areas are often more than 10 meters (33 feet) high, with some over 20 meters
(65 feet) high. Automated storage systems can be built up to 40m high. For a
warehouse to function efficiently, the facility must be properly slotted. Slotting
addresses which storage medium a product is picked from (pallet rack or carton flow),
and how they are picked (pick-to-light, pick-to-voice, or pick-to-paper). With a proper
slotting plan, a warehouse can improve its inventory rotation requirements—such as
First in, First out (FIFO) and Last in, First out (LIFO)—control labor costs and increase
productivity.

(b) Modern Trends. Traditional warehousing methods with pallets on storage racks
have declined since the last few decades mainly due to introduction of JIT techniques.
The JIT system promotes product delivery directly from suppliers to consumer without
the use of warehouses. However, with the gradual implementation of offshore out
sourcing and off shoring in about the same time period, the distance between the
manufacturer and the retailer or the parts manufacturer and the industrial plant grew
considerably in many domains, necessitating at least one warehouse per country or
per region in any typical supply chain for a given range of products. Recent retailing
trends have led to the development of warehouse-style retail stores. The high ceiling
buildings display retail goods on tall, heavy duty industrial racks rather than
conventional retail shelving:

(i) The items ready for sale are placed on the bottom of the racks and crated
or palletized inventory is in the upper rack. The same building also serves as
both warehouse and as a retail store.

(ii) Trend relating to VMI gives the vendor the control to maintain the level of
stocks in the store. This method has its own issue that the vendor gains access to
the warehouse.

(iii) Large exporters/manufacturers use warehouses as distribution points for

developing retail outlets in a particular region or country. This concept reduces
end cost to the consumer and enhances the production sale ratio.
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(iv) Cross docking is a specialized type of distribution center in that little or no

inventory is stored and product is received, processed if needed and shipped
within a short time frame, as in warehousing, there are different types of cross
docks.

(v) Reverse logistics is another type of warehousing that has gained attention
in our "green-conscious" world. The term refers to items that are going from the
end user back to the distributor or manufacturer.

3.6.7 Automated Storage and Retrieval System (ASRS). ASRS as the name suggests is an
automated system comprising of a variety of computer-controlled methods for
automatically placing and retrieving loads from specific storage locations. ASRS are used in
applications where there is very high volume of loads being moved into and out of storage.
The storage density is important because of space constraints and no value adding content
is present in this process; accuracy is critical because of potential expensive damages to the
load. ASRS can be used with standard loads as well as nonstandard loads. ASRS systems are
devices designed for automated storage and retrieval of parts and items in manufacturing,
distribution, retail, wholesale and institutions. They are compact units that utilize the
unused overhead space of a plant or warehouse, and convert to live storage of product.
Items can be placed on trays or hang from bars, which are attached to chains/drives in order
to move up and down. The focus of the system is on bringing, "goods to the man" rather
than manual walking and searching. Space savings, increased productivity/reduced labor,
increased accuracy and reduced inventory levels are some of the primary benefits. The
equipment required for an ASRS includes a Storage & Retrieval Machine that is used for
rapid storage and retrieval of material. Storage & Retrieval Machines are used to move
loads vertically or horizontally. Storage & Retrieval Machine can also move laterally to place
objects in correct storage location. The traditional vending machine is the most common
and familiar ASRS system but because the application is to do with retail sales, the logistic
concept of a vending machine is missed. The trend towards JIT production often requires
sub-pallet level availability of production inputs, and ASRS is a much faster way of
organizing the storage of smaller items next to production lines. Traditional high bay
warehouses are designed with pallet storage in mind, and if goods are being delivered in sub
pallet quantities, high bay warehouses are problematic. The ASRS can be divided into two
primary segments, Fixed Aisle characteristically larger systems and Vertical Lift Modules
individually or grouped, small to medium-sized applications. Both technologies have unique
set of benefits and disadvantages and provide automated storage and retrieval for parts and
items. Some of the devices are as discussed below:

75
(a) Fixed-Aisle ASRS Devices. It is categorized into three main types: Single-Mast,
Double Mast, and Man-aboard. Generally these are supported on a track and
ceiling guided at the top by guide rails or channels to ensure accurate vertical
alignment, although some are suspended from the ceiling. The 'shuttles', that
make up the system travel between fixed storage shelves to deposit or retrieve a
requested load ranging from a single book in a library system to a several ton
pallet of goods in a warehouse system. The shuttles as well as move along the
ground, they are able to telescope up to the necessary height to reach the load
and can store or retrieve loads that are several positions deep in the shelving. A
semi-automated system can be achieved by utilizing only specialized shuttles
within an existing rack system. To provide a method for accomplishing throughput
to and from the ASRS and the supporting transportation system, stations are
provided to precisely position inbound and outbound loads for pickup and
delivery by the crane. In addition, there are five types of ASRS devices called
Unit-load ASRS, Mini-load ASRS, Vertical Lift Modules, Horizontal Carousels and
Vertical Carousels. These systems are used either as stand-alone units or in
integrated workstations called pods or systems. These units are usually integrated
with various types of pick to light systems and use either a microprocessor
controller for basic usage or inventory management software. These systems are
ideal for increasing space utilization up to 90%, productivity levels by 90%,
accuracy to 99.9%+ levels and throughput up to 750 lines per hour/per operator
or more depending on the configuration of the system.

(b) Man-aboard ASRS. A man-aboard ASRS offers significant floor space savings. This
is due to the fact that the storage system heights are no longer limited by the
reach height of the order picker. Shelves or storage cabinets can be stacked as
high as floor loading, weight capacity, throughput requirements, and/or ceiling
heights will permit. Man-aboard automated storage and retrieval systems are the
most expensive pick-to-stock equipment alternative. Aisle-captive
storage/retrieval machines can reach heights up to 40 feet; also there should be
enough storage density and/or productivity improvement over cart and tote
picking to justify the investment. The vertical travel is slow as compared to
horizontal travel, typical picking rates in man-aboard operations range between
40 and 250 lines per man-hour. The range is large because there is a wide variety
of operating schemes for man-aboard systems. Man-aboard systems are typically
appropriate for slow-moving items where space is fairly expensive.
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(c) Horizontal Carousels. A horizontal carousel is a series of bins which rotate on an

oval track. Every bin has shelves which are adjustable and can be configured for a
myriad of standard and special applications. An operator simply inputs a bin
number, part number or cell location and the carousel will rotate via the shortest
path. Multiple horizontal carousels integrated with pick to light technology and
inventory management software (a pod of carousels) are used for order
fulfillment. The operator simply follows the lights and pick round robin from the
carousels and place items in a batch station behind them. Each carousel pre-
positions and rotates when picked. The application of "product to picker"
principle enables operators to not to move from their position to prepare the
order. When the batch is complete, a new batch is inducted and the process
repeated until the wave is complete. Horizontal carousels can save up to 75% of
floor space; increase productivity by 2/3, accuracy levels to 99.9%+ levels and
throughput up to 750 lines per hour/operator. Horizontal carousel systems
generally outperform robotic systems for a fraction of the cost. Horizontal
carousels are the most cost effective ASRS system available.

(d) Vertical Lift Module. The vertical lift module is a board controlled automated
vertical lift module. Inventory within the vertical lift module is stored on front and
rear tray locations or rails. When a tray is requested, either by entering a tray
number in the built in control pad or by requesting a part through software, an
extractor travels vertically between the two columns of trays and pulls the
requested tray from its location and brings it to an access point. The operator
then picks or replenishes stock and the tray is returned to its home upon
confirmation. The vertical lift module systems could be customized to fully utilize
the height of the facility, even through multiple floors. With the capability of
multiple access openings on different floors, the vertical lift module system is able
to provide an innovative storage and retrieval solution. The rapid movement of
the extractor as well as inventory management software can dramatically increase
the efficiency of the picking process. This occurs by simultaneously retrieving and
storing trays in multiple units. Unlike large ASRS systems the vertical lift module
are modularized and can be easily integrated into the existing system, or be rolled
out in gradually over different phases. Most common applications include, order
picking, consolidation, kitting, parts handling, buffering, inventory storage, WIP,
buffer storage, and many more. The vertical lift modules provide floor space
savings, increased labor productivity, improved worker ergonomics, and
controlled process. Most vertical lift modules offer dynamic space storage which
measures the tray every time it's returned to the unit to optimize space, safety
features and some offer tilt tray delivery for increased ergonomic accessibility,
and laser pointers which indicate the exact item to be picked on each tray.
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3.6.8 Data Warehouse. A data warehouse maintains a copy of information from the
source transaction systems. This architectural complexity provides the opportunity to:
(a) Maintain data history, even if the source transaction systems do not.
(b) Integrate data from multiple source systems, enabling a central view across
the enterprise. This benefit is always valuable, but particularly so when the
organization has grown by merger.
(c) Improve data quality, by providing consistent codes and descriptions, flagging
or even fixing bad data.
(d) Present the organization's information consistently.
(e) Provide a single common data model for all data of interest regardless of the
data's source.
(f) Restructure the data so that it makes sense to the business users.
(g) Restructure the data so that it delivers excellent query performance, even for
complex analytic queries, without impacting the operational systems.
(h) Add value to operational business applications, notably customer relationship
management (CRM) systems.

3.6.9 Approaches for Data Storage. There are two leading approaches to storing data in a
data warehouse, the Dimensional Approach and the Normalized Approach.
(a) Dimensional Approach. The dimensional approach, is also referred to as Ralph
Kimball’s approach in which it is stated that the data warehouse should be modeled
using a Dimensional Model/Star Schema. In a dimensional approach, transaction
data are partitioned into "facts", which are generally numeric transaction data, and
"dimensions", which is also the reference information that gives context to the facts.
For example, a sales transaction can be broken up into facts such as the number of
products ordered and the price paid for the products, and into dimensions such as
order date, customer name, product number, order ship-to and bill-to locations, and
salesperson responsible for receiving the order. A key advantage of a dimensional
approach is that the data warehouse is easier for the user to understand and to use.
Also, the retrieval of data from the data warehouse tends to operate very quickly.
Dimensional structures are easy to understand for business users, because the
structure is divided into measurements/facts and context/dimensions. Facts are
related to the organization’s business processes and operational system whereas the
dimensions surrounding them contain context about the measurement (Kimball,
Ralph 2008).The main disadvantages of the dimensional approach are:
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(i) In order to maintain the integrity of facts and dimensions, loading the data
warehouse with data from different operational systems is complicated.

(ii) It is also difficult to modify the data warehouse structure if the organization
adopting the dimensional approach changes the way in which it does
business.

(b) Normalized Approach. The normalized approach, also called the 3NF model, is
also referred to Bill Inmon's approach in which it is stated that the data warehouse
should be modeled using an E-R model/normalized model. In the normalized
approach, the data in the data warehouse are stored following the degree, database
normalization rules. Tables are grouped together by subject areas that reflect
general data categories (e.g., data on customers, products, finance, etc.). The
normalized structure divides data into entities, which creates several tables in a
relational database. When applied in large enterprises the result is dozens of tables
that are linked together by a web of joins, furthermore each of the created entities is
converted into separate physical tables when the database is implemented (Kimball,
Ralph 2008). The main advantage of this approach is that it is straightforward to add
information into the database. A disadvantage of this approach is that because of
the number of tables involved, it can be difficult for users both to join data from
different sources into meaningful information and access the information without a
precise understanding of the sources of data and of the data structure of the data
warehouse.

(c) Normalized and Dimensional Models. Both models can be represented in

entity-relationship diagrams as both contain joined relational tables. The difference
between the two models is the degree of normalization. These approaches are not
mutually exclusive, and there are other approaches. Dimensional approaches can
involve normalizing data to a degree (Kimball, Ralph 2008). In Information-Driven
Business Robert Hillard proposed an approach by comparing the two approaches
based on the information needs of the business problem. The technique shows that
normalized models hold far more information than their dimensional equivalents but
this extra information comes at the cost of usability. The technique measures
information quantity in terms of Information Entropy and usability in terms of the
Small Worlds data transformation measure.
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3.6.10 Warehouse Management System (WMS). A WMS is a key part of the SCM and
primarily aims to control the movement and storage of materials within a warehouse and
process the associated transactions, including shipping, receiving, putting away and picking.
The systems also direct and optimize stock put away based on real-time information about
the status of bin utilization. Warehouse Management Systems often utilize Auto ID Data
Capture technology, such as barcode scanners, mobile computers, wireless LANs and
potentially Radio-frequency identification to efficiently monitor the flow of products. Once
data has been collected, there is either batch synchronization with or a real-time wireless
transmission to a central database. The database can then provide useful reports about the
status of goods in the warehouse. The objective of a warehouse management system is to
provide a set of computerized procedures to handle the receipt of stock and returns into a
warehouse facility, also model and manage the logical representation of the physical
storage facilities (e.g. racking etc.). Manage the stock within the facility and enable a
seamless link to order processing and logistics management in order to pick, pack and ship
product out of the facility. Warehouse management systems can be stand alone systems or
modules of an ERP system or supply chain execution suite. The primary purpose of a WMS is
to control the movement and storage of materials within a warehouse you might even
describe it as the legs at the end-of-the line which automates the store, traffic and shipping
management. In its simplest form, the WMS can data track products during the production
process and act as an interpreter and message buffer between existing ERP and WMS
systems. Warehouse Management is not just managing within the boundaries of a
warehouse today; it is much wider and goes beyond the physical boundaries. Inventory
management, inventory planning, cost management, IT applications & communication
technology to be used are all related to warehouse management. The container storage,
loading and unloading are also covered by warehouse management today. Warehouse
management today is part of SCM and demand management. The production management
is also to a great extent dependent on warehouse management and efficient warehouse
management gives a cutting edge to a retail chain distribution company.
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3.6.11. Warehouse management does not just start with receipt of material but it actually
starts with actual initial planning when container design is made for a product. Warehouse
design and process design within the warehouse e.g. Wave Picking is also part of warehouse
management. Warehouse management is part of logistics and SCM. Warehouse
Management monitors the progress of products through the warehouse. It involves the
physical warehouse infrastructure, tracking systems, and communication between product
stations. Warehouse management deals with receipt, storage and movement of goods,
normally finished goods, to intermediate storage locations or to final customer. In the multi-
echelon model for distribution, there are levels of warehouses, starting with the Central
Warehouses, Regional warehouses serviced by the central warehouses and Retail
warehouses serviced by the regional warehouses and so on. The objective of warehouse
management is to help in optimal cost of timely order fulfillment by managing the resources
economically.
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3.7 MANUFACTURING RESOURCE PLANNING

3.7.1 Manufacturing Resource Planning. Manufacturing Resource Planning (MRP) entails

management of resources with adequate planning and this planning is based on certain
input data which provides stable inputs. MRP provided methodology for optimum utilization
of resources in an organization. During 1980’s, due to over-frequent changes in sales
forecasts and entailing continual readjustments in production as well as the unsuitability of
the parameters fixed by the system, it led MRP to evolve into a new concept:
Manufacturing Resource Planning - II (MRP II). MRP II is defined as a method for the
effective planning of all resources of a manufacturing company. Ideally, it addresses
operational planning in units, financial planning, and has a simulation capability to answer
"what-if" questions and extension of closed-loop MRP. This is not exclusively a software
function, but a marriage of people skills, dedication to data base accuracy, and computer
resources. It is a total company management concept for using human resources more
productively.

3.7.2 History and Evolution. MRP and MRP II are predecessors of Enterprise Resource
Planning (ERP), a business information integration system. The development of these
manufacturing coordination and integration methods and tools made today’s ERP systems
possible. MRP and MRP II are still widely used, independently and as modules of more
comprehensive ERP systems, but the original vision of integrated information systems as we
know them today began with the development of MRP and MRP II in manufacturing. MRP
and MRP II evolved from the earliest commercial database management package developed
by Gene Thomas at IBM in the 1960s. The vision for MRP and MRP II was to centralize and
integrate business information in a way that would facilitate decision making for production
line managers and increase the efficiency of the production line overall.

3.7.3. The MRP II system integrates these modules together so that they use common data
and freely exchange information, in a model of how a manufacturing enterprise should and
can operate. The MRP II approach is therefore very different from the “point solution”
approach, where individual systems are deployed to help a company plan, control or
manage a specific activity. MRP II is by definition fully integrated or at least fully interfaced.

3.7.4 Basic Modules and Features. MRP II is not a proprietary software system and can
thus take many forms. It is almost impossible to visualize an MRP II system that does not
use a computer, but an MRP II system can be based on either purchased–licensed or in-
house software. Almost every MRP II system is modular in construction. Characteristic basic
modules in an MRP II system are:-
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(a) Master production schedule.

(b) Item master data (Technical data). (MPS).

(c) Bill of materials (Technical data).

(d) Production resources data (Manufacturing technical data).

(e) Inventories and orders (Inventory control).

(f) Purchasing management.

(g) Material requirements planning (MRP).

(h) Shop floor control (SFC).

(i) Capacity planning or capacity requirements planning (CRP).

(j) Standard costing (Cost control).

(k) Cost reporting / Cost control.

(l) Business planning.

(m) Lot traceability.

(n) Contract management.

(o) Tool management.

(p) Engineering change control.

(q) Shop floor data collection.

(r) Sales analysis and forecasting.

(s) Finite capacity scheduling.

3.7.5 Industry Specifics. MRP II systems have been implemented in most manufacturing
industries. Some industries need specialized functions e.g. lot traceability in regulated
manufacturing such as pharmaceuticals or food. Other industries can afford to disregard
facilities required by others e.g. the tableware industry has few starting materials – mainly
clay – and does not need complex materials planning. Capacity planning is the key to
success in this as in many industries, and it is in those that MRP II is less appropriate.
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3.7.6. MRP information systems help managers to determine the quantity and timing of
raw materials purchases. Information systems that would assist managers with other parts
of the manufacturing process MRP II followed. While MRP was primarily concerned with
materials, MRP II was concerned with the integration of all aspects of the manufacturing
process, including materials, finance and human relations. MRP II like today’s ERP systems
was designed to integrate a lot of information by way of a centralized database. The
hardware, software, and relational database technology however of the 1980s was not
advanced enough to provide the speed and capacity to run these systems in real-time and
the cost of these systems was prohibitive for most businesses. The vision had been
established, and shifts in the underlying business processes along with rapid advances in
technology led to the more affordable enterprise and application integration systems that
big businesses and many medium and smaller businesses use today (Monk and Wagner).

3.7.7. General Concept. MRP and MRPII are both incremental information integration
business process strategies that are implemented using hardware and modular software
applications linked to a central database that stores and delivers business data and
information. MRP is concerned primarily with manufacturing materials while MRPII is
concerned with the coordination of the entire manufacturing production, including
materials, finance, and human relations. The goal of MRPII is to provide consistent data to
all players in the manufacturing process as the product moves through the production line.
Paper-based information systems and non-integrated computer systems that provide paper
or disk outputs result in many information errors, including missing data, redundant data,
numerical errors that result from being incorrectly keyed into the system, incorrect
calculations based on numerical errors, and bad decisions based on incorrect or old data. In
addition, some data is unreliable in non-integrated systems because the same data is
categorized differently in the individual databases used by different functional areas. MRPII
systems begin with MRP, material requirements planning. MRP allows for the input of sales
forecasts from sales and marketing. These forecasts determine the raw materials demand.
MRP and MRPII systems draw on a master production schedule, the breakdown of specific
plans for each product on a line. While MRP allows for the coordination of raw materials
purchasing, MRPII facilitates the development of a detailed production schedule that
accounts for machine and labor capacity, scheduling the production runs according to the
arrival of materials. An MRPII output is a final labor and machine schedule. Data about the
cost of production, including machine time, labor time and materials used, as well as final
production numbers, is provided from the MRPII system to accounting and finance (Monk
and Wagner).
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3.7.8. Benefits of MRP II. For the companies that want to integrate their other
departments with their manufacturing management ERP software is necessary and the
benefits that MRP II systems can provide are:

(a) Better control of inventories.

(b) Improved scheduling.
(c) Productive relationships with suppliers.
(d) Improved design control.
(e) Better quality and quality control.
(f) Reduced working capital for inventory.
(g) Improved cash flow through quicker deliveries.
(h) Accurate inventory records.
3.7.9. Criticism. Authors like Pochet and Wolsey argue that MRP and MRP II, as well as the
planning modules in current APS and ERP systems, are actually sets of heuristics. The
production plans could be obtained better by optimization over more powerful
mathematical programming models usually integer programming models. While they
acknowledge that the use of heuristics like those prescribed by MRP and MRP II, were
necessary in the past due to lack of computational power to solve complex optimization
models, this is mitigated to some extent by recent improvements in computers. However it
should be noted that manufacturing scheduling is intrinsically a very large problem, and it is
easy to show for even a relatively simple example that it is not possible to guarantee
optimal outputs with any algorithm.
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3.8 FACILITIES MANAGEMENT

3.8.1 Concept. Facilities Management (FM) is an interdisciplinary field devoted to the
coordination of space, infrastructure, people and organization, often associated with
business services functions such as offices, arenas, schools, convention centers, shopping
complexes, hospitals, hotels, etc. FM also facilitates the business on a much wider range of
activities than just business services and these are referred to as non core functions and
these may vary from one business sector to another. In the globe there are basically two
types of accepted definitions of FM. Firstly the one used in official National, Continental
such as EN for Europe and Global (ISO) standards and norms. Secondly there are
commercial standards and norms defining FM such as the ones from International Facility
Management Association (IFMA) etc. According to the International Facility Management
Association (IFMA), facility management is, "A profession that encompasses multiple
disciplines to ensure functionality of the built environment by integrating people, place,
processes and technology." The definition of FM, provided by the European Committee for
Standardization and ratified by 31 European countries is, "The integration of processes
within an organization to maintain and develop the agreed services which support and
improve the effectiveness of its primary activities." According to this European standard
the scope of FM are 'Space & Infrastructure' (planning, design, workplace, construction,
lease, occupancy, maintenance, furniture, cleaning, etc.) and 'People &
Organization'(Catering, ICT, HRM, HS&S, accounting, marketing, hospitality, etc.). Over the
years, FM has been growing as a business field and also as a scientific discipline, slowly
finding and anchoring its position among organizations’ business processes. The dedication
of FM organizations to new developments and continuous innovation processes seems to
be the way to stay in business, constantly exceeding customer’s expectations and adding
value to the core business of the client organization.
3.8.2 Functions.
(a) The primary function of FM is to manage the efficient operation of buildings and
to minimize operational life cycle costs, including the impact of buildings on the built
environment.
(b) The FM industry is also responsible for ensuring that services are delivered in a
way that contributes to the productivity and profitability of building occupants, as well
as improving returns for owners and investors.
(c) The range of services provided includes traditional building services, such as
repairs, maintenance, security and cleaning, as well as more highly technical services.
(d) A key strength of the FM industry is the adaptability and experience of those
working in this sector. There are many technical and professional backgrounds within
the industry.
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(e) Facility Managers are people who are actively involved in managing the delivery,
operation, maintenance and disposal of their organization’s facility or facilities. Many
facility managers have migrated from building-related professions such as architecture
and engineering.
(f) Facilities’ planning is done ab-inito considering two important logistics designing
aspects viz. facilities location and layout. These two aspects play a very important role
in cost cutting of SCM as Location of facilities is effected by land and construction
costs, local taxes, labour availability and its cost, coordination problems and
transportation costs.
(g) The Layout of a facility has its impact on intra facility logistics cost e.g. Material
handling and material handling equipment.

3.8.3 Types of Maintenance. It covers a range of activities aimed at reducing the

occurrence of failures, ensuring satisfactory operation and productivity, and extending the
life of plant equipment. Maintenance is just one of the many activities that a facility
manager must manage, but its importance in underpinning improved environmental
performance cannot be overstated. Maintenance can either be planned or unplanned (e.g.
break-down). A range of planned maintenance strategies are in common use — these are
outlined below: (Summary adapted from AIRAH, 2001).
(a) Preventative Maintenance. The maintenance contractor performs regular
inspections, maintenance and calibration according to an agreed schedule, and
reports any obvious deterioration of the plant. The owner is responsible for the cost of
all major repairs.
(b) Comprehensive Maintenance. Under this strategy, the contractor covers the
cost of all repairs and replacements, and usually takes out insurance to manage this
risk. The activities undertaken may be similar to those above, but are usually
determined by the contractor, rather than the owner.
(c) Performance-Based Maintenance. The focus is on reliable delivery of defined
services (e.g. heating and cooling), as opposed to scheduled maintenance on specific
plant items. The contractor is rewarded based on reliable supply of those services.
(d) Occurrence of Maintenance. The bulk of facilities management and
maintenance activities occur in the operational phase of the life cycle. However,
consideration of these aspects is vital at other phases. Facilities management and
maintenance considerations at different phases of the building life cycle occur as
outlined in the Figure 3.81 below:
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FACILITIES MAINTENANCE CONSIDERATIONS
Ser No Phase Considerations

(a) Design & Documentation Document design intent and assumptions;

provide safe access for maintenance
(b) Construction Building Drawings
(c) Commissioning Balancing Reports
(d) Hand Over Operating & Maintenance Manuals
(e) Operation Facilities Management & Maintenance
(f) Tenant Fit Out Re-commissioning Waste Management
/Emissions
(g) Refurbishments Up-gradation of Buildings & Systems

FIGURE 3.81
3.8.4 Importance of Facilities Management and Maintenance Practices.
(a) Importance for the Triple Bottom Line. A balance has to be achieved between
protecting and improving the natural environment, contributing positively to the
economy, and achieving social equity. Facility managers have the potential to
influence the triple bottom line performance of the buildings that they are responsible
for managing and maintaining. Buildings have a significant impact on the environment,
both in their construction and in their operation. According to the Organization for
Economic Co-operation and Development (OECD, 2003), buildings consume around 32
% of the world's resources, including 12 % of its water. Buildings also produce 40 % of
waste going to landfill and 40 % of air emissions. Companies that are involved in the
construction and property sector account for a significant proportion of resource use
and negative environmental impacts. Facility managers have a responsibility to ensure
that these impacts are minimized and that positive contributions are made. Facility
managers, in their day-to-day management and operation of buildings, contribute
significantly to the creation of a healthy working and living environment for tenants
and owner-occupiers. Implementing sustainable management practices and setting up
the framework for measuring, monitoring and reporting outcomes will become an
increasingly important facet of facilities management. There is a growing body of
research and literature into the link between well-designed workplaces and increased
worker productivity. Facility managers have a pivotal role in providing a good quality
indoor environment for workers by maintaining good indoor air quality and thermal
comfort. Organizations are realizing the importance of the quality of their workplaces
to their business performance and economic bottom line.
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(b) General Benefits. Sustainable facilities management and maintenance practices

have numerous benefits to the environment, including reduced water, energy and
resource consumption and fewer emissions that contribute to climate change. The
incorporation of sustainable practices by facility managers into the management and
maintenance of a building improves the building over the long term, in terms of the
efficiency of its resource consumption and enhanced value and provides a range of
social, environmental and financial benefits. The benefits for the various users of
commercial buildings are outlined below:-

(i) Owners. Owners of sustainable buildings can benefit financially from

incorporating sustainable management and maintenance practices. Sustainable
management practices can lead to lower energy and water consumption,
resulting in reduced energy and water costs. If resource efficiency and waste re-
use and recycling management practices are implemented, less waste needs to
be taken off site, leading to reduced waste disposal costs.

(ii) Occupiers. The adoption of green practices by facility managers can lead to
greater efficiencies in the building's various /HVAC systems, which can result in
better indoor air quality and an improved thermal environment. The benefits for
occupants include an improved indoor environment quality, improved health,
potential increases in worker productivity, and reduced absenteeism and sick
days.

(iii) Managers. In addition to improving the sustainable outcomes of a

building, the incorporation of green practices by facility managers into the
management and maintenance of a building provides professional benefits. The
facility managers role and profile within the organization will grow as awareness
of sustainability increases.

(c) Risks. The construction phase is often a dynamic phase, which may see changes to
the building services that may compromise the performance of the building. Some of
the perceived risks that come with the incorporation of sustainability into the
facilities management and maintenance practices in commercial buildings are
outlined below. There are a range of factors that contribute to this situation:
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(i) Dislocated delivery process.
(ii) Dilution of the skills base through specialization.
(iii) Dependence on BMCS and other technology with inadequate support and
technical knowledge.
(iv) Knowledge and skill gaps in the supply chain.

(d) Barriers and Drivers. The barriers to achieving sustainable outcomes through
implementing sustainable facilities management and maintenance practices are:
(i) Government legislation.
(ii) Market demand.
(iii) Corporate responsibility.
(iv) Life cycle costing.

(e) Construction Phase. The barriers to achieving sustainable outcomes through

implementing sustainable facilities management and maintenance practices are:

(i) Split Incentives. A significant impediment to the upgrading of existing

buildings and the implementation of sustainable facilities management practices
is the split incentive that occurs through the financial gain by either the tenant
or the owner as a result of the improvement.

(ii) Lack of Knowledge and Education. The part of the stakeholders of

commercial buildings is a considerable barrier to implementing sustainable
management practices and to achieving sustainable outcome. The building's
design and services can be planned to achieve sustainable outcomes, but if these
features and technologies are incorrectly operated then poor performance may
result.

(iii) Lack of Adequate Metering and Monitoring. In order to enhance

sustainability performance through the implementation of sustainable
management and maintenance practices, the building's performance must be
measured and tracked over time, targets should be set, and opportunities for
improvement be identified.
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(iv) Routine Management Practices. Facility managers and maintenance staff

can become entrenched in routine, continuing to manage and maintain the
building as they have always done. Check-lists and log sheets are commonly
used, requiring a simple check or Confirmation and they do not typically require
interpretation of the measured results, which can lead to opportunities for
improvement being overlooked.

(v) Overly Technical Building User Guide. The building user guide should
explain the building's sustainability strategy and how the building's passive and
active features are designed to enhance performance. The building user guide
should include information on the building fabric, building services, monitoring,
performance targets, transportation facilities, and energy, water and
waste/recycling policies. If the guide is too technical and not explained in
layman's terms, building occupiers/tenants are not likely to understand their
role in improving performance and achieving sustainable outcomes.

(vi) Unsustainable Procurement Policy. Procurement policies need to be

regularly updated in order to accommodate the range of new sustainable
products, materials and technologies in the marketplace. Repeat purchasing of
service equipment and office products e.g. plant equipment, office paper, etc.
without considering the other potentially more sustainable alternatives that are
available is a barrier to improving sustainable outcomes in commercial buildings.

3.8.5 Opportunities for Improving Performance. There are many opportunities for
improving sustainability outcomes through implementing initiatives during the facilities
management and maintenance process.

(a) Gain commitment from senior management Find a champion at a senior level to
support the change.

(b) Identify risks and priorities, set policies, objectives and targets (long- and short-
term) in conjunction with stakeholders.

(c) Develop a plan to implement the process.

(d) Allocate resources to action the plan.

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3.8.6 The Figure 3.82 below shows the processes, players involved, issues faced and tools
employed for incorporating sustainability into facilities management will by facility
managers.

MANAGEMENT AND PLANNING

FIGURE 3.82
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3.8.6 The Figure 3.83 below shows an example of how sustainability initiatives may be
incorporated into existing facilities management processes. Where possible, these actions
should be done as part of the existing change process within the organization.

PROCESSES, PLAYERS, ISSUES INVOLVED IN FACILITIES MANAGEMENT

FIGURE 3.83
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3.8.7 The likely steps in developing an Environmental Management Plan (EMP) are:

(a) Identify priorities.

(b) Set objectives and targets.
(c) Define performance indicators.
(d) Document strategies and time frames to achieve targets.
(e) Determine specific actions to implement each strategy.
(f) Allocate responsibilities and resources.
(g) Establish mechanisms to monitor, evaluate and report progress (use existing
mechanisms where possible).
(h) Track costs and benefits.

3.8.8 Maintenance Planning. A maintenance plan defines a structured approach to

optimizing the performance of a building and its services, in terms of life, reliability and
efficiency. By considering environmental impacts when drafting the plan, better ESD
outcomes can be achieved. The efficiency and performance of a building can be improved
through the implementation of a maintenance plan that incorporates provisions for
monitoring, commissioning processes, and scheduled maintenance. To gain a basic
understanding of the building's operations, a number of audits (energy, water and waste)
should be undertaken to identify where the building sits with regard to environmental
performance. This will allow strategies to be developed to optimize the building's
performance over time. Other steps that can be taken to assess a building's operational
performance include:

(a) Developing an asset register that lists equipment and location, and allows the
identification of equipment nearing its end of economic life.
(b) Developing a building-specific maintenance specification for each major system.
(c) Installing sub-meters and instrumentation to indicate system performance.
(d) Reviewing maintenance procedures and performance.
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3.9 DOCUMENT AUTOMATION IN SCM
3.9.1. Documentation. A large amount of documents are used in SCM. These documents
could be such as, invoices, packing lists/slips/sheets /manifests, pick tickets,
forms/reports of many types e.g. MSDS, damaged goods, returned goods,
detailed/summary, etc., import/export, delivery, Bill Of Loading (BOL), etc. These
documents are usually the contracts between the consignee and the consignor, so they are
important for both parties and also any intermediary, like a third party logistics company
and the governments. Document handling within logistics, supply chain management and
distribution centers is usually performed by manually or semi-automatically using bar code
scanners, software and tabletop laser printers. There are some manufacturers of high speed
document automation systems that will automatically compare the laser printed document
to the order and either insert or automatically apply an enclosed wallet/pouch to the
shipping container usually a flexible poly bag or corrugated fiberboard/rigid container.
Protection of Privacy and Identity Theft are major concerns, especially with the increase of
e-Commerce, Internet/Online shopping and Shopping channels, other past references are
catalogue shopping and mail order shopping, all these making it more important than ever
to guarantee the correct document is married or associated to the correct order or
shipment every time. Software industry produces numerous documents such as ERP, WMS,
TMS, legacy middleware and most accounting packages. A number of research projects
have looked into wider standardization and automation of documents in the freight
industry.
3.9.2. Document Automation. Document assembly was pioneered in the late 1970s in
Utah by the company that would later become known as Hot Docs. The basic functions are
to replace the cumbersome manual filling in of repetitive documents with template-based
systems where the user answers software-driven interview questions or data entry screen.
The information collected then populates the document to form a good first draft. In more
advanced document automation systems it allows users to create their own data and rules
(logic) without the need for programming. While document automation software is used
primarily in the legal, financial services, and risk management industries, it can be used in
any industry that creates transaction-based documents. Popular document automation
solutions on the market today include HotDocs, Business Integrity, Exari, Intelledox,
Rapidocs, Xpertdoc, XpressDox, ActiveDocs and dox42. A good example of how document
automation software can be used is with commercial mortgage documents. A typical
commercial mortgage transaction can include several documents including:
(a) Promissory note.
(b) Environmental indemnity.
(c) Trust deed.
(d) Mortgage.
(e) Guaranty.
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3.9.3. Some of these documents can contain as many as 80 to 100 pages, with hundreds of
optional paragraphs and data elements. Document automation software has the ability to
automatically fill in the correct document variables based on the transaction data. In
addition, some document automation software has the ability to create a document suite
where all related documents are encapsulated into one file, making updates and
collaboration easy and fast. Simpler software applications that are easier to learn can also
be used to automate the preparation of documents, without undue complexity. Clipboard
managers such as text BEAST allow the user to save frequently-used text fragments,
organize them into logical groups, and then quickly access them to paste into final
documents.

3.9.4 Document Automation in the Legal Services Market. The role of automation
technology in the production of legal documents has been widely recognized. For example,
Richard Susskind’s book, ‘The End of Lawyers’ looks at the use of document automation
software that enables clients to generate employment contracts and Wills with the use of
an online interview or decision tree. Susskind regards Document Assembly as one of 10
'disruptive technologies' that are altering the face of the legal profession. In large law firms
document assembly systems are increasingly being used to systemize work, such as complex
term sheets and the first drafts of credit agreements. With the liberalization of the UK legal
services market spearheaded by the Legal Services Act 2007 large institutions have
broadened their services to include legal assistance for their customers. Most of these
companies use some element of document automation technology to provide legal
document services over the Web. This has been seen as heralding a trend towards
commoditization whereby technologies like document automation result in high volume,
low margin legal services being ‘packaged’ and provided to a mass-market audience.

3.9.5. Document Automation in Insurance Market. Insurance policies and certificates,

depending on the type, policy can also be hundreds of pages long and include specific
information on the insured. Typically, in the past, these insurance document packets were
created by typing out free-form letters, adding pre-printed brochures, editing templates and
customizing graphics with the required information, then manually sorting and inserting all
the documents into one packet and mailing them to the insured. The various documents
included in one packet could include the following kinds of documents:
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(a) Welcome letter.

(b) Contract.
(c) Certificate.
(d) State specific policy documents.
(e) Listing of items insured and insurance amounts.
(f) Amendments.
(g) Riders.
(h) ID card.
(i) Company information.
(j) Marketing material (other products).

3.9.6. A lot of work can go into putting on packet together. In most policy admin system
e.g. Life Pro, the system will generate some kind of policy statement as a starting point, but
might need to be customized and enhanced with other required materials. Document
Automation software, for example, Print Expert, was used to automate insurance policy
documents, and was installed at World Insurance, Woodmen of the World, Universal
Underwriters Group in the insurance market. Other systems included Document Sciences,
Docucorp, Insystems, EMC and Adobe Live Cycle products.
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3.10 INTEGRATED LOGISTICS SUPPORT (ILS).

3.10.1 Concept. Integrated Logistics Support (ILS) is an integrated and iterative process for
developing material and a support strategy that optimizes functional support, leverages
existing resources, and guides the system engineering process to lower life cycle cost and
decrease the logistics footprint or the demand for logistics and making the system easier to
support. Originally ILS was developed for military purposes. ILS is also widely used in
commercial product support or customer service organizations as a System-wide
management of entire logistics chain as a single entity, instead of separate management of
individual logistical functions. In general, ILS plans and directs the identification and
development of logistics support and system requirements for military systems, with the
goal of creating systems that last longer and require less support, thereby reducing costs
and increasing return on investments. ILS therefore, addresses these aspects of
supportability not only during acquisition, but also throughout the operational life cycle of
the system. ILS is the integrated planning and action of a number of disciplines in concert
with one another to assure system availability. The planning of each element of ILS is ideally
developed in coordination with the system engineering effort and with each other.
Tradeoffs may be required between elements in order to acquire a system that is:
affordable has lowest life cycle cost, is operable, supportable, sustainable, transportable,
and environmentally sound. In some cases, a deliberate process of Logistics Support Analysis
will be used to identify tasks within each logistics support element. The most widely
accepted list of ILS activities include:-

(a) Reliability engineering, Maintainability engineering and Maintenance

(preventive, predictive and corrective) Planning.
(b) Supply and Support / Acquire resources.
(c) Support and Test Equipment/Equipment Support.
(d) Manpower and Personnel.
(e) Training and Training Support.
(f) Technical Data / Publications.
(g) Computer Resources Support.
(h) Facilities.
(i) Packaging, Handling, Storage, and Transportation.
(j) Design Interface.
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3.10.2 Decisions are documented in a life cycle sustainment plan of a Supportability
Strategy, or as an Integrated Logistics Support Plan. ILS planning activities coincide with
development of the system acquisition strategy and the program has to be tailored
accordingly. A properly executed ILS strategy will ensure that the requirements for each of
the elements of ILS are properly planned, resourced, and implemented. These actions will
enable the system to achieve the operational readiness levels required by the war fighter at
the time of fielding and throughout the life cycle.
3.10.3 Backdrop. ILS is a technique introduced by the United States of America’s army to
ensure that the supportability of an equipment item is considered during its design and
development. The technique was adopted by the United Kingdom, Ministry of Defense
(MOD) in 1993 and was made compulsory for the procurement of the majority of all MOD
equipment.
(a) Influence on Design. ILS provides important means to identify as early as
possible reliability issues / problems and can initiate system or part design
improvements based on reliability, maintainability, testability or system availability
analysis.
(b) Design of the Support Solution for Minimum Cost. Ensuring that the Support
Solution considers and integrates the elements considered by ILS.
(c) Initial Support Package. The tasks include calculation of requirements for spare
parts, special tools, and documentation. Quantities required for a specified initial
period are calculated, procured, and delivered to support delivery, installation in some
of the cases, and operation of the equipment. The ILS management process facilitates
specification, design, development, acquisition, test, fielding, and support of systems.
3.10.4 Maintenance Planning. Maintenance planning begins early in the acquisition process
with development of the maintenance concept. It is conducted to evolve and establish
requirements and tasks to be accomplished for achieving, restoring, and maintaining the
operational capability for the life of the system. Maintenance planning relies on Level of
Repair Analysis as a function of the system acquisition process. Maintenance planning will:-
(a) Define the actions and support necessary to ensure that the system attains the
specified system readiness objectives with minimum Life Cycle Cost.
(b) Set up specific criteria for repair, including Built-In Test Equipment (BITE)
requirements, testability, reliability, and maintainability; support equipment
requirements; automatic test equipment; and manpower skills and facility
requirements.
(c) State specific maintenance tasks, to be performed on the system. Address
warranty considerations.
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(d) Define actions and support required for fielding and marketing the system.
(e) The maintenance concept must ensure prudent use of manpower and resources.
When formulating the maintenance concept, analysis of the proposed work
environment on the health and safety of maintenance personnel must be
considered. Minimize the use of hazardous materials and the generation of
waste.

3.10.5 Supply Support. Supply support encompasses all management actions, procedures,
and techniques used to determine requirements to:
(a) Acquire support items and spare parts.
(b) Catalog the items.
(c) Receive the items.
(d) Store and warehouse the items.
(e) Transfer the items to where they are needed.
(f) Issue the items.
(g) Dispose of secondary items.
(h) Provide for initial support of the system.
(i) Acquire, distribute, and replenish inventory.

3.10.6 Support and Test Equipment. Support and test equipment includes all equipment,
mobile and fixed, that is required to perform the support functions, except that equipment
which is an integral part of the system. Support equipment categories include:
(a) Handling and Maintenance Equipment.
(b) Tools (hand tools as well as power tools).
(c) Metrology and measurement devices.
(d) Calibration equipment.
(e) Test equipment.
(f) Automatic test equipment.
(g) Support equipment for on- and off-equipment maintenance.
(h) Special inspection equipment and depot maintenance plant equipment, which
includes all equipment and tools required to assemble, disassemble, test,
maintain, and support the production and/or depot repair of end items or
components. This also encompasses planning and acquisition of logistic support
for this equipment.
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3.10.7 Manpower and Personnel. Manpower and personnel involves identification and
acquisition of personnel with skills and grades required to operate and maintain a system
over its lifetime. Manpower requirements are developed and personnel assignments are
made to meet support demands throughout the life cycle of the system. Manpower
requirements are based on related ILS elements and other considerations. Human factors
engineering or behavioral research is frequently applied to ensure a good man-machine
interface. Manpower requirements are predicated on accomplishing the logistics support
mission in the most efficient and economical way. This element includes requirements
during the planning and decision process to optimize numbers, skills, and positions. This
area considers:
(a) Man-machine and environmental interface.
(b) Special skills.
(c) Human factors considerations during the planning and decision process.

3.10.8 Training and Training Devices. Training and training devices support encompasses
the processes, procedures, techniques, training devices, and equipment used to train
personnel to operate and support a system. This element defines qualitative and
quantitative requirements for the training of operating and support personnel throughout
the life cycle of the system. It includes requirements for:
(a) Competencies management.
(b) Factory training.
(c) Instructor and key personnel training.
(d) New equipment training team.
(e) Resident training.
(f) Sustainment training.
(g) User training.
(h) Disposal and safe procedures training.

3.10.9 Embedded training devices, features, and components are designed and built into a
specific system to provide training or assistance in the use of the system. One example of
this is the HELP files of many software programs. The design, development, delivery,
installation, and logistic support of required embedded training features, mockups,
simulators, and training aids are also included.

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3.10.10 Technical Data. Technical Data and Technical Publications consist of scientific or
technical information necessary to translate system requirements into discrete engineering
and logistic support documentation. Technical data is used in the development of repair
manuals, maintenance manuals, user manuals, and other documents that are used to
operate or support the system. Technical data includes (may not be limited to):-
(a) Technical manuals.
(b) Technical and supply bulletins.
(c) Transportability guidance technical manuals.
(d) Maintenance expenditure limits and calibration procedures.
(e) Repair parts and tools lists.
(f) Maintenance allocation charts.
(g) Corrective maintenance instructions.
(h) Preventive maintenance and Predictive maintenance instructions.
(i) Drawings/specifications/technical data packages.
(j) Software documentation.
(k) Provisioning documentation.
(l) Depot maintenance work requirements.
(m) Identification lists.
(n) Component lists.
(o) Product support data.
(p) Flight safety critical parts list for aircraft.
(q) Lifting and tie down pamphlet/references.
(r) Hazardous Material documentation.

3.10.11 Computer Resources Support. Computer Resources Support includes the facilities,
hardware, software, documentation, manpower, and personnel needed to operate and
support computer systems and the software within those systems. Computer resources
include both stand-alone and embedded systems. This element is usually planned,
developed, implemented, and monitored by a Computer Resources Working Group (CRWG)
or Computer Resources Integrated Product Team (CR-IPT) that documents the approach and
tracks progress via a Computer Resources Life-Cycle Management Plan (CRLCMP).
Developers will need to ensure that planning actions and strategies contained in the ILSP
and CRLCMP are complementary and that computer resources support for the operational
software, and ATE software, support software, is available where and when needed.

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3.10.12 Packaging/ Handling/ Storage/ Transportation. This element includes resources
and procedures to ensure that all equipment and support items are preserved, packaged,
packed, marked, handled, transported, and stored properly for short- and long-term
requirements. It includes material-handling equipment and packaging, handling and storage
requirements, and pre-positioning of material and parts. It also includes preservation and
packaging level requirements and storage requirements (for example, sensitive, proprietary,
and controlled items). This element includes planning and programming the details
associated with movement of the system in its shipping configuration to the ultimate
destination via transportation modes and networks available and authorized for use. It
further encompasses establishment of critical engineering design parameters and
constraints (e.g., width, length, height, component and system rating, and weight) that must
be considered during system development. Customs requirements, air shipping
requirements, rail shipping requirements, container considerations, special movement
precautions, mobility, and transportation asset impact of the shipping mode or the contract
shipper must be carefully assessed. PHS&T planning must consider:-
(a) System constraints (such as design specifications, item configuration, and safety
precautions for hazardous material).
(b) Special security requirements.
(c) Geographic and environmental restrictions.
(d) Special handling equipment and procedures.
(e) Impact on spare or repair parts storage requirements.
(f) Emerging PHS&T technologies, methods, or procedures and resource-intensive
PHS&T procedures.
(g) Environmental impacts and constraints.

3.10.13 Facilities. The Facilities logistics element is composed of a variety of planning

activities, all of which are directed toward ensuring that all required permanent or semi-
permanent operating and support facilities (for instance, training, field and depot
maintenance, storage, operational, and testing) are available concurrently with system
fielding. Planning must be comprehensive and include the need for new construction as well
as modifications to existing facilities. It also includes studies to define and establish impacts
on life cycle cost, funding requirements, facility locations and improvements, space
requirements, environmental impacts, duration or frequency of use, safety and health
standards requirements, and security restrictions. Also included are any utility
requirements, for both fixed and mobile facilities, with emphasis on limiting requirements of
scarce or unique resources.
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3.10.14 Design Interface. Design interface is the relationship of logistics-related design

parameters of the system to its projected or actual support resource requirements. These
design parameters are expressed in operational terms rather than as inherent values and
specifically relate to system requirements and support costs of the system. Programs such
as "design for testability" and "design for discard" must be considered during system design.
The basic requirements that need to be considered as part of design interface include:

(a) Reliability & Maintainability.

(b) Standardization.
(c) Interoperability.
(d) Safety, Security & Usability.
(e) Environmental Aspects.
(f) Privacy, particularly for computer systems.
(g) Legal Aspects.
RESEARCH
GAPS
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4.1 CONCEPT OF SCM IN FOOD INDUSTRY

4.1.1. Concept. 'Food SCM' (FSCM) is the term given to the system and inter-connections
of organizations, people, activities, technologies, information and resources involved in
production and distribution of a food products. It encompasses many different disciplines
and logistical steps from sourcing the right raw material and ingredients through to on-time
delivery to the consumer. The supply chain can be quite complex when dealing with food
products. Terms such as, "Farm To Fork" or "Paddock To Plate", refer to the supply chain
within the food industry as an expression to visualize the chain. The FSCM involves the
people and organizations in getting your meals. The chain starts from farmers/ growers/
producers, then there are the manufacturers who turn the raw material into palatable
products, this may involve several stages and several manufacturers. The manufacturing
can also be done close to where the commodity crop is grown or it can be moved elsewhere
or even exported to another country. Subsequently comes the packaging company, who
manufacturer the packaging material to protect the products. The distributors and
transporters move the food supplies by road, rail, air or sea. Once the product arrives at the
destination, it goes into the shops or marketplace for selling. The shop can be a huge multi-
national supermarket or a small outlet. The retailers promote the product to attract the
consumers to buy it, by way of advertising and marketing strategies, both at the point of
sale and through advertising media like newspapers and television channels. Finally, the
customer buys the product, takes it home and consumes it. The supply chain then gets
completed.

4.1.2 Farm to Fork. The stages of the food supply chain are generally as outlined above in a
simplified manner. It can be far more complicated in reality with many inter-dependencies
and numerous steps involved. Effective supply chain management is essential for the food
industry because of the fact that the food gets spoiled faster. The business thus should
ideally take care that the right products reach the right customer at the right price and at
the right time in right condition and this can only be done by the managing the supply chain
effectively. The supply chain process always involves a two way flow of goods or services
and the information between the manufacturers and the customers. Large numbers of
companies in the food industry get the feedback from the customers and they then utilize
the suggestions from the customers in further development of their products.
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4.1.3 Globalization. It is the trend being followed today and has a definite impact on the
supply and demand in the food industry; Globalization of the supply chain means
transporting food across the world for processing and back again to the country of origin to
be sold to the consumers. This at times can make environmental and commercial sense,
however ineffective and incompetent SCM can lead to major problems such as bankruptcy.
The technological changes in the SCM such as improved communication has brought
significant changes in the relationship between the partners in the supply chain, enhancing
productivity and the profits of the businesses in the food industry. Companies increasingly
are becoming aware that their opportunities of having a competitive edge in business can
only come through effective SCM. In the case of companies operating on global scale, SCM
strategies drive operational efficiencies and affect the bottom line, unlike technology or
other core areas affecting business. SCM is always in a dynamic mode. Project managers
heading supply chain projects are often faced with lot of challenges and large number of
issues to overcome through the project. There is a need to identify practical problems and
road blocks faced in implementing the operations of Global supply chain projects. Some of
these issues discussed are as follows:-
(a) Project Level. Projects often are planned and rolled out on global scale involving
multiple countries and locations with all sites scheduled to go live around the same
timelines. The Project managers and sponsors would be located in one country and thus
physically it becomes impossible for project managers to keep running to all locations
and be available to concentrate on all sites. Though project teams are formed at regional
country level however if the project planning, design and control lies with one office or a
single person or a team, the rest of the project teams would become enablers and
implementers resulting in the dilution of energy and focus. The core project team
resources cannot spread themselves thin to attend to all sites and hence the biggest or
the most important locations get attention while the others suffer due to lack of focus.

(b) Project Control. Supply chain projects involve technology implementation along
with infrastructure and software. They also involve multiple logistical modules involving
transportation, international freight and warehousing etc. Span of control over project
implementation is very important in case of logistics projects involving multiple channels
of external and internal agencies. Project managers at best can concentrate on rolling out
the project in one country depending upon the number of sites and the logistical
components involved. If the project involves setting up a distribution center or
warehouse, all the more reasons that the roll out should be limited to country level.
Adoption of right technology and its implementation often faces roadblocks in
implementing global supply chain projects. Projects normally roll out common processes
to be followed across all countries and locations and involve use of technology to drive
the processes.
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(c) Technology Imperatives. Multinational companies have their supply chain

operations across the world managed not only for one application or a set of
applications. Each location and country would have implemented either legacy systems
or stand alone systems to manage individual local logistics activities. Once implemented,
it becomes difficult to isolate such applications and shift them to one common platform
without which common processes and standardization cannot be driven across locations
Secondly any software solution would require to be customized to suit local site and
country requirements. One solution does not fit all and while the solution may work in
one country with bigger volumes and size of supply chain network and warehouses, the
same software may not be suitable to be implemented in a small country with one
location.

(d) Technology Absorption. Cost of Technology Absorption is also an important

issue as when a project proposes to introduce a system across all countries in the supply
chain network and intends to bring about seamless integration and common processes; it
needs to account for the cost of technology and capability of all countries and locations
so as to absorb the cost. The costs of IT implementation are in any case exorbitant and
the bigger sites or countries may be able to pay for the IT cost but if the same cost is
expected to be paid by another country which has lesser volumes, it may not be able to
absorb the cost, unless the global project management is able to absorb the costs into
the project cost or get corporate management to absorb the cost and take it off from the
user country’s budget. Implementation of technology also calls for the IT teams to travel
to all locations, implement the setup, train the people and stabilize the sites before they
become operational. The cost of implementation can be very high and all countries may
not be able to bear the cost of such implementation.

(e) Resource Capability. Supply chain projects involve multiple locations and cross
functional departments and teams within the organization, as well as include multiple
external agencies who manage the logistics. Driving projects through various country
managements requires enormous internal selling to be done. The projects also call for
external selling with the service providers. Local country managements as well as the
service provider country managements may or may not have the same interest and
commitment to the project as much as the global project leadership would have. These
are soft challenges faced by Project Managers, to be able to sell the idea and get
commitment from all stake holders. The availability of quality resources both internally
and externally in all locations is critical to the implementation of the project and is often
a challenge which can hold up implementations and training.
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(f) Supply Chain in Perishable Food Business. Perishing ability of agricultural
produces creates uncertainties within the supply chain in respect to product quality,
safety and reliability. The supply chain partners are aware of deterioration problems and
to avoid losses the partners tend to stock less quantities. To ensure product quality of
agricultural raw materials for a long time requires efficient designed storage facilities
(Georgiadis et al. 2005) that many firms cannot afford to buy or install. Similarly, the
challenge happens on processed food products because of limited shelf lives. The firm
may opt to produce and stock fewer quantities to avoid losses resulting from expired
products, but it is quite clear that if the demands turn to be high, other customers willing
to buy will turn away without the product because of stock out and vise versa. Common
mistakes do generally happen in SCM and the issue is always on developing a cost
efficient and effective supply chain in agriculture and food business.

4.1.4 Vital Elements of SCM in Food Supply Chain. SCM encompasses a set of
interdependent companies that work closely together to manage the flow of goods and
services along with the value-added chain of agricultural and food products, in order to
realize superior customer value at the lowest possible costs (Wood, 2004) as well as the
associated information flow (Byrne 2006). The supply chain includes not only the processor
and the suppliers but also the transporters, warehouses, retailers, and even the customers
themselves (Chopra and Meindl, 2008). Exploring seriously the potential of SCM concept, a
firm may realize a significant revenue growth (Gunasekaran, et al. 2008). By using more
supply chain strategies, the firm can save about 10 percent of its annual operation.
Application of SCM strategies have been widely pronounced in other manufacturing and
service providing sectors such as in auto-mobiles, electronics, books, hotels, telephone
companies among others. (More literature on SCM available at Chopra and Meindl (2008),
Gunasekaran et al. (2008), Bellantuono et al. (2007), Fawcett et al. (2007), Bowersox (2006),
Reina and Trck (2004), Wheatley et al. (2004), Woods (2004) and Simchi-Levi et al. (2003).
Wood (2004) identified several reasons for rising interest in SCM in agribusiness industry.
The reasons at supplier level include:
(a) Greater differentiation of food products.
(b) Competition for consumer expenditure.
(c) Changes in the operating environment.
(d) Improvement of product quality.
(e) Ability to ship products in cost-effective ways provides consumers with flexibility
from which to choose.
(f) Consumers’ sensitivity to quality, safety, health and nutritional factors of
food products.
(g) Interest in place of origin and means of production, including non-food values
such as environmental sustainability and animal welfare.
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4.1.5 Food Supply Chain. The reasons identified as above raise interest for the food
processing sector to review the operation of their supply chain. Consumer’s ability to
choose from alternative suppliers exerts greater pressure than ever before, over the food
production and distribution systems. In turn it becomes clear to food processors that
business success depends on responsiveness to consumer demands. Moreover, Wood
(2004) presented the understanding of the concept and implications of SCM in developing
countries focused on its application in planning, developing and managing agri-business. In
developing countries supply chain are long and fragmented with multiple small holders, not
only in agricultural products (Wheatley et al. 2004) but also in the food processing sector. It
is quite clear that the driving force of developing interest in SCM is its advantage towards
competitiveness; a critical factor is how effectively the chain addresses customers’ wants
and needs. Porter’s argument Vol. 4, No. 12 International Journal of Business and
Management 72 presented in Wood’s (2004) is that, the difficult in developing a strategy, is
to do something different that is hard for competitors to copy. He proposed human
capabilities and relationships lead to a sustainable advantage, because these approaches
are intrinsically hard to copy. A supply chain as shown in the Figure 4.11 below is a logical
network of facilities and distribution options that can perform the following functions:

(a) Procurement of perishable raw materials.

(b) Transformation of materials into intermediate and finished products at factories.
(c) Distribution of the finished products to customers through outlets or by the mode of
direct marketing.

4.1.6 Supply chains are thus required to exist in both support services, as well as
manufacturing organizations, although the complexity of the chain may vary greatly from
crop to crop, location to location, season to season, industry to industry and firm to firm.
The Figure 4.11 below amplifies the aspects of Food Supply Chain which are its key issues
and need to be well understood.
 110

FIGURE 4.11

4.1.7 Food Supply Chain for Perishables. In a very simple supply chain for a single non-
perishable food product, raw material is procured from vendors, transformed into finished
goods in a single step, and then transported to distribution centers and ultimately to
customers. It appears to be an easy business operation, which can be managed with little
knowledge and resources. In actuality realistic supply chains have multiple end products
with shared components, facilities, capacities and many regulatory provisions related to
food safety, public and environmental health. The flow of materials is not always along an
anticipated and planned network. Various modes of transportation may be considered, and
the bill of materials for the end items may be both large and complex.
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4.1.8 Importance of Managing Supply Chain. Traditionally, marketing, distribution,

planning, manufacturing, and the purchasing organizations along the supply chain are
operated independently. These organizations have their own objectives and these are often
conflicting. Marketing department’s objective is thus to offer high customer service and
expect maximum sales realization, which is in conflict with manufacturing and distribution
goals. Quite often the manufacturing operations are designed to maximize throughput and
lower costs with little consideration for the impact on inventory levels and distribution
capabilities. On the other hand purchasing contracts are often negotiated with very little
information beyond historical buying patterns. The result of these factors is generally that
there is not a single, integrated plan for the organization. Clearly, there is a need for a
mechanism through which these different functions can be integrated together. SCM is a
strategy through which such integration can be achieved.

4.1.9 Characteristics of Supply Chain for Perishables. An effective supply chain

management can be typically viewed to lie between fully vertically integrated firms, where
the entire material flow is owned by a single firm and on the other side, where each channel
member operates independently. Therefore coordination, not the ownership, between the
various players in the chain is a key in its effective management. SCM can also be equated
to a well-balanced and well-practiced relay team. Such a team is more competitive when
each player knows how to be positioned for the hands-off. The relationships and
understanding are the strongest between the players who directly pass the baton. Thus the
entire team therefore has to make a coordinated effort to win the race. The decision making
process for an effective SCM for perishables can be categorized under two levels:
(a) Strategic level.
(b) Tactical or operational level.

4.1.10 Strategic Level. Strategic decisions are normally made typically over a long time
horizon after due consideration of number of factors. These decisions generally flow out of
corporate doctrine or are linked to the corporate strategy and guide the SCM policies from a
design perspective in line with corporate objectives. The higher / macro level planning
needs people with insight of the subject, multidimensional understanding and analytical
ability to integrate various legal, technical, commercial and policy dimensions in decision
making process. The higher hierarchy must have a burning desire to create some meaningful
outcome with broad vision keeping all stakeholders in mind. These managers are generally
institution builders, willing to share and communicate their vision with others and along
with globalization process this becomes more complicated because at strategic level it is
important to have global perspective.
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4.1.11 Tactical Level. The tactical or operational level decisions are based on short term
activity and normally focus on day-to-day activities. The endeavor while taking routine
decisions is to ensure smooth functioning. These decisions are generally taken to manage
the product flow in the “strategically” planned supply chain effectively and efficiently.

4.1.12 Important Decisions for Perishables. There are basically four such major areas in
SCM of perishables business. There are both strategic and operational elements in each of
these decision areas:-

(a) Geographical Location.

(b) Production area.

(c) Storage or Inventory.

(d) Transportation and distribution.

4.1.13 Geographical Locations for Food Production. One of the most critical decisions is to
select the right location for processing / production. Thus understanding of the factors
affecting procurement of food is imperative and underlining of these factors in identifying
the geographical location for investment in procurement, processing, distribution and
marketing infrastructure is equally important. The geographic placement of sourcing points,
production facilities and storage points are the part of first step in creating a supply chain.
The location of facilities involves a commitment of resources to a long-term plan. Once the
size, number, and location of these are determined, possible paths by which the product
flows through to the final customer can easily be made. These decisions represent the basic
strategy for accessing customer markets, and will have a considerable impact on revenue,
cost, and level of service. The recent initiatives taken by many companies in India indicate
that when these factors were ignored they became one of the reasons for cost overrun and
quality issues in SCM. These decisions should, therefore, be determined by an optimization
process, that considers production costs, taxes, duties and duty drawback, tariffs, local
content, distribution costs, production limitations, etc. The location decisions are primarily
based on strategic reasons as well as have implications on operational efficacy and
performance level.
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4.1.14 Production Decisions for Perishable Foods. One of the most important decision in
developing an efficient supply chain of perishables is to balance the supply and demand. The
strategic decision would be to select the products to produce, locations to produce them,
allocation of suppliers to location, production locations to distribution centre’s and
distribution centre’s to customer markets. These important decisions will have major impact
on the revenues, costs and customer service levels of the company. Operational decisions
should also focus on detailed production scheduling. These decisions include the
construction of the master production schedules, scheduling production on farms, and
communication and extension strategy. Considerations vital for SCM is balancing the
demand and supply without compromising on safety and quality control measures at
production area.

4.1.15 Food Selection, Purchasing and Storage. Resources are required for the selection,
purchase and storage of food. A caterer must consider the optimum use of these resources
to produce the desired results. The aspects that need to be considered for selection,
purchasing and storing are:-

(a) Resources those are required for efficient selection, purchase and storage of food
in your establishment.

(b) Techniques for procurement you need in the market place.

(c) Various methods to store your equipment and food to avoid waste.

(d) Methods to deal with advertisements to get the best results.

(e) Objectives. The likely objectives should be able to:-

(i) Identify resources needed for food selection, purchase & storage.

(ii) Plan for food purchase.

(iii) Choose foods wisely.

(iv) List techniques for food purchasing.

(v) Store food and equipment appropriately.

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4.2 ANALYSIS OF INDIAN FOOD INDUSTRY

4.2.1. Concept. India can become the food supplier of the world. It has the required
cultivable land and all the seasons for production of all varieties of fruits and vegetables.
Also an agribusiness system that works well, although it needs to be vastly improved. The
single most important problem facing the Indian agricultural industry is the highly inefficient
supply chain. It is because of lack of cold chain infrastructure and also a food processing
industry. Incidentally approximately 20 per cent of all foods produced in India (Rs. 500 b)
gets wasted. Establishment of an efficient and effective supply chain using state of the art
techniques shall make it possible to serve the population with value added food, while
simultaneously ensuring remunerative prices to the farmers. The surplus of cereals, fruits,
vegetables, milk, fish, meat and poultry can be processed as value added food products and
marketed aggressively both locally and internationally. Investments in cold chain
infrastructure, applied research in post harvest technologies, installation of food processing
plants in various sectors and development of food retailing sector are mandatory for
achieving gains in this sector. Strategic growth plans for achieving both national and
international competitiveness of the food industry are essential.

4.2.2. Emerging Opportunities. It is important to identify emerging opportunities in the

food and cold chain sector in India and find ways and means in which existing market
challenges in India can be overcome using technology and experience. In particular there is
a need to identify opportunities for improvement in real estate and cold chain
infrastructure, establishing food processing plants, wholesale, retail, third party logistics and
technology.

4.2.3. Indian Agricultural Industry. India out of total land available has, 52% of cultivable
land as against 11% in the world. All 15 major climates of the world, snow bound Himalayas,
hot humid Southern peninsula, Desert to Ghats and heavy rain belts are all available in India.
There are 20 agro-climatic regions and nearly 46 types of soil out of 60 varieties available in
the country. Sunshine hours and day lengths are ideally suited for round the year cultivation
of crops. India can well be defined as centre for biodiversity in plants, animals, insects,
micro-organism as it accounts for 17% animals, 12% plants and 10% fish genetic resources of
the globe. In the live stock sector, India has 16% of cattle, 57% of buffalo, 17% of goat and 5
% of sheep population of the world. Agriculture contributes 24.2% to GDP, 15.2% of total
exports and provides employment to 58.4% of country’s work force. The FICCI report of
October 2004 also specifies that India is the:-
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(a) Second highest fruit and vegetable producer in the world (134.5 million tons)
and the cold storage facilities are available only for 10% of the produce.

(b) Second highest producer of milk with cold storage capacity of only 70,000 tons.

(c) Fifth largest producer of eggs. Investments of Rs 500 Crores required in cold
chain to store 20% of surplus of meat and poultry products.

(d) Sixth largest producer of fish with harvesting volumes of 5.2 million tones.
Investment required is estimated to be Rs 350 Crores.

(e) India even with such vast natural resources and abundant agricultural produce
ranks below 10th in the export of food products.

(f) Estimates put processing levels in the fruits and vegetables sector at 2%, meat
and poultry at 2%, milk at 14%, fish at 4%, bulk meat de-boning is to the tune of 21%.

(g) The food processing sector, though in the nascent stage, constitutes 14% of
manufacturing GDP amounting to products value of Rs.2, 80,000 Crores. It employs 1.30
crore persons and the increase is at an annual rate of 7%.
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4.2.4. Food Processing Industry. Food processing industry has a vital role to play by linking
the farmers to the end consumers in the domestic as well as the international markets. Food
processing combined with marketing has the potential of solving the basic problems of
agricultural surpluses, wastages, paucity of rural jobs; create better remuneration to the
growers. In the next ten years, food production is expected to double. The produces if
processed and marketed appropriately, can make India a leading food supplier of the world.
India with a population of 1.20 billion (growing at about 1.7 % per annum) provides a large
and growing market for food products. Food products accounting for as much as 49% of the
total spending are the single largest component of private consumption expenditure. The
upward mobility of income classes and increasing awareness as well as need for
convenience and hygiene is driving demand for perishables, non food staple and processed
foods. Eating out is becoming a culture and thus a booming practice in urban India.
Processed foods are accepted as alternative to the home cooked food because of the
convenience offered. Globalization of trade and efficient SCM provide the food retailers in
developed countries avenues to source a year-round supply of fruits and vegetables from
developing countries. Thus, both for local consumption as well for export there is a year
round opportunity for fruits and vegetables, meat and poultry products and ready to eat
processed foods. The processed food industry needs to introduce innovative new products
of high quality at low cost in small package sizes in ready to eat format to cash on
this booming opportunity, however due to extensive manual handling the food hygiene and
quality become suspect. Multinational companies have entered the food value chain in
India, Cargill and Conagra in Agri-inputs, Tropicana in food processing and Metro in
wholesaling. Local companies like Dabur, MTR, ITC, Godrej, and Amul are aggressive across
the value chain. Multiple restaurant chains such as McDonalds, Pizza Hut, Dominos, Coffee
day, and Saravana Bhavan, and Sagar Chains are growing rapidly. In spite of this entire pace
the food sector is slow as compared to the other sectors such as IT and Pharma. There are
no billion dollar players in India in the food industry where as China and Philippines have
several large players with sales exceeding US $ 1 billion. Food processing chain along with
food safety has become an important aspect and has been depicted pictorially along with
interface food safety control points in the Figure 4.21 below:
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FOOD PROCESSING CHAIN

FIGURE 4.21

4.2.5 Food Supply Chain. India has large opportunities to become a leading global food
supplier. There is need for right marketing strategies and agile, adaptive and efficient SCM.
India has diversity in terms of its population with several religious groups with different food
habits and culture. This diversity should be used to advantage to become the “Halal Food
Hub”, the “Organic Food Hub”, the “Vegetarian Food Hub” and the “Sea Food Hub” among
others. The food supply chain is complex with perishable goods and numerous small stake
holders. In India, the infrastructure connecting these partners is very fragile as each stake
holder: farmers, wholesalers, food manufacturers, retailers all work in silos. The demand
forecasting is totally devoid and the farmers try to push what they produce in the market.
Activities such as data integration, financial flow management, supply-demand matching,
collaborative forecasting, information sharing, goods movement synchronization through
efficient transport scheduling, are facets of efficient SCM and very well practiced in high
technology industries accruing immense benefits. These efficient SCM practices need to find
their way in the food supply chains.
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4.2.6 Cold Logistics. These supply chains also need to take advantage of technology
improvements in data capture and processing, product tracking and tracing, synchronized
freight transport transit times for time compression along the supply chain. The SCM need
to be designed and built as a whole in an integrated manner with the processes of new
product development, procurement and order to delivery processes well designed and well
supported using IT tools and software. The food supply chain can be subdivided into a
number of sectors. Agriculture, horticulture, fisheries and aquaculture are the primary
producers, the manufacturers who process the food for ready to eat or cook format
together with the packaging companies are in the intermediate stage, and the retailers,
wholesalers and caterers are in the last stage of the supply chain. During each stage value is
added by the new ownership such as processors, distributors, packers, etc. and the cost and
profits are part of the business. The food items can go to the final consumer from any of the
three stages:-
(a) Farmers in the form of fresh produce.
(b) Caterers directly from the manufacturer.
(c) Retailer (small or big) to the consumer.

4.2.7 Food Supply Chain Cluster. Food chain clusters are formed with the participation of
various stake holders such as farmers, seed growers, merchants, transporters, wholesalers,
retailers, financial institutions, and insurance companies. However information sharing is
utmost essential for generating efficiency, Internet and mobile communications assist in
enabling transfer of information and finances between the stake holders. In advanced
countries, the retailers (Walmart, Tesco, etc) have become the Channel Masters of food
supply chain taking over from the food manufacturers. In India, with no superstores, no
economies of scale, too many intermediaries, there is a vacuum and there is no suitable
channel managing or coordinating the supply demand, supply chain or managing the
logistical activities. There is tremendous opportunity for smart players to enter a growing
market with a high potential of retail FDI but one needs to remember that the infrastructure
capital outlays are high and the returns are long term, as well as there are numerous risks
associated with owning a cold chain viz. country risk, monsoon risk, crop or raw material
supply failures due to pests, diseases, etc., partner risk, and numerous others. In India, there
are very few large food manufacturers. Amul, Ruchi, Soya, Nestle, MTR, ITC, Dabur,
Britannia, HLL’s food and beverages section, beverage companies such as Coke and Pepsi
are some of the big names. In poultry Godrej Agrovet, Suguna, Pioneer and Venkateswara
hatcheries are some of the companies integrating operation end to end, from breeding to
ready to eat chicken foods. High taxes on processed food, high import duties, nascent
contract forming, make the profitability a big issue in India. There are several regulatory
changes that need to be made all along the supply chain so that they are consistent and
mutually reinforcing.
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4.2.8 Features of Cold Chain. Cold chain in a logistic system providing a series of facilities for
maintaining ideal storage conditions for perishables from the point of origin to the point of
consumption in the food supply chain. The chain needs to start at the farm level e.g. harvest
methods, pre-cooling etc. and function up to the consumer level or at least to the retail
level. A well organized cold chain reduces spoiling of food products, retains the quality of
the harvested products and guarantees a cost efficient delivery to the consumer with
adequate attention for customer service. The main features of the chain are that if any of
the links is missing or is weak, the whole system fails. The cold chain SCM generally consists
of:-

(a) Pre-cooling facilities.

(b) Cold Storages.

(c) Refrigerated Carriers.

(d) Packaging.

(e) Warehouse and Information Management systems.

(f) Traceability.

(g) Financial and Insurance Institutions.

4.2.9 Cold Chain Management. The cold chains are an important proportion of the retail
food market. Fast foods, ready to cook meals and frozen products have increased in market
share in recent years. There are several food temperature levels to suit different types of
products, frozen, cold chill, medium chill, and exotic chill are some of the frequently
nomenclatures with identified temperature ranges. The range of temperatures is dependent
on the products whether it is meat or ice cream or potatoes or bananas. Failure to maintain
appropriate temperature regimes throughout the product life cycle may shorten the
product life or adversely affect its fitness for consumption. Cold chain management thus
involves maintaining appropriate temperature regime when the product travels say from a
farm in Himachal Pradesh to the consumer in London or New York City. That is why the
logistics challenge is formidable in food chains, which is cost conscious industry. There are
several government levied regulations in all countries and the responsibility to maintain
hygiene and standards falls on the food retailer or manufacturer (See figure 4.21 above).
The recent developments in electronic tagging prove to be very useful for monitoring the
temperatures and also the shelf life of the product.
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4.2.10 Supply Chain Expertise. There is a need to adapt the concept of Efficient Consumer
Response (ECR) which was introduced in the United States in the 1990s and is now followed
worldwide in grocery supply chains. ECR is applicable to a set of strategies that endeavour
to get companies across a supply chain to work closely to serve their customers better and
at lower cost. Consumers thus benefit from improved product availability and choice, while
distributors and suppliers derive better efficiency and cost savings. Collaborative planning,
forecasting and replenishment are another area which has yielded substantial savings for
retailers. Relationship between the stake holders in the supply chain is of paramount
importance for ECR and other relationship paradigms to work.

4.2.11 Food Packaging. Packaging of food products due to its hygienic and usage
importance is becoming competitive with every day. Dairy products, edible oils, farm
products, sugar, fruit juices, concentrates, preserves, hot and cold beverages, breakfast
foods, biscuits in confectionery and Atta, are some major foods of daily necessities where
packaging has excellent potential and growth areas. Packaging has become a competitive
tool to reach the consumer and the task assumes increasing responsibility with more and
more of competitive and substitute products being introduced. The sector has been opened
to various avenues such as, introduction of modern technology for processing and packaging
and entry of host of new organizations from all sectors of the economy both domestic and
overseas. Packaging not only enhances the life of the food product it also adds on to the
convenience of carriage, usage and attractiveness. The cost of packaging can vary anywhere
from 10 to 64% of production costs and efforts need to be made to reduce this cost as it
effects the consumer, by the use of manufacturing automation and economies of scale.
Reusable packaging can also be resorted to in certain cases of food products.

4.2.12 Standardization. It is a powerful tool for improving SCM efficiency. There are
basically two types of standards in the food supply chain. The first one is the food standard
that concerns itself about the content and the manufacturing process and the packaging etc.
There are several such standards for dairy, poultry etc. The second standard concerns
regarding the logistics and IT systems like standardization of cartons, pallets and IT software
so that seamless transfer of goods and information is possible. Standards enable partners
across the supply chain to enjoy increased productivity and economies of scale due to better
compatibility and interoperability of their systems and processes.
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4.2.13 Food Safety and Hygiene. Food safety has become a growing concern across the
world and there is increasing need to provide greater assurance about the safety and quality
of food to consumers. The enhancement in world food trade and the advent of the Sanitary
and Phy to sanitary Agreement under the World Trade Organization (WTO) have led to
increasing recognition and adoption of food safety measures. The capacity of India to
penetrate world markets depends on its ability to meet increasingly stringent food safety
standards imposed in developed countries. Food standards are expected to acquire greater
importance given increasing concerns on food safety on the back of breakout of diseases
such as BSE, Avian Influenza and Bird Flu etc. on the one hand, and growing consumer
demand for products which are healthy on the other. Compliance with international food
standards is a prerequisite to gain a higher share of world trade.

4.2.14 Training. The food supply chain is going through a period of transition and needs to
be supported through new organizational forms manned by specialists. Training, coaching,
counseling and mentoring have to be extended to all the players in the supply chain. For
example, it is important to conduct courses and training sessions on cold chain management
to raise the knowledge and awareness on the importance of implementing the cold chain
management to ensure that there is no breakdown in maintaining the required temperature
throughout the supply chain. In this way a pool of skilled workforce with good knowledge of
cold chain management to meet the needs of the industry to be a cold chain will be
generated. The same is also applicable to other areas in the food supply chain such as
procurement, retailing etc.

4.2.15 Business Model. The food processing industry SCM commences at the farm and
culminates with the consumer. The local consumer could be served though home delivery or
through a retailer or a neighborhood kirana store. However an international consumer can
be served through food malls, thus the products need to be so manufactured to cater for
local consumer as well for export. It is important to forecast the demand for each of the
channels and serve the customer within the expected lead time. The service levels and the
pricing will determine if the customer returns for his or her next purchase.
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4.2.16 Government Policy. Food and Agriculture are important national activities and affect
the well being of its population. The policies thus formulated by the government play vital
role for farming, production, processing, distribution and retailing and also in financing
these activities and this becomes all the more important in view of the globalization of the
food industry. Permitting foreign operators for food production, distribution and retailing is
a decision of national importance and these decisions need to be consistent all along the
SCM, mutually reinforcing and not contradictory. There are several regulatory measures
handled by multitude of departments divided between State and Central governments.
While some of this is inevitable but streamlining by looking at the SCM would be extremely
productive. Research also needs to be initiated to develop indigenous packaging materials,
machines, laboratories for developing new food products and more importantly protocols
for storage and processing food raw materials.
4.2.17 Government Initiatives. The Government of India has accorded high priority to the
establishment of cold chains and encourages major initiatives in this sector. Salient aspects
are as follows:-
(a) Foreign equity participation of 51% is permitted for cold chain projects.
(b) There is no restriction on import of cold storage equipment or establishing cold
storages in India.
(c) National Horticulture Board operates a capital investment subsidy scheme which
provides 25% (Maximum Rs.50 lakhs) subsidies to the promoter. Furthermore, to handle
the expected higher agricultural production, the Inter Ministerial Task force on
Agricultural Marketing Reforms constituted by Ministry of Agriculture, Government of
India has recommended the creation of additional cold chain facilities at an investment
cost of Rs. 2500 crore of which Rs. 625 crore are to be provided as subsidy and the rest
has to come as private investment. They have also suggested modernization of existing
facilities with an investment cost of Rs. 2100 crore of which Rs. 525 crore are to be
subsidy and the balance to come as private investment.
(d) The state governments also have taken initiatives in the food processing and
cold chain sectors. Gujarat government has accorded priority to agro processing and
horticulture, in view of the high export potential for fruits like mango, banana and
Chikoo. The government supports the sector by providing assistance to farmers for
agricultural inputs, developing systems like drip irrigation and encouraging development
of infrastructure facilities like warehousing, cold chain, etc for better pre-harvest and
post-harvest crop management. Gujarat also has good logistical infrastructure such as
airport, seaport and extensive road & railway network. Other states such as
Maharashtra, Andhra Pradesh, Kerala and Punjab also have similar schemes in place.
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4.2.18 Agri Export Zones (AEZs): The concept of the AEZ attempts to take a comprehensive
look at a particular produce/products located in a contiguous area for the purpose of
developing and sourcing the raw materials, their processing and packaging, finally exporting
them. The entire effort thus is centered on a cluster approach of identifying the potential
products, the geographical region in which these are grown and adopting an end to end
approach of integrating the entire process, right from the stage of production till it reaches
the market. The government helps in sourcing for raw materials, setting up of processing
facilities, providing finance at low interest rates and even matching with international
buyers. The export zones mooted by the Agricultural and Processed Food Products Export
Development Authority to increase international trade in agri-commodities are an attempt
to take a holistic approach to encouraging trade in specific commodities located in
contiguous areas. For instance in the different states the AEZs would focus on differently:-
(a) Tamil Nadu focuses on grapes, mangoes and Chikkoo.
(b) In Kerala the focus is on vegetables.
(c) In Punjab and Haryana focus is on kino, wheat and rice.
(d) Karnataka the focus is on vegetables and flowers.
(e) Maharashtra the emphasis is on mangoes, grapes and flowers.
(f) Gujarat focuses on bananas, mango, castor and garlic.
(g) Uttaranchal the focus is on litchi and medicinal plants.

4.2.19 Private Sector Initiatives. There are several private sector initiatives in the food
processing and service sector. A number of companies are actively working on integrating
the agriculture supply chain. These show the feasibility of operating efficient cold chains in
the India scenario. They could be treated as pilots and other projects can be built emulating
them. The cases which can be considered are as follows:-
(a) Mcdonalds-India, a fast food service operator growing its own ingredients such
as lettuce, potatoes, etc.
(b) AMUL which is a highly successful cooperative dairy in Gujarat.
(c) E-choupals which is an ITC success story of procurement of produce from small
farmers and is an example of supply chain management Indian style.
(d) Bombay dabba walah which is an excellent example of six-sigma forward and
reverse logistics delivery.
(e) ITC, Mahindra and Rallis together are creating a network of service providers
who offer information on weather and prices, credit, transport and assured demand.
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4.2.20 Windows of Opportunity in Food Supply. Opportunities available are as follows:-

(a) Cold Chain Infrastructure. Investments in real estate and cold chain
infrastructure are capital intensive and will yield slow returns. However, 100% FDI is
allowed in this sector. The Infrastructure consists of Coolers, Warehouses, Refrigerated
Trucks, Carriers, Shopping malls, etc.
(b) Third Party Logistics: The food supply chain is temperature sensitive and manual
handling reduces the product quality and life. Logistics providers with air conditioned
trucks, automatic handling equipment and trained manpower will provide end to end
support. They can also adapt state of the art techniques such as cross docking that will
reduce the transit times and inventory.
(c) Food Processing Industry: The Government of India allows 100% FDI in this
sector. There are incentives for setting up processing plants either in Agri –Export Zones
or outside of them. Sourcing of raw materials either fruits and vegetables or flowers or
meat is easier with an AEZ since the participants already exist with knowledge about the
industry standards. The opportunities in India are listed below:-

(i) Halal hub (Export to South-East Asia, Middle East).

(ii) Vegetarian hub (20% of Indian population + overseas).

(iii) Organic food hub (Export to Europe and USA).

(iv) Sea food hub ( India and Overseas).

(d) Retail: Retail is one of the largest sectors in the global economy and is going
through a transition phase in India. One of the prime factors for non-competitiveness of
the food processing industry is because of the cost and quality of marketing channels.
Globally more than 72% of food sales occur through super stores. In India there are 12
million outlets selling food and related items including push carts, wet markets and
neighborhood kirana stores. The kirana stores are generally located in small space and
have no cold storage facilities. They also have restricted capital resulting in lack of
shopping variety. The Indian retail sector is estimated to have a market size of about $
180 billion; but the organized sector represents only 2% share of this market. A strong
retail front-end can also provide the necessary fillip to agriculture and food processing,
and other industries. Currently 100% FDI is not allowed for foreign companies. India
presents a huge opportunity and is all set for a big retail revolution. India is the least
saturated of global markets with a small organized retail and also the least competitive of
all global markets.
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4.2.21 Research Opportunities in Food SCM. There are several significant research issues
for an emerging economy like India. The Agribusiness may look of low technology however
there are several innovations possible with tremendous consequences. Few are listed
below:-
(a) Strategic Level: India has adequate fresh food supplies which are currently being
wasted as also it has a very large local market. The Government can encourage
processed food manufacturers to set up mass production facilities and it can be
marketed through the fair price shops selling fresh foods. There is also a need to design
a country wide production and distribution system for each of the products taking into
account the constraints of power, infrastructure and water and identifying the possible
MNCs who can play a vital role in such a challenging task. The formats of small packages
combined with “buy before you eat” variety will reduce the load on cold chain and will
cater to the large section of people without refrigerators at home. Another important
area of research is to develop predictive models for concerns such as “What happens if
100% FDI is allowed in retail” and ’’ROI models for establishing cold chain
infrastructure” etc.
(b) Operational level: Planned produce as per demand rather than cropping as a
matter of routine is essential as this will probably lead to contract farming and ensure
quality of the produce. Design experiments to resolve problem of choosing the right kind
of inputs and the appropriate timing for various tasks such as seeding, weeding and
harvesting depends on the environmental parameters. Design of E-procurement and JIT
delivery systems for restaurants and hotels in big cities will save money on inventory,
wastage and bulk purchase. The above statement can be taken as a sample of research
issues of extreme significance to the country. There are several other methods that can
be thought of to tickle the minds while creating significant opportunities for growth.

4.2.22 Imperatives. India is all set to become the food supplier of the world. It has the
required cultivable land, has all the seasons for production of wide varieties of fruits and
vegetables, well developed indigenous agribusiness system. The business system is tuned to
food habits (cooking at home) and convenience (Kirana stores) of rural and urban folks of
the previous generation. Factors such as rapid growth in the economy, the technological
innovations in home appliances such as refrigerators microwave ovens, rise of families with
dual incomes and the changing food habits of the population all point to the increasing need
for healthy processed food. The supply chain sector is very weak with no process owner and
this can spell disaster. The food SCM needs the attention of the academics, the industry and
the Government.
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4.3 HOUSEHOLD SELECTION SCENARIO

4.3.1. Situation Illustration. Anita woke up one morning not knowing what to cook for her
family, even though she had all kinds of food commodities in the house. She was in deep
dilemma trying to figure out what to feed her family with which would be liked by all
members. Anita thus we can say is having a problem of selection or in other words she
cannot choose what to give her family and many of us do find ourselves in such decision
dilemma a number of times. Selection or choice of food is very important in meal
management. Providing food in a manner which is palatable and liked by the people can
be a complicated issue. SCM in food supplies decisions are required to be taken with
careful thought and due planning. Thereby it becomes imperative to understand the
aspects required to be looked into while selecting the types of food as it depends on
finances available, nutritional needs and effects of advertisements. Examination of each of
the factors as given below and their influence on food selection or choice can be understood
by the following:-
(a) Finances Available. The more money you have the more variety and quantity of
food you can buy and thus have greater choice. People who have a lot of money can
afford a variety of meals and also can eat away from home. People with small incomes
have a limited choice and it becomes a hard task to buy enough food to meet family
needs. If you have a limited food budget, you can save money by buying foods during its
season and buy cheaper items as well, after comparing prices in different shops.
(b) Likes and Dislikes. You eat to keep alive and healthy. At the same time most
people also eat to enjoy the food. People tend to eat food they like and avoid those that
they dislike. Is there any food you dislike? Why do you dislike it? Is this food very
nutritious:-
(i) Likes. Food is enjoyed when it is liked; it is also enjoyed because it
provides some sensations for your aromas and flavour that comes from food are
detected by special nerves in the sense organs of taste and smell. Sight and
temperature also have a great effect on the enjoyment of food. Cooking food often
develops the flavour and changes the texture of food. Many variety of food are
traditionally eaten hot or cold. If food is too hot or too cold its true flavour may be
masked and it may be unpalatable.
(ii) Dislikes. Food is normally disliked because of their colour, flavour /
texture. The food is of new variety and has not been tried earlier, does not look
attractive, may be associated with some ill feeling and maybe the way of cooking is
not appealing.
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(c) Advertisements. A great influence on food choice is due to advertisement.
Advertisements have a way of persuading people to make choices. These are ways in
which manufacturers and sellers tell us they have certain goods and services for sale.
Advertisements cost money thus the cost of advertising of a product is added to the
production cost to make up the price of a product. The cost of the product gets higher
with more number of advertisements. Food manufacturers and shops advertise their
products through television, radio, magazines, newspapers, posters and leaflets. Good
advertisements are decent, honest and truthful. They do not mislead the public about a
product. They show a sense of responsibility to people. They conform to fair competition
behavior of different manufacturers and businesses.
(d) Nutritional Needs. The food choice will also depend on your need for food;
everyone has a biological need for food as it is essential for life and without food one
becomes weak and ill. People vary the quantity /amount of food they need for reasons
like health, age and activity. The choice of food will therefore also depend on each of
these factors. Your nutrition knowledge also helps you to choose food that provides the
necessary nutrients to meet your needs.
(e) Food Purchasing. Food purchasing can be a interesting adventure or boring mis
adventure depending on one’s approach to it. To make food purchase interesting, one
has to know a lot about the market place and ways in which you can make the most out
of your food budget. There are some of the things one can do to avoid waste of your
time and money when purchasing food. Firstly one must know the factors that
determine the cost of the things to be purchased such as given below. These aspects can
explain how each of these affects the cost of the things bought:
(i) Production cost
(ii) The season, the market supply of the goods.
(iii) The demand of the goods.
(iv) Advertisements.
(v) Amount of processing etc.
(f) Production cost. This is the amount of money used to produce the item. In
the case of food, the production cost will include the money spent on cleaning the land,
sowing the seeds, harvesting and processing. The final cost of a product is determined
by this amount plus others aspects like transportation cost, profit and handling charges.
(g) Season. Seasonal differences in the cost of food occur frequently as food items
always cost less during their season because they are available in plenty and so the
supply becomes high. When market supply of a commodity becomes high the price of
the commodity falls. Food items that are out of season become scarce and therefore
their prices are higher.
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(h) Demand. Usually when more people want a certain item, its price increases, as
demand and supply are inversely related to each other.

(h) Food Processing. Processing adds value to products and it costs money thus food that
is processed to provide conveniences costs more than unprocessed one. These factors
affect the cost of products, thus having learnt about these factors one would then
know how to buy commodities so that one does not spend too much money.

(j) Factors Determining Amount to be spent on Food. Generally in most of the

cases food budget is one of the largest expenses; however careful planning and
purchasing can result in substantial savings. Normally if one is rich, they tend to spend
more money on food and poor spend less. Factors are as follows:-

(i) Personal preferences.

(ii) Your values and your lifestyle will all determine your food selection and hence
the money you spend buying food.

(iii) The skill of bargaining for example would help you to buy goods at the
cheapest possible cost.

(iv) Buying foods in season and in bulk also helps to cut down cost.

(v) Buying food from farm gates instead of from retailers also cuts cost. When you
buy food, buy them from places where prices are lower and is of good quality.

(vi) Buy food from places that are clean and where food is well stored.

(k) Forms. Food is also sold in many forms. The form in which you buy is
determined by the storage facilities you have, how much convenience you need and
what you want to use the food for. Foods are sold fresh, dried, frozen or canned.

(i) Fresh Food. Fresh food provides most nutrients since processing may destroy
the nutrients. Fresh foods are natural and do not require fortification or processing.
They therefore cost less. However, because they are fresh they get spoiled fast.
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(ii) Frozen Food. Frozen food is much nearer to fresh food as far as nutrient
content is concerned. Freezing prevents the action of enzymes and microorganisms.
Microorganisms are minute organisms which we cannot see but which can be very
harmful to us and can spoil our food. Frozen foods must be stored in the freezer in
useable quantities. However it must be remembered that when you thaw a frozen
food completely it must be used immediately to avoid spoilage. Thawed foods
should not be refrozen.

(iii) Dried Food. Dried food has their moisture removed. Some dried food like milk
powder, can be reconstituted by adding water. Dried food does not require
refrigeration. They are light in weight and take up less storage space.

(iv) Canned Food. Canned food is convenient to use as it will not get spoiled as long
as the can is not opened. Canned food should be stored in cool dry places. They do
not have the taste of freshly cooked foods, they are much more expensive than food
in other forms and however they have long shelf life. Unless canned foods are
fortified with nutrients they lose most of their nutrient content.
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4.4 PURCHASING

4.4.1. Shopping Tips.

(a) Choose the form that you can easily handle.
(b) Buy food which you can afford.
(c) Always make a shopping list to buy the things of need without wasting time.
(d) Choose the type and location of market appropriate to your needs.
(e) Compare prices and quality of commodity before you buy.
(f) Buy food items in bulk if you have storage facilities and money. It is always
cheaper.
(g) Do not shop when you are hungry; it makes you buy more than necessary.
(h) Do not take children along on shopping as you buy unnecessary things.
(i) Avoid impulsive buying, which implies buying things you did not plan for.
(j) When you buy canned or packaged food, look out for the manufacturing and
expiry date. Expiry date is the last day a product is considered fresh. A food may still be
safe to eat after this date but the taste and nutrient quality may not be good.

4.4.2. Don’ts. Do not buy processed foods when the following signs are seen:-
(a) Cans are bulging, dented or rusty as they may contain spoiled food & cause food
poisoning.
(b) Frozen food packages that are soft or soggy may have thawed for a long time
and may be spoiling.
(c) Refrozen foods can be detected as stained packages or crystallized products.
(d) Opened or damaged packages. Moldy or coloured dried foods.
(e) Meat or fish that has dull or slimy surface.
(f) Tetra pack if found bloated should be avoided.

4.4.2. Points Considered while Purchasing Food Commodities.

(a) Fruits and Vegetables. High quality fruits and vegetables are the ones that are
ripe, crisp, fine and free from bruises. Nutrients values of fruits and vegetables decrease
over a period therefore you should try to buy those that are fresh. Vegetables will
usually wither when kept in the sun or kept for too long.
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(b) Starchy Roots and Plantain. These food items form the staple food in many
homes and are relatively cheap but do not have good keeping quality and can be used
for a variety of food products. They are sold in fresh or dried and powdered forms.
Examples of such foods are plantain cassava, yam, cocoyam, water yam, potato and
taro. When purchasing these food items care must be taken so that only good quality
food is bought. Roots should be free from bruises since this would make them rot
quickly. They must be firm to touch. Softness in roots is a sign of spoilage. They must not
start sprouting. Ripped plantain should not have black spots on the skin.

(c) Animal Products. Food in this group is very expensive and gets spoilt very
quickly. The most expensive animal foods are not necessarily the most nutritious. If you
have limited resource you can still get good quality protein from cheap sources. When
buying animal food, quality and safety are very important considerations.

(d) Eggs. Eggs may have white or brown shells. The nutritive value is the same. Eggs
can be bought fresh or dried. While buying eggs always look for shells that are rough and
not shiny. Test for freshness by putting it in a jar of salt water. When it floats the eggs is
stale and buy eggs those are clean and not cracked.

(e) Milk. Milk is sold in liquid or powdered form. Your choice will depend on what
you want to use it for and the storage facility you have. Milk can be bought fresh. Its
keeping quality is not good especially outside the refrigerator. When milk tin is opened
and used the remaining milk should be poured out of the tin and kept in the refrigerator
or a cool dry place, well covered.

(f) Legumes. These include groundnuts, cowpeas and soya beans. Legumes are sold
shelled or unshelled, dry or canned. When buying legumes you must buy the ones that
are not infested with weevils, also they must not be mouldy. It is better to make your
own groundnut paste than to buy from the market. Often groundnut paste is
adulterated before it is sold in the market.

(g) Cereals. Cereals are normally sold in grains or in powdered form or as breakfast
cereal. When buying cereals there is need to avoid the ones that have weevils or have
grown moulds. Mouldy cereals are not good for consumption. Make your own corn
dough instead of buying from the market.
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(h) Food Storage. Food commodities that are purchased from the market must be
stored well if they must keep their quality. Food is stored mostly because we want to
keep it safe and prolong its shelf life. There are three types of food storage. These are:-
(i) Dry storage.
(ii) Refrigerator storage.
(iii) Freezer storage.

(i) Dry Storage. Food to be kept dry is usually stored in cabinets or store rooms.
Cereals, canned foods packaged foods and other dry food items should be kept in cool
dry and clean places in the kitchen. Food should not be stored above refrigerator/
cooker or near any heat outlet. The temperatures of these areas are warm and favour
growth of microorganisms. Storage areas must be kept clean.

(j) Refrigerator Storage. Refrigerator temperatures should be between 0 deg C and

7 deg C. Temperatures in the refrigerator vary depending on the part of the refrigerator.
Foods stored in the refrigerator must be covered well so that it would not dry out or
absorb odour from other foods.

(k) Freezer Storage. The temperature of the freezer should be – 18 degrees C or

below. Frozen foods be kept in their original packages in the freezer. Foods to be frozen
should be wrapped in moisture and vapour proof wrapping and arranged properly in the
freezer. After shopping frozen food must be stored immediately in the freezer, so that
they will not thaw completely.

4.4.3. Summary. Food selection, purchase and storage require use of many resources,
important ones being time, energy, money, storage facilities, knowledge and market. A
good market list is required when shopping to avoid waste of resources and impulse buying.
When food is chosen wisely one can save a lot of money while providing adequate meals.
Food stored properly is safe and lasts longer. These aspects need to be well understood in
SCM in food supplies.
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4.5 SCM OF FOOD SUPPLIES: INDIAN PERSPECTIVE

4.5.1 Indian Markets. India over the past two decades has seen rapid transformation of
food supply chains. Modern retail sales have grown exponentially at nearly 49 percent per
year and are rapidly penetrating urban food markets and rural markets. The food-processing
sector has also grown concentrating and undergoing a rapid increase in the capital-output
ratio however with little increase in employment. The modern segment is emerging in the
wholesale sector with the penetration of modern logistics firms and specialized modern
wholesalers. However, the broad traditional segment of the wholesale sector is also
transforming wherein the supply chains are shortening more so as village brokers are
reduced to a minor role and as Public Wholesale Markets (Mandi’s) wholesalers are buying
directly from farmers. In addition cold stores have also expanded rapidly and have taken on
the wholesale functions to the extent of supplanting wholesale markets and provide credit
to farmers. This all indicates a ferment of change in supply chains, which in the medium or
in due course run can transform the conditions for betterment, contrary to as faced by
farmers. The main player by far in this unfolding quiet revolution is the private sector—
whether modern or traditional. The direct role of the government as buyer or seller as on
date is only seven percent of the food economy in India. The private sector, both modern
and traditional, decides the food security of India. Policies that enable and provide
encouragement to that sector to invest will decide the future of food security.

4.5.2 Rural to Urban Areas. To have a clearer picture we need to focus on the structural
transformation of food supply chains from rural to urban areas. There is also a need to
focus on the transformation in the supply stream, downstream which being the retail
segment of the supply chain and midstream being the food processing and
wholesale/logistics segments of the supply chain. The transformation in Rural to Urban
supply chains need to be understood as these are critical to the food security of urban
Indians, which number around 79 million being 18 percent of the population (in 1961) and
was approximately 350 million being 30 percent (in 2010) and will be an estimated 590
million by 2030, 40 percent of the Indian population and greater than the current entire
European Union (Figures are from Ministry of Home Affairs). The SCM of food supply chain
also becomes critical to the incomes of hundreds of millions of those employed in rural and
urban areas as farmers, wholesalers, truckers, processors, and retailers participating in
these supply chains. (These estimates may even be substantial underestimates of urban
shares in India, as discussed in Sivaramakrishnan, Kundu, and Singh (2005)).
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4.5.3. Rural–Urban Food SCM. The focus being on the chain from farm to retailer or
consumer, it emerges that there have been three principal changes in India’s rural–urban
food supply chain over the past several decades as discussed below:
(a) The food supply chain volume has tripled in the past three decades. Urban food
expenditures have tripled in real terms over the past 35 years, to US$45 billion by 2006
(Based on a series of representative national household surveys from the National
Sample Surveys [NSSs]). The trend indicates urbanizing of the Indian food market. In
1971, urban food expenditures made up for about one-quarter of total national food
expenditures, whereas by 2006, this had increased by more than one-third. This
increase has been nearly completely supplemented by domestic production, as India
exports and imports a very small share of its food economy and exports more food than
it imports.
(b) The food supply chain composition has also diversified over the past three
decades. The share of cereal consumption in the urban food basket has declined from
36 percent in 1972 to 23 percent in 2006. In the same period, the share of cereals in
rural areas declined from 56 to 32 percent (India stat). There by reflecting that
approximately 29 percent of India’s food economy has been in cereals in 2006, as
against 52 percent in 1972. Incidentally the food security debate tends to focus
narrowly on grain where as Non grain food (dairy, pulses, fruits, vegetables, meat, and
fish) is 71 percent of India’s food consumption and also is an important source of
calories, protein, and vitamins.
(c) The Indian Government’s direct role in the marketing of grain output doubled over
the past three decades, from 12 percent of grain output in the 1970s to 24 percent in
the early 2000s (As cited in Rashid, Cummings, and Gulati 2007). However, the
government’s role in food market as a share of the overall food economy is very small
and has stayed nearly constant over the three decades—at 6 percent in the early 1970s
to 7 percent by the mid-2000s. (This was worked out by multiplying the government
procurement share over times the share of grains in the food economy). The
government, as a direct player, is a very minor actor in the Indian food economy.
Although the government has transformed the grain economy by increasing the market
share of the parastatal at the margin—from 12 to 24 percent—the grain economy and
the overall food economy are overwhelmingly operated by the following:-
(i) Private Sector. Mainly traditional private players are such as Mandi
traders, private mills, village brokers, traditional retailers and now increasingly also
modern private sector including agribusiness, large food processing companies and
supermarkets.
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(ii) Market Channels. Both private-sectors led modern retail, food processing,
food service industry and public-sector led parastatal wholesaling, processing, and
retail have shown higher annual growth rates than overall urban food expenditures.
(iii) Enterprises Operating. This effectively means that large enterprises also now
operate in the sector along with modern private-sector players for example;
retailers, processors, logistics firms etc. procure directly from farmers. These reforms
have been progressively enacted over the past decade—in some cases pan-India and
in other cases over some states.
(iv) Structural Transformation. In the structural transformation we proceed from
the downstream segments in the supply chain mainly retail and food service to the
midstream segments involving processing and wholesale. While we find a substantial
ferment of change, both in the emergence of the modern sector and in the
transformation of the traditional market channels.
4.5.4. Supermarket Revolution. Food retail is transforming in Indian cities both in stores as
well as in food service establishments, such as restaurants and fast-food chains. The focus is
on the example of the rise of modern food retail in chains of supermarkets, hypermarkets,
convenience stores, and neighborhood stores. An emerging and potentially important factor
in the medium to long run in transforming rural–urban food supply chains in India, is the rise
of modern food retail. (Reardon, Timmer, and Minten 2010; Reardon and Minten 2011a
have analyzed and reviewed the recent changes with a unique dataset and a substantial set
of key informant interview case studies, and which reviewed earlier research, such as Joseph
et al. (2008) and others). The rise of Indian modern food retail that makes its path
somewhat different from other developing countries, its recent supermarket revolutions
are:-

(a) Modern retail in India has developed in three waves. The first wave was
establishment of government retail chains, started in the 1960s and 1970s. The second
wave was cooperative retail chains, starting in the 1970s and 1980s. The third has been
the rise of private retail chains in the 1990s and 2000s. This third wave occurred in two
phases:-

(i) The first phase, from roughly the mid-1990s to the early 2000s, was
southern-India focused, middle-class centered, and domestic–foreign joint ventured.
It also was very small compared with the second phase.
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(ii) The second phase, which started in the mid-2000s and has proceeded to
the present and we expect it to continue for some years, has occurred throughout
India and is mainly in the middle class, though in some formats and places it has
moved into the lower-middle and upper working class, as well as into smaller cities
and even rural towns. The second phase has been mainly driven by domestic capital.
(b) The surprise factor about this first trend is not that there were waves of modern
retail rise, starting with state retail and then cooperatives and then private retail chains.
Indeed, this has been a common pattern in a number of other developing countries. The
surprise factor has been that right into the takeoff of private modern retail in the past
five or six years, the state chains such as Fair Price Shops are still a major force, for
example, the Fair Price Shops equivalent of a major chain are the cooperative retail
chains, such as Reliance Fresh, Mother Dairy/Safal (again, equivalent in sales to a major
private chain). This means three different modern retail transformative models vie and
compete to diffuse food system change.
(c) The rise of modern private retail in India in the past six years has been
exponential, growing at 49 percent per year. The great majority around 75 percent of
modern private retail rose from 2006 to 2010. (As given in Delhi-specific study by
Minten, Reardon, and Sutradhar (2010), which showed similar rates). By 2010, the sales
of the leading 20 private chains that sold food were roughly US$5 billion, of which about
US$2.5 billion was for food. This is approx 6 percent of urban food retail; it is still a small
share of the market. However, this share was below 1 percent 6 years earlier so the
change has been rapid. (The above share for private retail is corroborated by the
findings of Minten et al. (2010) for Delhi, where it has been shown that supermarkets’
grain share is 7 percent and fresh produce share is around 4–5 percent).
(d) The Indian private retail chain development has unique or rare characteristics:-
(i) It is driven by domestic capital investment, rather than by the more
common FDI driven retail expansion seen in many other developing countries.
(ii) It is early in terms of usual international patterns, in diversifying into small
format stores. It is early in its penetration of small cities and even rural towns and
areas, such as rural business hubs like DCM Shriram consolidated Hariyali Kisaan
Bazaar and ITC’s Choupal Saagar.
(iii) It is early in its initial penetration of the food markets of the poor and
lower-middle class and of fresh produce retail. These unique factors have helped
propel the rapid diffusion of private retail chain development.
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(e) The drivers of these three retail trends as given above can be hypothesized to
the following main determinants:-
(i) Food insecurity and persistent poverty.
(ii) Rapid income growth.
(iii) Rise of the middle class in India.
(iv) Rapid increase in expenditures on consumer durables and Fast-Moving
Consumer Goods (FMCG).
(v) Urbanization—overall and growth of Tier 2 and 3 cities and towns.
(vi) Growth of the rural economy.
(vii) Partial liberalization of FDI distribution. Partial liberalization of procurement
rights of retailers.
(viii) Retail transformation via government and cooperative investments from the
1960s and 1970s onward.
(ix) Rapid growth in investible funds from the financial sector, corporate
earnings, and remittances.
4.5.5. Effects of Modern Retail. The growing importance of modern retail might have
important effects on the rural–urban food supply chain. The modern retail appears to be
having emerging effects both midstream and upstream in the food supply chain (Reardon
and Minten 2011b; Minten et al. 2009). On one hand the supermarkets offer a large
selection of staples and processed / semi processed products, reflecting the larger emphasis
on these types of products in urban areas, which may serve to expand, concentrate,
diversify, and modernize the food-processing sector. On the other hand for their fresh
produce needs, modern retailers in India, as in other developing countries, currently
rely on a mixture of procurement mechanisms, including sourcing from brokers on
wholesale markets in spot transactions as also from specialized and dedicated
intermediaries on wholesale markets, from their own collection centers and a maybe from
their own farms. Presently, seemingly the most important procurement method is from
current small scale of modern retail operations, procurements from wholesale markets
through brokers and also directly through wholesale markets. However, some large
investors in the modern retail sector for example, Reliance are engaged in pre - urban
collection centers, where traditional market channels are bypassed, especially for
perishables like leafy greens mainly for large city stores. Farmers usually gain under these
circumstances, because transaction costs are reduced due to lower transport costs and as
collection centers are set up close to producers, faster turnaround, no auctions taking place,
no waiting for buyers, reliable weighing, transparent pricing and immediate payments.
However, modern retail establishments often have strict quality requirements
regarding the produce they purchase, and they often procure only better-quality products.
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Firstly this means that when supermarkets procure directly from farms in India, they do so
from small or medium rather than marginal farmers and from farmers with more non land
assets, such as irrigation. Secondly there is emerging evidence that modern retail charges
lower prices than traditional retail, which may prove an urban food security boon from retail
transformation as it is seen that prices charged for a number of products (rice, wheat
flower, vegetables, fruit, edible oil) were lower than or at the same level as those charged
by traditional retailers. The modern retailers might deliver these products at cheaper rates
because of more efficient procurement systems through better SCM and better in-store and
in-distribution-center inventory management and handling.

4.5.6. Emerging Transformation Midstream: Processing Sector. The food-processing sector

has also been transforming in the past two decades. The salient trends are as follows:

(a) First Processing Products with Added High Value. Products are made to undergo
complicated processing and have a larger value added—between 5 and 15 percent.
However there is no adding of ingredients and neither product is mixed. Examples are
dairy products such as butter, curd as well as meat, fish, and sugar.
(b) Second Processing Products. These are those products that have as an input a
first-processed product and to which another product (a flavor, a preservative, or
another ingredient) is added. Examples include biscuits, bread, ghee, ice cream, and jam.
These form 10.2 percent of urban food expenditure and 5.7 percent of rural.
(c) There has been increasing consumption of processed food, mirrored by the
increasing size of the processing sector. The output of the food-processing industry has
doubled over the past 15 years: climbing from 628 billion rupees in 1984/85, to 991
billion in 1994/95 to 1,215 billion in 2000/01 (Bhavani, Gulati, and Roy 2006).
(d) The share of processed food in total food consumption is higher than typically
thought, even though the share of moderately and highly processed food is still only
about 50 percent of food in urban areas and 40 percent in rural areas.
(e) Primary products are those consumed without processing include fruits and
vegetables, eggs, and fluid milk at the farm. Non processed products form only 16.8
percent of food consumption in urban areas and 15.3 in rural areas. Thus, roughly 83–85
percent of Indian food products are consumed processed.
(f) The processed food consumption rises with income and urbanization. During a
study on dividing the urban population into 12 income categories it was found that the
poorest and richest groups spend about 30 percent and 58 percent respectively of their
food budget on a high processed food category The result implied that with rise in
income the consumption of processed food increases, which is a typical global result,
including in developing countries (Wilkinson 2004).
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(g) The traditional sectors related to oil, fats, grain, sugar, dairy, and tea and coffee,
dominate the food-processing industry with 80-85% of total processing output,
employment and factories. Three industries viz. oils and fats, grain, and dairy, showed an
annual growth rate in output that was larger than the average for the processing sector
in recent years; thus, they are growing in relative importance. The processing share for
grains, oil, and sugar is nearly 100 percent and for other sectors, processing is relatively
unimportant, estimate is that only 2 % of fruits and vegetables are processed in India.
(h) There is emerging evidence of consolidation in the Indian food-processing
industry. This is at least partially driven by the de reservation. In 1987- 88, 18 food-
processing subsectors were reserved for small enterprise (Bhavani, Gulati, and Roy 2006,
citing Development Commission for Small Scale Industries 1992). It emerged that half of
these subsectors were de reserved leaving only pickles/chutneys, some vegetable oils,
bread and pastry and spice grinding etc. as reserved however tobacco and alcoholic
beverages as still licensed.
4.5.7. Emerging Transformation Midstream. There have been noticeably two sets of trends
in the transformation of the wholesale sector in India, firstly government driven and
secondly private-sector driven as discussed in subsequent paragraphs below.

4.5.8. Government Driven Transformation. The Indian Government has played a direct
transformational role in the retail sector and also an indirect transformational role by
regulating and investing in the wholesale sector. Both these roles gave rise to trends and
policies that had echoes in many other developing countries at roughly the same time
(Reardon and Timmer 2007). Details discussed are as follows:-

(a) Direct Transformational Role. In the 1960s, the government set up a parastatal to
directly procure grain as a wholesale entity. This plan was conceived because of the
assumption that the traditional wholesaler exploited farmers in markets and engaged in
profiteering, and speculating. The government set itself up as a substitute to the private
traders for a part of the market. The direct involvement was aimed at maintaining and
controlling reserve stocks, influencing market prices, and subsidizing the poor (Rashid,
Cummings, and Gulati 2007). This role has gradually increased in the grain sector over
the past three decades. The government’s direct role in the overall food sector is very
minor; with its share in total food expenditure market and subsistence remaining nearly
steady for 30 years at only 6–7 percent of the overall food economy. However, in the
grain quarter of the food economy, the government’s direct roles in procurement as
wholesaler and marketing as retailer of grain output doubled over the three decades,
from 12 percent of grain output in the 1970s to 24 percent in the early 2000s. Food
Corporation of India was instrumental in direct transformational role towards an
organized system of wholesale procurement.
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(b) Indirect Transformational Role. To transform the wholesale sector from the
traditional system, the Indian government undertook investment and regulation to
integrate and concentrate into nodes, rather than the fragmented and diffused structure
of the traditional system. To this end a public wholesale market system, as well as a
concomitant marketing regulation, was developed from the 1960s. First mandis were
built and then the five-year plans emphasized building of physical wholesale markets,
storage structures and warehouses, and transport lines (The Expert Committee on
Agricultural Marketing [2001], known as the Guru Report). It is estimated that in 1947
there were only 268 wholesale markets which by 2004 became 5,964 with 2,143 primary
mandis, 2,810 secondary mandis, and 1,011 nonregulated mandis. An example is the
establishment of Azadpur primary mandi located in Delhi. This large mandi covers 43
acres, with 438 big stalls of 600 square feet each, 796 small stalls of 200 feet each and
four million tons of fruits and vegetables exchanged per year in recent years. The focus
in terms of wholesale sector regulation has been on the Agricultural Produce Market
Committees (APMC) Act. The produce marketing regulation Agricultural Produce Market
Committees which started in the 1960s merely fits within the general trend. Moreover,
there was panoply of marketing public institutions set up during the third five-year plan
in the mid-1960s. The Agricultural Produce Market Committees at the state levels
merely fit into this general trend of forming government bodies to implement the
regulations, while also investing in the sector’s infrastructural development. The
injunction that all wholesale trade, and thus purchase from farmers, must pass through
the Agricultural Produce Market Committee mandis forbade contract farming, collection
centers by private retailers or wholesalers or processors, direct marketing from farmers
to consumers, and private wholesale yards. In short, this injunction was aimed at
funneling all trade from farmers to consumers through the Agricultural Produce Market
Committee mandis at some point. This was originally designed to break the back of what
was conceived to be an exploitative private trader system.
(c) Private Sector Driven Transformation. By the early 2000s, there was a crescendo
of criticism of the Agricultural Produce Market Committee system, emphasizing both its
inadequate performance relative to its purpose and the narrowness of its purpose
relative to the emerging needs for wholesale and logistics services in India’s
transforming overall food economy. The first critique the Agricultural Produce Market
Committee system’s inadequate performance was set out by the Guru Report (Expert
Committee on Agricultural Marketing 2001). The report starts by acknowledging that the
Agricultural Produce Market Committees regulated markets did some of what they were
originally intended to do that is to redress problems in marketing. It then goes on to say
that the initially promising approach developed into a system fraught with problems, as
follows:-
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(i) Agricultural Produce Market Committee has had limited success.
(ii) The requirement that trade must pass via the Agricultural Produce Market
Committee mandi has hurt competition.
(iii) Licensing has given way to entry barriers.
(iv) Agricultural Produce Market Committees were supposed to control
unethical practices in the mandis but have failed.
(v) Prior to or in the absence of Agricultural Produce Market Committees
reform, companies set up collection centers by obtaining a license from Agricultural
Produce Market Committees.
(vi) After Agricultural Produce Market Committees reforms in a state, retailers
and processors set up collection centers outside mandis (off-market), such as
retailers and wholesalers like Reliance and Metro in Maharashtra and Safal (Mother
Dairy) in Uttarakhand, or produce wholesale and processing companies, such as
Adani, which has controlled atmosphere apple distribution centers in Himachal
Pradesh. These collection centers are usually in peri- urban areas and source highly
perishable products (for example, greens) or semi perishables for stores in the city.
(vii) Companies as well as public-private partnerships have set up various
cluster platforms, such as private mandis, mega-food parks, integrated agrifood
parks, private chains of rural business hubs and logistic parks.
(viii) Companies have also started or extended contract farming, sometimes
also called as sponsored farming, after Agricultural Produce Market Committee
reform, such as Godrej Industries in Maharashtra.
4.5.9 Rise of Modern Private Food Wholesale SCM in India. Since recent past there has
been a rapidly emerging modern sector with cluster of food logistics, distribution, and
wholesale companies in India. Based on field case studies and a review of evidence we can
trace the rise of this segment and noted its symbiotic links to the rise of modern retail in
India. The main points are as follows:-
(a) Modern food retailers in India are increasingly shifting toward the use of
modern SCM and wholesale companies are directly sourcing from manufacturers, from
traditional stockiest and general-line wholesalers. This is especially true for processed,
refrigerated, semi processed and fresh food. In this sense, the food retailers are
following a general trend that has been seen elsewhere in Asia and also globally.
Retailers do this in order to cut transaction costs, increase consistency of quality, and
meet quality and safety standards and regulations. In the longer run in India, this change
can have the same effect observed elsewhere of accelerating the tendency to
consolidation in the processing, logistics, and wholesale sectors.
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(b) The corollary of the first point is that modern retail’s emergence appears to be
advantageous and encourages India’s food logistics and distribution sector, a leading
investor site, noted, “Logistics has a great potential in the wake of a retail revolution,
and so companies are game to capitalize on this high growth opportunity.”
(c) The other factor is such as promoting third-party food logistics investments. The
Economic Times (2009) noted that although only 20 percent of the logistics sector is
organized and the rest is informal, this percentage could rise with a reduction in
intermediation due to a shift from multiple warehousing to regional-based logistics with
a revision of the tax regime.
4.5.10 Ferment and Change in Traditional Wholesale Sector. The rural economy on long-
term basis is seen to be in an unchanging traditional system of privileged wholesalers
dominating trade. The village collectors or brokers dominate the interface of the market,
with both extending credit to farmers to tie their output and credit markets. It is also found
that instead of a stagnant rural market economy, there appears to be great ferment and
rapid transformation. It appears to be happening not at the same rate or in the same way in
all rural zones, but rather to be concentrated in certain areas—primarily in the swaths of
agricultural areas within the vast market catchment areas within six to eight hours of Tier 1
and Tier 2 cities. In the recent past farm, mill, cold store and trader surveys in west, central,
and eastern Uttar Pradesh and also Madhya Pradesh share certain key findings that run
counter to conventional wisdom about rural markets. (Das Gupta et al. 2010a, 2010b;
Reardon, Minten, Punjabi Mehta, Das Gupta, Rajendran, and Singh 2011; Reardon, Minten,
Punjabi Mehta, Das Gupta, Rajendran, Sarawgi, et al. 2011) The findings from these studies
as well as findings from comparable surveys reflect the following:-
(a) Firstly rural traditional market transformation is much more advanced in certain
regions of the states than in others. For example as per the survey findings, the West
and Central regions of Madhya Pradesh (Malwa Plateau) and West and Central Uttar
Pradesh are sharply different from the East regions of each of these states. The average
farm size is larger, farmland distribution is more unequal with 30 percent of farmers
owning 70 percent of farm land, land rental share is higher, marketed surplus rate is
higher, incomes are higher, livestock holdings and milk output are much higher,
chemical and fertilizer use is higher, credit use is higher, and all indices of traditional
market transformation are much higher.
(b) Secondly, similar differences were reflected by the surveys over other regions
which were also manifest over farm size strata. By contrast, the small farmers in the
dynamic areas and the medium farmers in all zones had assets and behavior
corresponding to what we described for the dynamic zones in general.
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(c) Thirdly it is usually assumed that staple food supply chains are dominated by
long chains, which is supposed to lead to inefficiencies. However surveys show that the
role of the village/field broker is quite limited, as regards share of market surplus from
farmers.

4.5.11 Emerging Revolution in Food SCM. The details discussed above indicate that from
the midst of the traditional rural areas are emerging areas of rapid transformation, whether
due to the involvement of the modern sector or from the transformation of traditional
supply chains. This transformation is mirrored though in a more concentrated way and at a
faster pace, in the urban food economy. The government’s direct role as buyer and seller is
only 7 percent of India’s food economy and that share is as much as 25 percent in the food
economy which is grains. The private sector both modern and traditional thus decides
India’s food security. It is also evident that the economic environment in league with policy
changes has been crucial in spurring the quiet revolution in food supply chains. A host of
liberalization policies, combined with public investments, has spurred an avalanche of
private investments by farmers, traders, cold stores, mills. The first persisting constraint is
asset poverty and policies that do not yet address it sufficiently. They also include individual
assets, such as education, tube wells, and credit access. The state and cooperative supply of
subsidized tube wells, credit, fertilizer, and seed are heavily biased toward medium and
large farmers in the study areas discussed. Broadening the infrastructure and distribution of
public goods and services to poorer areas and strata are major challenges. The second
persisting constraint is that unlike most of the rest of Asia and perhaps most strikingly China
and Southeast Asia, India’s continuing constraint on foreign direct investment in food retail
means that it still forgoes that source of investment capital and expertise, as well as the
incremental gains to urban food security that retail transformation brings. This may be a
moderate constraint, because domestic retail investment is far more vigorous and fueled by
cash-rich conglomerates in India than in many other countries. Among the policy issues are
the following:-

(a) Partial or slow liberalization of wholesale markets Agricultural Produce Market

Committee C reform.

(b) Limits on private-sector procurement, storage, and sales to traders.

(c) Storage Control Orders under the Essential Commodity Act.

(d) Regulatory and fiscal uncertainty and transaction costs, such as double taxation for
interstate movement.
RESEARCH
FRAMEWORK
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5.1 FOOD SUPPLY CHAIN MANAGEMENT MODEL CRITERIA

5.1.1 General. The decision makers in any organization always require broad framework of
guidelines for facilitating critical decision making process and thus the need arises for
comprehensive models to act as facilitators. The models should be capable of analyses of
the extended intricacies of SCM to be able to guide in efficient decision-making, as well as
increase the profits of the entire chain. Determination of optimal network configuration,
inventory management policies, supply contracts, distribution strategies, supply chain
integration, outsourcing and procurement strategies, product design, and information
technology are some examples of strategic decision-making that affect the long-term profits
of the entire supply chain. Despite notable advancements in IT and in-spite of marked
improvements, SCM still remains constrained in adequately addressing many practical
aspects. Importantly the inadequacies are due to the interdependencies among various
departments/ operations and autonomous partners existing in the chain. (Lakovou, 2001;
Tayur, Ganeshan, & Magazine, 1999). The existing models and their characteristics along
with the dynamically evolving legislative framework hinder the task of managing food
supply chains efficiently. Some of the shortcomings are listed as under:-
(a) Traditional models are incapable of taking into account the impact of regulatory
legislations prevalent in the changing environment, particularly important for
food SCM because of their unique characteristics, ranging from product storage
to transportation specifications (Hobbs & Young, 2000; Van der Vorst, Beulens,
De Wit, & Van Beek, 1998).
(b) Short life of food product creates uncertainty for the buyer with respect to
product quality, safety and reliability, thereby affecting the quantity of supply as
well as uncertainty for the seller in locating a buyer.
(c) The perishable products may have to be moved to the marketplace at the
earliest to avoid deterioration and thus the sellers are unable to store the
products till favorable market conditions get created. In fact sellers may have to
provide frequent deliveries thus generating requirement of dedicated modes of
transportation e.g. refrigerators etc.
(d) Food products usually exhibit high seasonality in raw materials availability and in
end-products demand, and therefore they need to have efficiently designed
storage facilities to ensure retention of their quality.
(e) Food safety issues have profound ramifications on the design of the supply chain
as proper monitoring and response to food safety problems requires the ability
to trace back small lots, from retailer to processor or even back to the supplying
farm.
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(f) Another feature of food chains is that few products are transformed from
commodity to differentiated branded foods, while others undergo packaging but
remain essentially intact in character.

5.1.2 The last two decades has seen the rise of a plethora of acronyms normally used in
conjunction with production, operational management and control. To name a few JIT (Just-
In-Time); TQM (Total-Quality-Management); ZI (Zero-Inventory); ECR (Efficient Consumer
Response); VMI (Vendor Managed Inventory). All these acronyms have now been
integrated within the domain of SCM. The growth in the IT and easy accessibility of
computing power, development and implementation of objective based modeling systems
have been changed to a new environment, for integrating quantitative and simulation
models, as a backend system for both horizontally diversified and vertically integrated SCM
systems. The SCM provides a versatility of applications particularly in the private business
sector enterprises for cost cutting and for having a competitive advantage. The important
features are:-
(a) Satisfying the end-consumer by providing the right product, in right condition at
the right time.
(b) Optimum utilization/ allocation of limited resources.

5.1.3 Motivation. Thus arises the need to design a model so as to facilitate the following:-
(a) Enhancing decision-making process for capacity planning of multi-echelon supply
chains in uncertain environments by studying the long-term behavior of SCM.
(b) Offer a generic methodological framework that could address a wider spectrum
of strategic SCM related problems.
(c) Provide standard methodologies for the analysis of SCM and the steady state of
the system, assuming that all transient phenomena have been diminished
normally this assumption may be valid in SCM where product demand exhibits a
smooth pattern as the demand has a low coefficient of variation.
(d) Cater for important family of products with shorter life cycles and larger demand
variability, for which the utilization of the traditional methodologies may lead to
considerable errors.
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5.1.4 Need for Models. SCM as an effective tool has helped in performing the task of
downsizing or right-sizing and re-engineering of the organizations thereby transforming the
enterprises into lean and mean competitive units. This was possibly done by cost cutting
and process simplifications, involving optimization in terms of the quantum of persons
involved, time taken, complexity of the work etc. The strategies thus followed lead to
enhanced productivity and profitability of the organizations. However the benefits of these
soon receded and it was felt that the approach to the way organizations work needed to be
changed. The participants in the SCM chain, suppliers, sub-contract suppliers, in-house
product processes, transportation, distribution, warehouses, and the end customer,
generally, perform mutually exclusive tasks and thus do not compete directly with each
other. Before discussing appropriate models, introspection becomes imperative and there is
a need to explore the following issues:-
(a) Issues for SCM.
(b) Type of SCM model.
(c) Framework of SCM models.
(d) Issues in the design of SCM framework.
(e) Quantitative methods and SCM.
(f) IT as a SCM enabler.
5.1.5 Issues in SCM Models. SCM is known to encompass all such like activities, functions
and facilities involved in producing and delivering a product or service, from suppliers to the
customers. The SCM paradigm is geared towards optimizing each component of operations
management viz. production, warehousing, inventory, transportation and distribution etc.
and the inter-links between these components. In the period between 1970’s and the
1980’s, numerous models for production and operations control and management were
developed: Inventory management models, JIT model, VMI model, Zero Inventory (ZI)
model, Total Quality Management (TQM) model etc. These models generally focused on
the optimization of a sub-part of the overall SCM whereas the main aim was at the
optimization of the full chain. Analyzing various trade-offs among the different components
of the supply chain for example, JIT would require a factory to keep inventories low and
produce and distribute products in a timely manner; however JIT ignores many other
aspects which cannot be seen independently, e.g. Availability of the input materials such as
food products is uncertain and irregular; the factory may need to ensure smooth and
continuous production. Regional stocking may permit reductions in transportation costs
through increased shipment consolidation, as well as expanded sales through better
delivery performance. These improvements may be accomplished with only moderate
increases in inventory and warehousing costs. However, in an environment where different
functional units manage the various logistics activities independently, an organization is less
likely to properly analyze such important trade-offs.
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INTERDEPENDENCE OF SUPPLY CHAIN

FIGURE: 5.11

The Figure 5.11 above reflects a simple representation of the interdependence of various
players of the supply chain and the other functional domains in the organization and implies
that production, finance and marketing decisions cannot be made independently. The
models of 1970-80’s as discussed above ignored the interdependency of production,
operations, marketing, finance and functions with other domains within an organization.
Marketing decisions can have serious impact on logistics functions and vice-versa.
Marketing campaigns always need to be coordinated as higher demand is directly related to
production. On the other hand, when raw materials are cheap, or when the factory
temporarily has an over-capacity, the marketing department may decide to cut prices or
start other promotion campaigns during these periods to increase demands. Financial
decisions are directly related to production and logistics decisions. New products require
investment in raw materials and also consume other change-over costs; it also gets related
to increased demand for capital to finance the production plan. The deliveries of finished
products generate financial income thus forecast of demand can be used to calculate the
amounts payable and receivable in the future. All these decisions are driven by the activities
in the SCM of any company. A major factor in the current scenario is the globalization of
SCM due to falling trade barriers, opening of the Asian markets and proliferation of trade
agreements - EC, ASEAN, NAFTA, APEC, etc. All this has changed the global market; SCM
now has become not only a problem of logistics but also of demand and supply.
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5.1.6 Type of SCM Model. The organizations today acknowledge that Efficient Consumer
Response (ECR) can lead to competitive advantage. SCM is tantamount to coordinating all
the operations in an organization including those of the suppliers and customers. SCM
strategies which are effective are essential for successful implementation of ECR
programme. Production planning and control model is required to focus on all the aspects of
the operations and distribution activities as well as links with other functional domains such
as finance and marketing. The SCM model thus ideally should also be able to perform the
task of managing and coordinating activities upstream and downstream in the supply
chain. Any such comprehensive model in its entirety will be very complex and cannot be
used without a sufficient computational infrastructure. Analysis of interrelationship details
is given below:-

(a) Supply-Demand Relationship. In an effective SCM framework it is a must to

have clear understanding between supply and demand relationships, as also
their implications for strategic implementation. There is an interdependent
relationship between supply and demand; wherein there is a need to
understand customer demand so that it can be managed and future demand
can be created to meet the desired level of customer satisfaction. Ideally the gap
should be nullified between supply and demand. Putting the supply-demand
together efficiently is only possible in the context of overall perspective. The
wide gap between the supply and demand sides of an organization can only be
bridged by a comprehensive umbrella strategy and this can be done by
developing a holistic strategic framework that leverages the generation and
understanding of demand effectiveness with supply efficiency. Suitable
framework provides a strategic anchor to prevent the supply and demand
components of a business from drifting apart.

(b) Integrated Supply and Demand. The basis of such strategic framework lies in
the integrated supply and demand model as shown in the Figure 5.12 below.
The model is designed basically around two key principles. Firstly organizations
must bring a multi-enterprise view to their supply chains and must be capable of
working co-operatively with other organizations in the chain rather than seeking
to outdo them. Secondly, they must recognize the distinct supply and demand
processes that must be integrated in order to gain the greatest value.
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INTEGRATED DEMAND-SUPPLY MODEL

FIGURE: 5.12
(Source: This model is based on the work done by Bill Copacino)

(c) The key element is the core process of the supply and demand chains viewed
from a broad cross-enterprise vantage point rather than as a discrete function.
To gain the maximum benefits, organizations need to identify the core processes
across the demand and supply chain, as well as exploring the impact of each of
these processes on the different functions. The integrating processes that create
the links between the supply and demand chains as shown in the Figure 5.13
below implies that the planning processes and service processes must be
integrated. This integration must be done across the boundaries of the
enterprises. If each participating organization in the chain formulates its own
plans on the basis of its own private information, then there is no way to
integrate the supply and demand chain processes that they share.
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INTEGRATING PROCESSES IN SUPPLY CHAINS

FIGURE: 5.13
(Source: This model is based on the work done by Jeff Beech)

(d) The supporting IT infrastructure can make such integration possible wherein it is
required to handle routine transactions. IT can also play a critical role in
facilitating timely sharing of planning, production and purchasing information;
capturing and analyzing production, distribution and sales data at new levels of
details and complexity. IT also provides an integrating tool that makes it possible
to convert data into meaningful pictures of business processes, markets and
consumers that are needed to feed company strategies in order to develop
competitive advantage.

5.1.7 SCM Framework. A framework to understand the issues involved in SCM is explained
by the pyramid structure as given at Figure 5.14, the pyramid helps to analyse issues at four
levels:

(a) Strategic. SCM can contribute to an organizations basic value proposition to the
customers, important questions arising are: What are the basic and distinctive
service requirements of the customers? What can SCM do to meet these needs?
Can the SCM capabilities be used to provide unique services to the customers?
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(b) Structural. The next level of questions arising are: Should the organization
market its products directly or should it use distributors or other intermediaries
to reach the customers? What should the SCM network look like? What
products should be sourced and from which manufacturing locations? How
many warehouses should the company have and where should these be
located?
(c) Functional. Functional excellence requires that the optimal operating practices
for transportation management, warehouse operations, and materials
management are designed. Achieving functional excellence entails development
of a process-oriented perspective on replenishment and order fulfillment so that
all activities involved in these functions can be well integrated.

SCM : FRAMEWORK PYRAMID

FIGURE: 5.14
(Source: Based on work done by William C. Copacino)
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(d) Implementation. Development of SCM strategies without ideal implementation of

plans is important particularly for the organizational and information systems.
Organizational issues centers on the overall structure, individual roles and
responsibilities, and measurement systems needed to build an integrated operation.

(e) Analysis. The decisions made within the SCM strategy pyramid are interdependent.
It is imperative to understand the capabilities/ limitations affecting the functional
and implementation decisions and consider these factors while formulating a SCM
strategy and structure. The SCM models used in practice lie in between two extreme
models basically on one end of the spectrum is the vertically integrated supply chain
model in which the organization has direct control over each and every component.
On the other end of the spectrum lies the horizontally diversified supply chain model
in which the number of participants is very large. In a vertically integrated supply
chain system, the organization can control every component of the chain and can
make various changes to the system to optimize the chain very easily. But in a
horizontally diversified supply chain the tendency is to optimize only the functions
that the organization is involved in, thus conscious efforts must be made by all the
participants in the supply chain for the integration of their respective components in
the supply chain. The type and structure of the supply chain that gets established
depends on many factors viz. Geographical, Cultural, Government Legislations and
Time.

5.1.8 Quantitative Methods and SCM. Extensive decision support tools are required for
effective monitoring, channel design, transportation, distribution planning, inventory
control and effective SCM. The quantitative models used in SCM are in general large linear
programming models viz. models for job scheduling, transportation and distribution,
warehouse/facility location etc. All these models have one intrinsic limitation as they are
single objective/criteria optimization methods. Rarely one encounters single criterion
problems, all real life problems are also multiple criteria decision making problems.

5.1.0 Transportation. Transportation and distribution planning are management tools to

assist in the planning of how much to move, what and where, mode of transportation,
support, carrier preference, structure incorporation, load creation and sequencing, vehicle-
scheduling and utilization optimization, operation within a warehouse, order allocation,
receiving, radio frequency/hand held scanning inventory control etc.
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5.1.10 IT and SCM. IT provides a powerful set of tools and depending on its usage it can
lead to the failure or success of a supply chain process. With the development of
Information Systems (IS) and IT the use of information sharing and decision making is
growing at a very fast pace. IT solutions no longer likely to provide strategic advantage but
effectively are the business basics. The competitive advantage for organizations originates
from development of creative IT strategies and implementing them. IS enables existing
strategies to be utilized appropriately and the information flow provides the linkages that
allow the supply chain to operate efficiently.

5.1.11 Conclusion. Technologies like internet, intranet, extranets and group wares facilitate
sharing of information using common databases. This allows sharing the information not
just within the functional divisions of an enterprise but upstream and downstream the
supply chain. Electronic Data Interchange (EDI) can be used to place orders, inventory
database can be shared between the manufacturer and the supplies for efficient
implementation of JIT inventory; for vendor managed inventory (VMI) this sharing is a must.
The internet and EDI can be used by the customer to monitor the status of the order placed,
request changes in the order and vice-versa, they may be used to inform the customers
about the status of their order, besides being used for billing etc.
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5.2 QUANTITATIVE MODEL FOR FOOD SCM

5.2.1 General. The requirement of improving food quality and reduction in food wastage led
to development of Food Supply Chain Management (FSCM), which considers intrinsic
characteristics of food supply chains, besides traditional SCM objectives such as cost and
responsiveness. Growing consciousness of environment towards sustainable development
also brings additional objectives to the food supply chains and the fast evolution of
sustainable development results in the development of a new fast-growing concept called;
Sustainable Food Supply Chain Management (SFSCM). In response to these developments,
researchers have developed various decision support tools that can be used for handling
progressively and increasing complexity along the alteration process from SCM to FSCM and
now to Sustainable Food Supply Chain Management (SFSCM). An endeavor has been made
to review the SFSCM to identify logistical key issues and relevant quantitative modeling
challenges. The evaluation shows that towards obtaining sustainability together with
considering intrinsic characteristics of food supply chains, there is a gap between the needs
of the practice and the current available methods. In the analysis improvement
opportunities have been presented for future development of models by identifying the
missing points.

5.2.2 Food Supply Chains. The food supply chains are composed of organizations which are
producing and distributing edible products to consumers. Globalization of food production
has made consumers more aware of the origin of their food, leading to a growing interest in
traceability, freshness and quality of what they have bought. Product assortments at the
same time are widened by producers for satisfying the consumer thereby broadening the
needs and resulting in more complicated lot sizing decisions and increasing transportation
costs. The aforementioned developments can be given as some of the main reasons as to
why FSCM has become an important issue in both public and business agendas. FSCM
requires a different management approach that considers intrinsic characteristics of food
products and processes besides traditional SCM objectives such as cost and responsiveness.
Food supply chains recently have confronted another trend being sustainability that
necessitates new/advanced approaches in FSCM. Sustainability broadly is meeting the
needs of people who are living without causing damage to the future generations; driving
factors for sustainability can be listed as current legislation, public interest or competitive
opportunity (Linton et al., 2007). Sustainable development deals with balances between
ecological, economic and social processes at the level of society in the long term.
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5.2.3 Research Methodology. The study focus is on quantitative models about FSCM;
however there is a need to consult some qualitative studies about food supply chains to
understand related logistical key issues more clearly. The search criteria employed was
based on the following a sustainable FSCM, food supply chain production and distribution
planning, food supply chain quantitative models, sustainability in food supply chains, food
safety/security issues in food supply chains. Framework of this study is based on three basic
issues as given in Figure 5.21. Firstly the logistical key issues, involving in identifying
logistical demands from practice, secondly current available methods and thirdly needs for
new/advanced models or quantitative modeling challenges. Based on this framework,
endeavor is to determine key modeling challenges for SFSCM.

LOGISTICAL KEY ISSUES AND MODELLING CHALLENGES IN SFSCS

FIGURE 5.21
5.2.4 Logistic Key Issues. Logistic demands from practice cost and responsiveness issues are
the two main traditional concerns in SCM. Consumers today in food sector throughout the
year demand high quality of food in various innovative forms and at a competitive price.
SCM thus aims to achieve better customer service with less cost while satisfying various
requirements of other stakeholders in the chain. The food industry compared to the past
has moved more towards international markets, for sourcing of products required for their
operations. This changing system leads to the need of advanced models and tools for
planning FSCM operations along with global coordination and optimization of geographically
dispersed facilities so as to reduce operation costs. A major concern for establishing SCM
responsiveness has two main dimensions; firstly the time between placing and receiving an
order and secondly how quickly can companies respond to customers unique and rapidly
changing needs. Responsiveness is important for maintaining customer satisfaction and
customer service in the food industry. The key factors for forming a responsive FSCM are
stated as follows:
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(a) Timely information sharing.

(b) Shortening of total cycle time.
(c) Coordinating the workflow at different echelons of the SCM.
(d) Effective decision support systems.
(e) Reduction of lead time for information and materials flow.
(f) Integrating information about operation.
(g) Reducing redundant echelons.
(h) Flexible capacity.

5.2.5 Reducing Cost - Improving Responsiveness. There is a conflict trade-off between the
cost of the SCM, its efficiency and its responsiveness, resulting in discussions on the position
of the customer order decoupling point. On one hand increased product diversity and
competition leads to decrease in inventories to reduce inventory costs; simultaneously on
the other hand keeping more inventories always guarantees better consumer response.
FSCM endeavors to maintain a reasonable balance between these two decision areas:
reducing cost versus improving responsiveness.

5.2.6 Food Quality and Food Waste. Food quality and waste issues are the two main
triggers for the transition from the SCM to the FSCM which has additional challenges and
complexity as compared to traditional SCM. In FSCM there is a continuous change in the
quality of the food product commencing from the time the raw material leaves the grower
to the time the product reaches the consumer. Perishable products have a shorter shelf life
span. The conventional SCM Models do not take perishing ability or changes in product
value into account (Blackburn and Scudder, 2009). Perishable products require special
management, which can deal with additional challenges such as temperature controls,
quality decay modeling or waste reduction methods. Presently FSCM are serving consumers
who are more concerned about food safety and security issues than before, also other
stakeholders have growing concern on these issues leading to formation of global
organizations dealing with food related problems, the Food and Agricultural Organization
(FAO), the World Health Organization (WHO). These are United Nations (UN)
organizations, who lay down specifications that non-perishables should meet two basic
criteria:
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(a) In case of high rate of deterioration at ambient storage conditions it requires

specific storage conditions to slow down the deterioration rate.

(b) A notified specific obsolescence date of the product such that reordering for the
products with the same date becomes impractical and this can be notified as
shelf life. The shelf life of a product can be defined as length of the time,
starting from the day it is produced before the product is considered
unacceptable for consumption or becomes obsolete (Donselaar et al., 2006).

5.2.7 Sustainability and Transparency. Sustainability and transparency are issues that lead
to the need for SFSCM for dealing with additional challenges and with much more increased
complexity as compared to FSCM and SCM. Kyoto Protocol has set binding targets for
industrialized countries and for the governments towards achieving sustainable
development in quality of food supplies. This can be termed as its one of the most
outstanding and recent step. The EU is also a highly influential proponent of sustainability.
Important EU regulations concerning sustainability are, The General Food Law (Regulation
EC/178/2002) and The Waste Electrical and Electronic Equipment (WEEE) (Directive
2002/96/EC) (Bloemhof, 2005). These are related with growing concerns about the future
as well as the concept of sustainable SCM design as emerged and aiming to incorporate
economic, environmental as well as societal decisions into supply chains in the design
phase. Escalating sustainability consciousness of stakeholders in FSCM affects the decision
making process and operations. That means an integrated approach linking SCM decisions
to the pillars of sustainability with quality consideration is necessary for companies,
accordingly the pressures and incentives for sustainability in SCM are; legal demands
legislation, customer demands, response to stakeholders, competitive advantage,
environmental and societal pressure groups and reputation loss. Transparency another key
issue also has growing impact on FSCM. Consumers also wants to get more insight in
production processes as well as what has happened to the product as it went through the
SCM. This places emphasis on especially the people involved in SCM and aspects of
sustainability. In order to achieve transparency and tracking and tracing of products and
services throughout the value chain, intensified integration and cooperation between the
actors of the chain and improved monitoring of process activities are required. The
organizations aim at improvements in availability of and access to healthy food. Thereby,
they have various missions such as setting norms and standards, providing technical support
to countries or monitoring and assessing operations.
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5.2.8 Model Mix. Production, transportation and inventory management are the main
logistical components in a SCM. The common objective of all models is to improve the
performance of the related FSCM by enhancing the decision making process. The problems
numerated are proposed by various studies, to be resolved by various types of models such
as, Mixed Integer Programming (MIP), Linear Programming (LP), Multi Objective
Programming (MOP), Goal Programming (GP), Analytical and Simulation models. Different
software programs have also been used and approaches have also been developed for
obtaining solutions from the developed models. In some studies depending on the
complexity of the problem there is a need to develop several heuristics for producing
solutions that are close to the optimal solution. The reasons for facilitating from heuristic
methods can be given as the huge amount of time required to obtain an optimal solution. In
case of studies which have non-linear terms in their models the focus generally is on the use
of linear models. Moreover, some models serve the purpose of multi-decision planning
horizon, whereas some of them are developed for only single period decision planning.
Mode of transportation assumption is also different in different model studies. The FSCM
problems are characterized by various sources of uncertainties i.e. length of the order
forecast horizon, information availability and data timeliness, decision policies used, supply,
process and demand uncertainties. Generally all proposed models are implemented in
various FSCM either by considering collected real or generated hypothetical data.

5.2.9 Cost Reduction and Improved Responsiveness. All quantitative models endeavour to
minimize the costs of various operations in FSCM. The confronted costs in quantitative
models basically can be classified into four main groups mainly being, production, inventory,
distribution and other miscellaneous costs. The other costs generally represent cost which
depends on the type of the food product such as milk collection, biomass drying or by-
product credit. In some of the studies considering food quality decay, cooling, wastage and
quality loss, costs are handled within one or more main cost groups. Besides the above
mentioned main cost groups, dispersion is also incorporated in the costs of batches into the
quantitative model so as to solve the trade-off between reducing production costs of the
food products and reducing the concerns for food safety. Models on analysis gave different
results, some of them are discussed as below:-

(a) Except for a few studies {(Ahumada and Villalobos, 2009b); (Bilgen and Gunther,
2010); (Blackburn and Scudder, 2009); (van der Vorst et al., 2000)} in which there are
strict deadlines such as a specific production lot that has to be finished up to a
particular day or cycle time, FSCM responsiveness is not explicitly mentioned.
However aiming for coordinating operations in related FSCM it can be said that all the
developed quantitative models also serve the purpose of increasing responsiveness
with varying extent.
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(b) Forbidden stock-out possibilities can be regarded as a management approach to
improve customer responsiveness, apart from reducing operational costs,
utilization of transport carriers has also the potential to shorten cycle time for
delivery to the customer. Stochastic quantitative models have shortage costs to
encourage satisfying customer demand on time that can contribute to the
improved responsiveness.
(c) The studies referring to responsiveness brought in Marginal Value of Time rate
to measure the cost of a unit time delay in the SCM and subdivided the FSCM
into two segments viz. ‘‘Responsive’’ segment in which product deterioration
rates are high and an ‘‘Efficient’’ segment with lower deterioration rates.
Modeling each of them separately an important result was reached, that the
decisions in each segment of the SCM need not be coordinated to achieve
optimization.

5.2.10 Improved Food Quality and Reduced Waste. The perishability problem sometimes
leading to food waste in FSCM is too important to be ignored and affects many operations
along the chain. In response to the growing practical need, attempts have been made to
incorporate quality decay and waste factor of the product into quantitative models in food
logistics management. The general aim of the study remains of approaching real life
situations in FSCM as much as possible. Most of the models assume that the quality of
products diminishes linearly and are deemed to be useless after a specific time period,
implying that as long as products are above the pre-specified minimum levels, they are
regarded as acceptable. The model does not penalize the late delivery unless it is above the
pre-specified quality level. However because of quality decay neither part of the purchased
goods can be sold on the market nor it can be sold with a lower price than the best market
price. The Arrhenius equation is simple, but remarkably provides accurate formula for the
temperature dependence of the reaction rate constant (Wikipedia, 2012; Chang, 1981). The
studies which handle the perishability problem in their models, such as Rong and Grunow
(2010) and Vander Vorst et al. (2009) also try to include temperature controls of products
for determining the best temperatures throughout the chain.

5.2.11 Improved Sustainability. The fact that sustainability is not a new concept and the
study in this field as also the literature supports the argument that in terms of
environmental perspective, emission rates, energy usage and water use indicators as also in
terms of societal perspective fat content of products, are all used in the quantitative models
of food logistics management. The emissions try to manage a single indicator in terms of
carbon dioxide –equivalent emissions (CO2-equiv/year or CO2/year) and aim to coordinate
good distribution. The environmental impact is expressed as carbon dioxide (CO2) per
kg per mile travelled.
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The other environmental impact indicator energy used in the models relates to the various
operations in FSCM such as refrigeration, heating or lighting or machine use and is
expressed as MJ per second /per ton km. The common aim of the studies incorporating
energy use is to reduce the energy consumption throughout the chain while keeping up
operations. The consumption of an important natural resource, water, is also considered in
a few studies e.g. with the aim of controlling water use in related chains. The reviewed
literature on sustainable food logistics management shows that the food industry needs
more advanced models for the entire chain to support business decisions and capture SCM
dynamics. The assumptions of almost all studies rely on a completely deterministic
environment and from the perspectives of ease of development or solvability. However
most of the chain members in the food industry are confronted with various uncertainties
with respect to demand, supply or production amounts. Thus so as to get close to the real
life situation it is good to incorporate variation possibility of several parameters into the
FSCM quantitative models.

5.2.12. SFSCM. In general SFSCM is a complex process owing to the intrinsic characteristics
of FSCM and fast moving and highly competitive food sector. The need for adding
sustainability concerns into the FSCM, results in much more complicated and challenging
decision making process. Inevitably, food logistics systems are also affected from this
alteration process starting from traditional SCM to SFSCM. The quantitative studies on food
logistics management while pointing out the above mentioned alteration process lays
special focus on logistical key issues and current available methods to identify quantitative
modeling challenges in sustainable food logistics management. The core issues in SFSCM
have been discussed in three groups; cost reduction and improved responsiveness;
improved food quality and a reduction of food waste, and improved sustainability and
transparency. The quantitative studies on food logistics management have been evaluated
in terms of modeling characteristics and performance indicators considered for each of the
aforementioned logistical key issues.

5.2.13 Conclusion. The research on SFSCM is developing according to the needs of the food
industry. The arguable point is about its adequacy of aiding decision making process and
capturing SCM dynamics. It is important to highlight that currently the literature is
insufficient to respond to those practical needs. Generally, the intrinsic characteristics of
food products are not handled properly in the studies. The majority of the works reviewed
even do not contemplate on sustainability problems, the sustainability concerns find place
only in a few recent studies. The new models should take into consideration demands for
SFSCM.
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5.3 SYSTEM DYNAMICS MODEL FOR FSCM

5.3.1 General. In any organization strategic decision-makers need comprehensive models

that are capable of analyses of the extended intricacies of FSCM so as to guide them in
efficient decision-making and to increase the profits of the entire chain. Determination of
optimal network configuration, inventory management related policies, supply contracts,
distribution strategies, integration of supply chain, outsourcing and procurement strategies,
product design, and IT are some examples of strategic decision-making that affect the long-
term profits of the entire SCM. Despite notable advancements in IT and also marked
improvements FSCM still remains constrained in adequately addressing many practical real
issues. Important factors for these inadequacies are the interdependence among various
operations and autonomous partners across the chain, rendering all traditional myopic
models invalid. (Lakovou, 2001; Tayur, Ganeshan, & Magazine, 1999) Critical shortcomings
of most of the existing strategic models are as follows:-
(a) Inability to take into account the impact of regulatory legislation in present days
volatile environment, particularly important for FSCM because of their unique
characteristics, mainly from product storage, transportation specifications and up to
consumer delivery(Hobbs & Young, 2000; Vander Vorst, Beulens, De Wit, & Van
Beek, 1998).
(b) Short life of food product creates uncertainty for the consumer with respect to
product quality, safety and reliability i.e. uncertainty for the seller with respect to
quantity of supply as well as in locating a buyer, as perishable products must be
moved at the earliest to the marketplace to avoid deterioration. In fact leading to
the need for frequent deliveries, through dedicated modes of transportation as
sellers are unable to store the products till favorable market conditions are created,
which may not be feasible in FSCM.
(c) Food products due to high seasonality in availability of raw materials and also in
end-products need to have efficiently designed storage facilities to ensure retention
of their quality.
(d) Food safety issues have profound ramifications on the design of the FSCM as proper
monitoring and response to food safety problems requires the ability to trace back
small lots, from retailer to processor or even back to the supplying farm.
(e) Another feature of FSCM is that few products are transformed from commodity to
differentiated branded foods, while others undergo packaging but remain essentially
intact in character. All these characteristics along with the dynamically evolving
legislative framework further hinder the task of managing food supply chains
efficiently.
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5.3.2 Analysis. The following advantages accrue from this model research:-
(a) Facilitate decision-making process for capacity planning of multi-echelon supply
chains in such uncertain environments by studying the long-term behavior of supply
chains.
(b) Offer a generic methodological framework that could address a wider spectrum of
strategic FSCM related problems.
(c) The standard methodologies for the analysis of supply chains study the steady state of
the system, i.e. they assume that all transient phenomena have been diminished and
this assumption may be valid in those supply chains where product demand exhibits a
smooth pattern and i.e. demand has a low coefficient of variation (Fisher, 1997).
(d) There is an increasingly important family of products with shorter life cycles and larger
demand variability, for which the utilization of the traditional methodologies may lead
to considerable errors (Fisher, 1997).

5.3.3 System Dynamics (SD) Modeling & Analysis Methodology. SD Model is a dynamic
simulation model which can be applied within the field of SCM to diagnose problems and
evaluate possible solutions, optimize operations, and mitigate risk factors. It is also a major
modeling and analysis tool which helps in taking critical decisions. Forrester in the early 60s
introduced SD as a modeling and simulation method/ tool for the analysis and long-term
decision making tool of dynamic industrial management problems. Since then, SD has been
applied to various business policies and strategic problems. Case studies where the SD
methods are used to model solve logistics problems are as follows:

(a) Georgiadis and Vlachos (2004) used the SD methodology to estimate stocks and
their flow in a reverse supply chain providing specific mechanisms with a fixed
remanufacturing capacity change per year.
(b) Sterman (2000) introduced a generic SD model of the stock management structure
which is used to explain the sources of fluctuations, amplification and phase lag
observed in supply chains.
(c) Haffez, Griffiths and Nairn (1996) using an integrated SD framework described the
analysis and modeling of a two-echelon industry supply chain encountered in the
construction industry.
(d) Towill (1995) used SD model in supply chain redesign to gain added insights into SD
behavior and particularly into its underlying casual relationships. The outputs of the
proposed model are industrial dynamics models of supply chains.
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(e) Minegishi and Thiel (2000) used SD to improve the understanding of the complex
logistic behavior of an integrated food industry. They present a generic model and
then provide practical simulation results applied to the field of poultry production
and processing
(f) Simulation results are further used to compare various re-engineering strategies. In
this work we develop an SD-based holistic model of the entire supply chain, which
may be used as decision making aid tool, mainly for strategic decision-making. More
specifically, we design generic single-echelon inventory systems that incorporates
all state variables viz. stocks on-hand and on order and policies for both inventory
control and capacity planning.
(g) The use of single- echelon model as a basic module leads to method of how generic
multi-echelon supply chain models can be constructed. Although such an analysis
may differ from one product or stock keeping unit to another, we keep the
proposed model as generic as possible to facilitate its implementation on a wide
spectrum of real-world.

5.3.4 Basic Steps. To adopt the SD methodology as a modeling and analysis tool and to
tackle strategic issues for FSCM, firstly we need to:-
(a) Present guidelines for the methods and their development for the strategic
modeling of single and multi-echelon supply chains.
(b) Subsequently, we need to analyze in detail the key issue of strategic SCM of long-
term capacity planning. Specifically the capacity planning policies for a food supply
chain with transient flows due to market parameters/constraints.
(c) Finally, we need to demonstrate the applicability of the developed methodology on
a multi-echelon network of a major food supply chain (2004 Elsevier Ltd).

5.3.5 Problem and Model Description. Strategic SCM deals with a wide spectrum of issues
and includes several types of decision making problems that affect the long-term
development and operations of a firm. Firstly issues such as determination of number,
location and capacity of warehouses and manufacturing plants. Secondly details of the flow
of material through the logistics network, inventory management policies, supply contracts,
distribution strategies, supply chain integration, outsourcing and procurement strategies,
product design, decision support systems and IT. Methodological approach developed could
potentially be used for resolving most of the SCM problems. However, since each of the
problems have its unique characteristics, we need to have guidelines for the methods to be
followed and analyze in depth specific strategic management problems of long-term
capacity planning. As well as the problems of identifying dynamically optimal levels of
vendor sourcing, production, warehousing, distribution and transportation capability. The
SD approach followed utilizes well-proven methods and tools for strategic decision-making.
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5.3.6 System Dynamics Modeling Issues. It needs to be understood that supply chain
encompasses farmers/ vendors, manufacturers/ producers, distributors, retailers and
consumers. It is characterized by a stock and flow structure for the acquisition, storage, and
conversion of inputs into outputs and the decision rules governing these flows (Forrester,
1961; Sterman, 2000). The flow often creates important feedback among the partners of the
extended chain, thus making SD a well-suited model and analysis tool for strategic SCM. The
SD model issues are discussed below:
(a) The basic structure of SD model is reflected by causal loop or influence diagrams.
A causal loop diagram reflects the major feedback mechanisms and these mechanisms
are either negative or balancing or positive feedback/ reinforcing loops.
(b) A negative feedback loop exhibits a goal-seeking behavior and after a disturbance the
system seeks to return to an equilibrium situation.
(c) In a positive feedback loop an initial disturbance leads to further change, suggesting
the presence of an unstable equilibrium. Causal loop diagrams play two important
roles in SD as follows:
(i) Firstly, during model development, they serve as preliminary sketches of
causal hypotheses.
(ii) Secondly, they can simplify the representation of a model as the structure
of a dynamic system model contains stock and flow/ rate variables.
(d) The structure of a dynamic system model contains stock state and flow rate as
variables. Stock variables are the accumulations or inventories within the system,
while flow variables represent the flows in the system i.e. order rate, which are the
byproduct of the decision-making process.
(e) The SD model structure and the interrelationships among the variables are
represented by stock-flow diagrams. The mathematical mapping of a SD stock-flow
diagram occurs via a system of differential equations, which is numerically solved
via simulation. Presently high-level graphical simulation programs support the
analysis and study of these systems.

5.3.6 Single Echelon Model. The Figure 5.31 below presents the stock and flow structure for
a single echelon inventory system in a causal loop diagram. Details of the diagram are as
discussed:
(a) The descriptions coincide with the variables of the model. The arrows represent the
relations among variables.
(b) The direction of the influence lines displays the direction of the effect. Signs ‘‘+’’ or
‘‘_’’ at the upper end of the influence lines exhibit the sign of the effect.
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(c) When the sign is ‘‘+’’, the variables change in the same direction; otherwise they
change in the opposite one.

SINGLE-ECHELON INVENTORY SYSTEM.

FIGURE 5.31
(P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351–364)

(d) The structure of the systems internal environment consists of the stock variables
Supply Line and Inventory.
(e) Supply Line monitors the accumulation of unfilled orders, i.e. orders that have
been placed but not received yet.
(f) Inventory monitors accumulation of products on hand. Orders increase the
Supply Line.
(g) The rate of Order Fulfillment is determined by the orders after a time delay
equal to Lead time.
(h) Order Fulfillment reduces the stock of products in Supply Line and increases
Inventory.
(i) The variable Inventory is depleted by Sales and this process takes time equal to
the response time to customers demand.
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(j) The clear definition of the boundaries between the system under study and its
external environment is an essential step of SD. The model and its analysis are
kept as simple as possible while capturing all necessary elements for the analysis
of the system under study.
(k) In the simplistic model as exhibited in the Figure 5.31, producers/ vendors/
suppliers or manufacturers and customers represent the external environment
of the system i.e. source in SD nomenclature respectively.
(l) The SD underlying assumption is that producers and customers do not affect
the behavior of the system under study.
(m) In Causal loop diagram of an open-loop single echelon inventory system
producers and/or customers could potentially be included in the system
boundaries and thus, the effect of their particular attributes in stock and flows
determination would be captured. The mathematical equations to describe the
stock and flow structure of the single-echelon inventory system is as follows:
1
Supply Line (t) = Supply Line (t =0) + [Orders (t ) - Order Fulfillment (t)] dt
0

1
Inventory (t) = Inventory (t + 0) + [Orders (t ) - Sales (t)] dt
0

Sales (t) = min [Inventory (t) / Response Time, Customers’ Demand (t)]

Order Fulfillment (tÞ) = Orders (t - Lead Time)

5.3.7 Closed-Loop Single-Echelon Model. Orders are regulated by a decision rule to adjust
the stocks both in Supply Line and the Inventory to the desired values. The decision process
converts the open loop structure as above into the closed-loop structure as given in Figure
5.32 below.

Order is defined as the sum of two terms, namely:

Orders (t) = Expected Demand (t) + Inventory Position Adjustment (t)

The first term is a forecasted value for demand, calculated from a first order exponential
smoothing of the past values of Customer’s Demand with a smoothing factor equal to 1/a
DL.

Thus: Expected Demand (t)

= Expected Demand (t – dt) + 1/a DL [Demand (t) – Expected Demand (t)] dt

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CLOSED-LOOP SINGLE-ECHELON INVENTORY SYSTEM

FIGURE 5.32
(Georgiadis et al. / Journal of Food Engineering 70 (2005) 351–364

This second term is a periodical adjustment which is proportional to the difference between
desired inventory position, which being a decision variable and actual inventory position.
Inventory Position gives the sum of Supply Line and Inventory over time:

Desired Inventory Position (t) - Inventory Position (t)

Inventory Position Adjustment (t) =
Inventory Position Adjustment Time

The inventory position adjustment time reflects as to how quickly the firm can correct the
discrepancy and bring the inventory position in line with its goal. This policy for orders
determination is an anchor and adjustment policy that is standard in modeling specifically
the inventory systems in the SD (Sterman, 2000). Salient aspects are as discussed below:
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(a) Orders are limited by the inventory level of the producers, which can be
considered adequate as it is an external variable.

(b) The closed-loop structure as shown at Figure 5.32 restricts endless accumulation
of inventory as it occurs irrespective of the demand level in the Figure 5.31
above.

(c) Analysis of the two negative feedback loops as shown in Figure 5.32 is as given
below:

(i) Loop 1 can be defined by sequence of the variables, Orders - Order

Fulfillment – Inventory - Inventory Position - Inventory Position
Adjustment.

(ii) Loop 2 can be defined by the variables, Orders - Supply line - Inventory
Position - Inventory Position Adjustment.

(iii) The explanation of the negative feedback mechanism is available in the

route around Loop 1, wherein any increase in orders will concurrently
increase the order fulfillment and accordingly inventory and inventory
position will also get enhanced.

(d) The above step as discussed results inventory position adjustment to decrease;
as the desired inventory position changes slowly thus it can be assumed to be
constant for the next time step.

(e) The decrease in inventory position adjustment restricts orders, thereby orders
will stabilize at a finite level and eventually the system will reach a steady state
of equilibrium.
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5.3.8 Multi-Echelon Supply Chain Model. SCM as we are aware captures all the effected
partners such as vendors, manufacturers, producers, distributors, retailers, etc. and extends
over multiple echelons. All links or partners of the chain manage their own inventories
operating as an autonomous linkage of the chain, which is replenished from the upstream
echelon, while using a control policy to determine the frequency and magnitude of the
orders. A generic multi-echelon food supply chain can be designed that fits wide variety of
cases by linking the appropriate number of single echelon inventory models. The Figure
5.33 given below depicts a supply chain with three echelons, where the causal loop diagram
of each echelon is equivalent to the causal loop diagrams shown in Figure 5.32 above.

THREE-ECHELON SUPPLY CHAIN

FIGURE 5.33
(P. Georgiadis et al. / Journal of Food Engineering 70 (2005) 351–364)
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5.3.9 The SD approach can be used to expand the generic multi-echelon supply chains by
including strategic SCM issues. Capacity planning and manpower planning are examples of
such issues. Particularly capacity planning generally effects all operations of a supply chain,
e.g. stock space, manpower, production facilities, transportation means, etc. There is an
imperative need to concentrate on transportation capacity and examine efficient ways to
dynamically determine their levels. Capacity determination normally is quite simple in a
steady-state situation. In an evolving environment, as is the case under study, it is important
to consider a dynamic capacity planning policy. Development of a decision-making system
for capacity planning of a firm is feasible only after carefully balancing the tradeoff between
customer service maximization and capacity utilization maximization. It is possible by either
leading capacity strategies wherein excess capacity is used so that the firm can absorb
sudden demand surges, or trailing capacity strategies, wherein capacity lags the demand
and therefore capacity is fully utilized. Another form of capacity planning is done by
matching capacity strategy, which attempts to match demand capacity and demand closely
over time. The three strategies are depicted in Figure 5.34 below. In all three cases as
shown the firm is trying to take decision whether to acquire new capacity or not, at equally
spaced time intervals with length equal to the review period.
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5.3.10 The analysis of the Figure 5.34 gives an impression that the decision-maker could
determine capacities for all these operations once in the beginning of the planning horizon
by using a standard management technique that incorporates steady-state conditions.
However it is not fesible in the case under study, as product flows can change dramatically
for numerous reasons e.g. promotion activities or price variation strategies of the
competitors. Normally such demand shifts take time to materialize and they need to be
considered for the development of efficient capacity planning policies. It is evident that an
appropriate modeling methodology needs to be able to capture the transient effects of
flows in a food supply chain. SD has this capacity and moreover, it can sufficiently describe
the diffusion effects related to market behavior. In addition the model may also be used for
determining either owned capacity or additional leased capacity which is also typical for
supply chain operations. The causal loop diagram below at Figure 5.35 gives the generic
single-echelon system embellished with a dynamic loop that expresses a capacity planning
decision-making mechanism.
CAPACITY PLANNING DECISION STRUCTURE

FIGURE 5.35
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5.3.11 The control mechanism to perform the operation using owned and leased capacity
units is modeled as a negative feedback loop. The capacity required is determined by a
variable of the supply chain model e.g. If we study the capacity of the transportation
system, this variable may be the orders placed and when we analyze the necessary
warehouse space this variable may be the on hand Inventory. Capacity required is compared
with the actual capacity and in case there is capacity shortage, then capacity is leased to
achieve the desired service level. Capacity Expansion Rate determines the rate of change of
capacity towards the desired value. Assuming that capacity is reviewed periodically (every P
time units) before taking a decision, whether or not to invest on capacity expansion and if so
then to what extent. It is found that this policy is typical for most of the food supply chains
encountered. Capacity Expansion Rate is modeled by pulse functions, which may be positive
for times that are integer multiples of P. The pulse magnitude is proportional to the
Smoothed Capacity Shortage obtained from Capacity Shortage using first order exponential
smoothing to avoid unnecessary oscillations and multiplied by a control variable K. The
variable K represents alternative capacity expansion strategies. Values of K < 1 represent
trailing capacity expansion strategies, values of K > 1 represent leading strategies, and
values close to 1 represent matching strategies. A serious lead time elapses between a
decision of increasing capacity and the actual operation of the corresponding capacity units.
The Capacity Acquisition Rate captures this time and is determined by delaying the values of
the Capacity Expansion Rate. Actual Capacity has a useful life time, which regulates the
Capacity Disposal Rate.

5.3.12 Conclusion. The model can also be used for the conduct of various ‘‘what-if’’
analyses e.g. the impact of different leading strategies on the new or unexpected demand
satisfaction and the capacity utilization subject to a given capacity review period P can be
evaluated. A decision maker could also investigate the impact of different values of capacity
review periods for a given capacity expansion policy. More advanced ‘‘what-if’’ analyses can
be conducted to develop a long-term capacity planning strategy with the optimal values of P
and K.
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5.4 MATHEMATICS MODEL DEVELOPMENT

5.4.1 General. SCM as we are aware comprises of process-oriented integration of planning,

proceeding, coordination and control of material and information flows in a one-stage or
multistage supply chain. The basic idea of SCM is development of supply logic and focuses
on the integration of all partners in a supply chain with an aim to reduce costs in the entire
production process, from raw material purchase to delivery of the product to the customer,
thereby optimizing all partners in a chain. Partners in a SCM can be departments of either
single enterprise or multiple enterprises and the objective of a supply chain is always
customer satisfaction. At the strategic level a SCM can be broadly considered as being
composed of five activities: buy, make, move, store and sell wherein each activity acts as a
module and set of such modules along with its links constitutes a model. This being the
backdrop the goal is to have a model for SCM in mathematical terms, with an example of
mathematical formulation.

5.4.2 Understanding SCM Mathematics. In global economy, firms are spread all over the
world and at times have to collaborate to form supply chains to meet the needs of
customers. The process of coordinating activities and decisions across a supply chain is very
complex, with rewards accruing to chains which then emerge as leaders in the global
market. Academic researchers and scholars have developed a powerful array of
mathematical tools to address issues and solve problems associated with the coordination
of members of a supply chain. There is a need to focus on these mathematical tools and few
important tools used by SCM researchers have been examined below along with comments
on their applicability and limitations:

(a) Queuing Theory is an important tool used to model many supply chain
problems. It is used to study situations in which customers or orders placed by
customers, form a line and wait to be served by a service or manufacturing facility.
Clearly, long lines result in high response times and results in unsatisfied customers.
The Queuing Theory is used to determine appropriate level of capacity required at
manufacturing facilities and the staffing levels required at service facilities, over the
nominal average capacity required to service expected demand without these surges.

(b) Statistical Methods are used to make predictions about the level of consumer
demand and the extent of unpredictability in consumer demand. This forms the basis
of Statistical Process Control techniques used for monitoring of quality levels.

(c) Data Mining techniques are based partly on statistical tools and used to look for
patterns and relationships in a body of data. One important application of data mining
is in the analysis of marketing data to determine consumer behavior patterns.
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(d) Simulation Method is used to study situations characterized by uncertainty as

simulation involves creation of a model of a system based on specific assumptions
about system behavior and information about probability distributions associated with
various variables. By running simulations, it may be possible to determine the best
values of various system parameters, subject to the underlying assumptions. The main
advantage of simulation method is that it can be used to study extremely complex
systems that cannot be easily modeled by using other mathematical tools. It must,
however, be understood that the solutions recommended are a function of the quality
of the model and the underlying assumptions as incorrect assumptions will lead to
incorrect recommendations.

(d) Mathematical Model programming includes linear programming, nonlinear

programming and integer programming. A mathematical programming problem
consists generally of an objective and a set of constraints faced by the decision-maker.
Usually there are sets of variables, order quantities, for example that are under the
control of the decision-maker. There are also parameters that are fixed and
exogenously determined values that are not under the control of the decision-maker.
Mathematical programming techniques make it possible for a decision-maker to
determine the values of variables that result in the optimal solution. The
mathematical tools are used to obtain solutions to specific problems in SCM. Aspects
highlighted are as under:-

(i) Game theory may be used to obtain a more strategic perspective than those
provided by the mathematical tools. Game theory may be used to model
negotiation processes in supply chains and to develop insights into the balance
of power in supply chains.

(ii) Several advantages accrue with an understanding of the mathematics of supply

chains. Some of the mathematics models underlying supply chain software and
knowledge of supply chain mathematics make it possible to develop in-house
solutions that in some instances are superior to solutions offered by external
providers. The in-house solution can be completely customized to firm-specific
circumstances by the in-house team and can therefore be managed more
effectively.

(iv) Building up supply chain mathematics skills in a firm has other significant
advantage such as selling their logistics and supply chain skills to other firms,
thus converting the logistics function from a cost centre to a profit centre within
the firm.
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(v) Frito-Lay was successfully able to use its fleet of trucks to ship goods for other
companies, thus recovering a portion of the costs associated with the ownership
and maintenance of its private fleet of trucks.
(vi) American Airlines built up such an extraordinarily skilled pool of
mathematicians that it was able to spin them off into a separate firm –
American Airlines Decision Technologies, now called Sabre Airline Solutions –
that produces and sells the Sabre system for the booking of airline tickets.
(vii) People Express Airlines, one of American Airlines’ rivals in the early 1980s, was
driven to bankruptcy, because of its failure to develop a comparable pool of
analysts and mathematicians.

5.4.3 Limitations of Supply Chain Mathematics. A mathematical model of a supply chain is

based on assumptions about the supply chain. The outcome obtained is only as good as the
assumptions made and the model formulated. A sophisticated, precise model generating
recommendations that are altered significantly by a small change in the underlying
assumptions is less useful than a simpler, less precise model that generates
recommendations that remain essentially unchanged even with a large change in the
underlying assumptions. Thus the recommendations obtained from any mathematical
model must be tested for sensitivity to the underlying assumptions and the underlying
assumptions must be thoroughly tested for reasonableness. It is also important to realize
that mathematical models can only provide answers to questions posed by a decision-
maker. The task of asking the right questions and identifying the underlying problems facing
a firm cannot be performed by a mathematical model. For instance, a sophisticated
procedure for the routing of vehicles will not significantly benefit a firm that is selling the
wrong set of products or is using the wrong set of suppliers. Supply chain mathematics
cannot act as a substitute for intelligent decision-making by managers.

5.4.2 Supply Chain Operation Reference (SCOR) was founded in USA in 1996, by the Supply
Chain Council (SCC) as an independent organization for improvement in SCM aspects. The
SCOR model is an auxiliary device which standardizes cooperation processes among several
enterprises and makes them transparent. The main aim of the SCOR initiative is business
process modeling which takes place among several enterprises in a Supply Chain. The SCOR
model consists of four interlinked fundamental processes viz. Plan, Source, Make and
Deliver. The interconnection in the chain between supplier, producer and distributor exists
in order to achieve the common optimum with reference to costs, delivery time, delivery
amount and inventories. According to the definition the SCM involves certain potentials viz.
Supplier service improvement, Reduction of inventories, Shortening of production cycle,
Enhancement of predicting accuracy, Rise in productivity, Lower costs for purchasing,
production and distribution in the chain. Application of SCM concept makes it possible to
reduce inventories up to 60%, shorten production cycle up to 50 % and increase the
profits up to 30% and
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total costs up to 25 %. The local planned assignments within SCM are divided into three
time logic levels. Firstly at strategic level, the plan to define the enterprise strategy is by
shaping a configurationally optimal production and supply network among several
enterprises. Distribution channels from the raw material supplier to the selling market are
analyzed in this phase and analysis is done on the basis of the annual planned quantity,
production quantity and the situation on the stock. Secondly at tactical level analysis is
based on the data obtained at strategic level, with reference to long-term production and
transport plans. The aim of planning is to synchronize a medium/ long-term planning
programme with reference to capacities and terms, the input data for this planning are
necessary information on the supply chain structure, selling predictions and customers’
needs. Rough planning of purchasing, production and distribution is done on the basis of the
input data. Planning is done by means of simulation of different alternatives with reference
to resource, costs and delivery times. Thirdly at operational level realization of the set
programmes takes place through production planning and control.

5.4.3 Mathematical Model for SCM. In industry the cost of raw material, components from
external vendors constitute the main part of the total product cost and it can account for up
to 80 % of the total product cost. The vendor selection as already discussed is one of the
most important tasks in every industry. Basically there are two kinds of supplier problems
firstly supplier selection when there is no constraint and suppliers can satisfy the buyers’
requirements for demand, quality, delivery, etc. In this kind of supplier selection the
management needs to make the only decision as to which supplier is the best. The second
type of supplier selection problem is when there are some limitations on supplier’s capacity,
quality and so on. In other words no supplier can satisfy the buyer’s total requirements and
the buyer needs to purchase partly from one supplier and partly from another to
compensate for the shortage of capacity or low quality of the first supplier. The enterprise
has to decide which supplier it will contract and it must determine the appropriate order
quantity for each supplier selected. The existence of variable prices offered by the supplier
usually complicates the selection process and also the change in prices depends upon the
size of the order. In cases where variable prices are combined with capacities or conditions
of delivery, supplier selection can be very complicated.
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5.5 PROPOSED MODEL FOR SCM IN FOOD SUPPLY

5.5.1 General
5.5.1.1 Myths of Modeling. The models involving food supply chain concept are very
complex, however it is imperative to understand the intricacies and be smart consumers of
modeling technologies, as well as be able to ask some smart questions while understanding
the terminology. The first step is to understand that a model by definition is not the reality
and there is a need to understand the assumptions that have been made to represent the
system, whether mathematically or in a simulation. Acknowledging and recognizing the
assumptions made will help ensure that there are no surprises at the end result. It is also
important to understand how uncertainty and variability are used to build the model. In
most of the mathematical programming and optimization models uncertainty may not be
represented at all. Simulation models, on the other hand, can represent uncertainty with
underlying distributions. A smart user of modeling technologies also means having an
accurate understanding of what modeling is, and what it can do. The food supply chain
management modeling myths identified and dispelled in a white paper by Schneider
Logistics Inc.'s Jim Jeray are as given below:
(a) Myth No 1. There is one modeling or software package to solve the whole range of
your problems. The statement is incorrect as different kinds of questions require
different kinds of answers, different objective functions and often different software
applications. It is not possible to expect a single modeling tool to be able to handle all
possible requirements.

(b) Myth No 2. Once a model is built it will work forever. It is not feasible to have a
long life model as changes in variables such as demand patterns, transporters, product
lines, customers and supplier locations can make models obsolete. The longevity of
the model depends upon the continuation of supply chain environment.

(c) Myth No 3. Supply chain modeling is purely a mathematical exercise. The

underlying mathematical setup is important however it is usually constrained by
customer requirements and current business practices, in addition there is a need to
understand the questions that are being asked from the model as well as the required
degree of precision and the timeframe involved.
(d) Myth No 4. Model results are easily implemented. The analysis of the model is not
over once the model is run and occasionally models provide solutions that look good
on paper but are not operationally practical. No matter how sophisticated the tools
may be, the models will still require analysis and validation by supply chain
professionals.
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(e) Myth No 5. Gathering of data to support the modeling effort is quick and painless.
Modeling effort is totally dependent on the quantity and the quality of data that is
available. Getting enough right data is not an easy task for any organization and the
model will be no better than the data it is built upon.

(f) Myth No 6. All models can be created quickly and provide good solutions in less
than one week. Models can be created and run in a matter of hours while some can
take months just to develop. The time to develop, validate, run, and analyze the
results of a model depend on the complexity of the inputs and the desired level of
accuracy.

(g) Myth No 7. Models are 100-percent accurate. The models are never 100-percent
accurate; however they are still better than other alternatives, such as gut feel or
strings on a map.

5.5.1.2 Salient Aspects of Research Models. Myths of Modeling paint a totally negative
picture. Models can be effectively utilized for optimizing the decision making in SCM. It is
important to understand salient characteristics of numerous models which have been
formulated for various aspects of SCM in Food Supply System and some of these models
have already been discussed above. Analysis of these research models amplifies few salient
aspects as given below:

(a) "A model is a representation of the system", as explained by Kevin R. Gue,

Associate Professor of Logistics, Graduate School of Business and Public Policy, Naval
Postgraduate School, Monterey, Calif.
(b) Models may be used to achieve a single goal or a set of objectives, such as
minimizing inventory costs or maximizing service.
(c) Optimization tools can be used "to search through the set of possible solutions to try
and achieve the best value of that objective, which might include finding the set of
inventory policies that maximizes service within some cost constraint".
(d) In terms of improving the food supply chain, models assist in getting a better picture
of the demand signal and assist in decision making.
(e) Models which are in the form of a mathematical program or simulation can be used
at the strategic, tactical, or execution level, looking at such factors as demand,
distribution networks, transportation routing, or warehouse operations.
(f) Simulation models using “what- if” concepts. They are more tactical, less expensive
and assist in simulating plant or warehouse operations.
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(g) The inventory optimizer assists in, where, how and how much of products be
stocked within an existing network. These models are gaining popularity as companies
look for new ways to minimize inventory.
(h) Mathematical models tend to be more strategic and are used to perform study of
capacity planning or develop a new network design or a plan for new product
distribution. The cost of these models may run into the hundreds of crores of Rupees.
(i) A model should help in search of hundreds of thousands of permutations or
combinations of various possibilities. The solution then proposed must be feasible and
amenable to the constraints of the supply chain.

5.5.2 Models Used in SCM

5.5.2.1 Heuristic Model. Heuristic models are common in everyday life. Heuristic
approaches can be explained by an example of assembling of jigsaw puzzle wherein
alternative pieces in combination are tried until all the pieces fit together. At times shortcut
to this puzzle-building process is found by putting all the edge pieces first to build a frame
for quick solution. This is a example of heuristic solution and the concept of modeling in
heuristics can be described as using, "Rules of thumb to help the model search of all
possible solutions and to find what the best one is hopefully."”Heuristic' literally means by
trial and error," says Mark Ridge, Vice President of professional services, Radical Limited, a
provider of supply chain modeling software and consultancy based in Watford, U.K. The
heuristic approach does not always work, however there is need to accept its limitations
and take an appropriate course of action to deal with the shortfalls of heuristic estimates as
and when they arise.

5.5.2.2 Deterministic vs. Stochastic Models. A model can be Deterministic or Stochastic,

depending upon what uncertainty has been built into the model. As an example, "Say the
demand for photocopier paper at an office supply store is 42 ream cases per month. In a
stochastic model the demand has a mean of 42, however the demand is not static and it
may be different every month so the actual demand has some sort of distribution
underlying the average of 42. Incorporation of probabilities such as discussed above into a
model can be "mathematically and computationally difficult” and finding optimal solutions
to these kinds of models can be extraordinarily difficult, so it may lead to use of
deterministic models which do not incorporate issues of uncertainty.
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5.5.2.3 Mathematical Approach. The mathematical approach, such as mixed integer

programming optimization use mathematical techniques, to make resource allocation
decisions where there are competing demands upon resources and overriding criteria to be
satisfied. Unlike heuristic programs, mathematical programs are not iterative. They are run
once to deliver a solution. In the context of supply chain modeling, the mixed integer
programming optimizer allows a mathematically optimal network configuration to be found
given a user defined set of candidate locations subject to any constraints or parameter
settings." A combination of these two approaches also can be used. If the heuristic is run
before the optimizer, the user can benchmark the heuristic 'preferred' solution to the
optimum solution in a quantifiable way. "If the optimizer is run first, the optimum solution
can be modified according to the practical requirements for implementation."

5.5.2.4 Simulation Models. Simulation is typically used for analyzing the performance of
real world systems over time under various operating procedures and policies. The
combinative use of Mathematical and Heuristic models are ideal to solve problems
analytically, however complex real-world problems often require simple assumptions and in
simulation model the complexities of the problem and the relationships between various
variables are modeled by means of equations. The inputs for the model are thus often
described by probability distributions. The system is then simulated over time to analyze the
outputs. A good simulation model can also be used as a perspective tool for making
decisions.

5.5.2.5 System Dynamics (SD) Model. SD as already seen is a dynamic simulation model
which can be applied within the field of supply chain management to diagnose problems
and evaluate possible solutions, optimize operations, and mitigate risk factors. It is also a
major modeling and analysis tool which helps in taking critical decisions. The food supply
chain encompasses farmers, vendors, manufacturers or producers, distributors, retailers
and consumers and is characterized by a stock and flow structure for the acquisition,
storage, and conversion of inputs into outputs and the decision rules governing these flows.
The flow often creates important feedback among the partners of the extended chain, thus
making SD an appropriate model for strategic SCM. SD as a model and simulation method is
also used as a tool for the analysis and taking long-term decisions making of dynamic
industrial management problems.
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5.5.2.6 Daily Planning Breakthrough Model. Advanced planning is a key component of the
company in a customer centered supply chain program. In the present day environment
advanced integrated circuit solution provider (Agere Systems Company) has moved from a
spreadsheet based weekly planning system to a daily based planning system. The advanced
planning system being a key component in the company's customer centered supply chain
program, enables it to improve its performance significantly. In spite of a down market the
inventory turns reflected an increase from 6 to 8 percent in a year, shipping performance
jumped from 60 percent to 90 percent. The move to daily planning was driven by the desire
to provide customers with better service and the ability to carry fewer inventories. To the
extent the model is so flexible that when a new order comes in every effort is made to start
the order process the next day, thereby slashing the order cycle by as much as one week.

5.5.3 Proposed Model.

5.5.3.1 General. The agribusiness and the food industry due to greater global
competitiveness require enhanced co-ordination between Farmers, Food Industry and the
Consumer so as to enhance the efficiency and profitability of the FSCM. The co-ordination
steps to be followed by the processing firms gain importance to be able to control the
quantity and quality of their raw material. The food supply industry plans timely supply of
raw food material to ensure that they operate at optimum capacity throughout the entire
season. They may also take into account variations in quality within the supply area and at
different times during the season to maximize their production. These decisions will impact
on the choices growers make with regard to their harvest capacities and management and,
depending on the payment system in place, on their incomes as well. Other stakeholders in
the supply chain, such as contractors and haulers, also directly affect its management and
results. All modifications to the structure of the supply chain or the management rules
should take into account stakeholder strategies and ways of operating.

5.5.3.2 Approach. A modeling approach based on various complementary models needs to

be developed to simulate on a weekly/daily basis the planning and operation of FSCM
throughout the season/ year. The first model may be used to compare weekly and total
production for a season. The second model may focus on the simulation of logistic chains
and enable the impacts of technological and structural changes on daily harvest and
transport capacities to be assessed. Another model can be used to support discussion and
negotiation between growers and millers regarding evolutions in the supply chain
management. Escalating market instability demands firms to be increasingly reactive and
flexible, and implies the development of new forms of industrial organization in
agro-food chains.
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In this context, the control of products from supply areas to processing plants and
from plant to markets is a critical factor of efficiency. Numerous elements interact within
the supply chain such as industrial capacities, production risks, diversity of farm structures,
finding organizational solutions that satisfy the objectives and constraints of all stakeholders
are not a simple process and require a flexible approach. Thus the models should be such
which can take in wide variety of inputs and as an output provide flexibility to the decision
makers.

5.5.3.3 Flexible Model. The common objective of all the models is to improve the
performance of the related FSCM by aiding the decision making process. Procurement,
production, transportation and inventory management are some of the main logistical
drivers of a SCM. The problems numerated are proposed by various studies to be resolved
by different types of models such as, Mixed Integer Programming model, Linear
Programming model, Multi Objective Programming model, Goal Programming model,
Analytical and Simulation model. Different software programs are also used and different
approaches are also been developed for obtaining solutions from the developed models. In
some cases depending on the complexity of the problem there may be a need to develop
several heuristics for producing solutions that are close to the optimal solution. The reasons
for facilitating from heuristic methods can be given as the huge amount of time is required
to obtain an optimal solution. Models also serve the purpose of multi decision planning
horizon, whereas some of the models are developed for only single period decision
planning. Mode of transportation assumption is also different in different model studies.
The FSCM problems are characterized by various sources of uncertainties i.e. length of the
order forecast horizon, information availability and data timeliness, decision policies used,
supply, process and demand uncertainties. Generally all proposed models are implemented
in various FSCM either by considering collected real or generated hypothetical data. There is
thus a need to create a flexible model which may be a mix of various models and provides
the following facilities:
(a) Provide flexibility of accepting different inputs and assist in taking variety of
decisions.
(b) Achieve the set goals or a set of objectives.
(c) Provide inventory solutions.
(d) Help in search of all possible permutations or combinations of various
possibilities.
(e) Solutions proposed by model must be feasible and amenable to the
constraints of the supply chain.
(f) Lead to quick solutions for ideal decision making.
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5.6 INTEGRATED FOOD SUPPLY CHAIN MANAGEMENT MODEL

5.6.1 Broad Methodology. In an endeavor to formulate Integrated Food Supply Chain

Management (IFSCM) Model, approaches and support tools that could be valuable in
getting inputs for profitable and timely decisions as well as for appropriate negotiations
between firms seeking organizational solutions to problems have been investigated. The
model formulation has been attempted in two parts wherein the first part reviews
theoretical framework used in chain analysis and suggests a modeling approach for flow of
material. The approach provides negotiation support to stakeholders involved in the supply
chain by highlighting the impact of individual strategies on the efficiency of the chain as a
whole. The second part describes how this approach has been implemented in the Food
Supply industry. The IT based Software Model is proposed to be integrated to coordinate
various activities that provide the ideal co-ordination as follows:-
(a) Coordination between procurement department and large number of vendors for
procurement of variety of materials with respect to type, schedule, quantity and rates.
(b) Coordination between warehousing, inventory management and manufacturing or
production so as to ensure desired inflow of raw material.
(c) Coordination between large number of agencies such as transportation, marketing,
retail, managing consumer demand and satisfaction.
(d) Coordinate for better planning with respect to the financial aspects such as amount
invested, held as inventory, sales and spread involved in the market.

5.6.2 Broad Disciplines in FSCM. The food industry sector as we are aware is vast and
diversified, categorized by different segments such as fresh food, organic food, processed
food and livestock food industry. It is also understood that each segment requires a different
SCM strategy, such as for procurement and sourcing, inventory management, warehouse
management, packaging, labeling systems and distribution management. It is important to
understand the uniqueness and characteristics of food supply chain as well as have wide
acceptance of FSCM as a tool so as to provide opportunity for the firm to have competitive
advantage. The model emphasizes on the complexity of SCM of raw agricultural products,
amplifies issues on product perishing ability, marketing structure, transportation, product
quality and post-harvest losses among others. Perishing ability of agricultural produces
creates uncertainties within the supply chain in respect to product quality, safety and
reliability. IFSCM encompasses a set of interdependent aspects that are interlinked and
work closely together to manage the flow of goods and services along with the value-added
chain of agricultural and food products. The supply chain includes the farmer, processor,
suppliers, transporters, warehouses, retailers and also customers.
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Model formulation for SCM in Food Supply Industry thus involves an in-depth analysis of the
aspects involving the process of planning, organizing and controlling the flow of materials
and services from suppliers to end users or consumers. The Integrated Logistics besides
aspects as given above incorporates supply management, integrated production and
operations. Broad disciplines of Integrated FSCM Model which form the backbone of the
model as already discussed are depicted in the Figure 5.61 below:-

DISCIPLINES OF FOOD SUPPLY CHAIN

FIGURE – 5.6.1
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5.6.3 Assumptions for Formulation of IFSCM Model. The formulation of intended IT based
IFSCM Model has been done for a plant involved in production of fruit juices / concentrates,
fruit jams, sauce and wines. The framework of the plant for IFSCM has been based on certain
assumptions as discussed below:

(a) Parameters. The model is based on total integration between various elements of the
chain, thereby commencing the chain from the farms, involving procurement of raw food
supply as system inputs from farmers or cooperatives followed by management of
inventories, organizing and coordinating plant production of desired processed food
material, inventory management of finished products, packaging, warehousing,
transportation, supply to wholesalers /retailers, supply or delivery to consumers, and
wide variety of other facets such as documentation, management of legal aspects,
exports, financial management etc.

(b) Industrial Plant. The industrial plant assumed for the model is involved in production
and packaging of fruit juices, fruit concentrates, fruit jams, variety of sauce and wines. The
parameters for location of the plant, size, capability, HR aspects will not form part of the
model as these aspects would have been looked into before setting up the plant. It is
assumed that the plant has been setup after detailed analysis and in depth coordination
with the farmers/ mandi operatives/ cooperatives. The market analysis also would have
been completed and the setup for marketing established up to retail stores. Plant as
discussed will deal in preparation of fresh juices and in the process adopt various
techniques to preserve them and to ensure their quality, including various process and
preservation methods. Plants complete line will provide for integration of fruit processing,
concentration and production of wide variety of products to ensure gap free utilization of
all plant facilities.

(c) Farmers. The farmers or the corporate growers will act as vendors. The type, variety,
quality and quantity of produce will be coordinated for sustained supply of seasonal food
products as raw material for processing into finished product. Production contracts will be
the primary means of control and vertical integration of family farms. These are generally
of two types wherein, firstly Production Management contracts specify the methods
farmers must use and secondly Resource-Providing contracts, require the contractor to
provide materials and equipment. In the latter case which is increasingly the prevalent
arrangement, the family farm owns its land and "sells" its output, but retains no real
decision making control over the essential farming activities, like crop selection,
equipment purchase, production methods, sales channels, and buyers.
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(d) Cooperative Farming. Cooperatives are involved in corporate farming, which being
the business based on agriculture, specifically the practices being followed by mega
corporations. It is a modern food industry concept which encompasses the use of
products for the company itself and entire chain of agriculture-related business.
Involvement of cooperatives is being figured for coordination of availability of land,
fertilizers, loan to farmers, and availability of equipment before growing the food variety,
subsequently collection, weighing, storage, transportation, payment etc.

(e) Contract Farming. In this method when followed an agreement that involves
producers/farmers, intermediaries, processing and or marketing firms, to provide the
farm produce at predetermined prices and quality, at specified places, after a specified
duration. The contracts could be of three types namely:
(i) Procurement contracts under which only sale and purchase conditions are
specified.
(ii) Partial contracts wherein only some of the inputs are supplied by the
contracting firm and produce is bought at pre-agreed prices.
(iii) Total contracts under which the contracting firm supplies and manages all the
inputs on the farm and the farmer becomes just a supplier of land and labour. The
relevance and importance of each type varies from product to product over time and
these types are not mutually exclusive.

(f) Warehouses. The aspects involved will be storage of supplies or the raw material from
farmers/growers, inbound processing, cross docking, warehousing & storage. Inventory
management, production, packaging and management of outbound processing are also
some of the aspects forming part of the Integrated Model. The warehouses will also cater
for cold storage as well as normal storage depending on the variety to be held and also
the duration of the storage.

(g) Plant Processing/ Production. Detailed scheduling and production planning are
important aspects to be considered before plant execution. The plant will be capable of
processing of fruits like mango, orange, apple, pears, etc. for making juice concentration,
paste, jam, jelly, ketchup, etc. The plant size assumed is capable of processing between
100 to 150 Ton/day depending on availability of fruits. The most important steps involved
in processing of juices and beverages are:
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(i) Selection and preparation of raw material viz. fruits such as Apple, Pineapple,
Mango, Tomato, Guava, Berry, Grapes, Oranges or Lemon as per the plant
requirement.
(ii) Extraction of Juices. Straining, Filtration, Clarification Blending and
Pasteurization. Preparation of Juice Concentrations, Clear Juices, formulated, blended
and spray dried and converted into readily soluble powders.
(iii) Filling, Sealing, Sterilization, Cooling, Labeling and Packing.

(h) Marketing/ Sales Management. The focus will be on the practical application of
marketing techniques, management of marketing resources and activities. Marketing
managers will be responsible for influencing the level, timing and composition of
customer demand to create an effective, cost-efficient marketing management strategy.
Firms must possess a detailed, objective understanding of their own business and the
market in which they operate. In analyzing these issues, the discipline of marketing
management often overlaps with the related discipline of strategic planning. The software
of the model should provide inputs to the Managers to employ various tools from
economics and competitive strategy to analyze the industry context in which the firm is
operating. Marketing manager will also collect the data required to perform accurate
marketing analysis by conducting market research, to obtain this information it may
employ a variety of techniques to conduct market research, but some of the more
common include:
(i) Qualitative marketing research such as focus groups.
(ii) Quantitative marketing research, such as statistical surveys.
(iii) Experimental techniques such as test markets and Observational techniques
such as ethnographic (on-site) observation.
(iv) Oversee design and various environmental scanning/ competitive intelligence
processes to help identify trends and inform the company's marketing analysis.
(v) Brand audit to find the current position in the industry as compared to its
competitors and examination of its effectiveness.

(i) Order Fulfillment. The aspects involved are development of a marketing plan to
specify how the company will execute its chosen strategy and achieve the business
objectives. The content of marketing plans varies from firm to firm, but aspects commonly
included are sales orders processing, logistics coordination, transportation planning,
costing and execution of plans.
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(j) Information Management. The role of IT and information asymmetry is eminent and
very important for encouraging vertical integration and lateral integration within the
supply chain. The main purpose of the IT software created will be integration and
information management so as to gather daily inputs and coordinate the procurement of
material, plan efficient production schedules, product delivery and inventory pricing in
the face of changing demands. The growth in the IT software’s and easy accessibility of
computing power, development and implementation of objective based modeling system
have been used in the new environment, for integrating quantitative and simulation
models, as a backend system for both horizontally diversified and vertically Integrated
FSCM.

5.6.4 Purpose. The main purpose of the model is to find efficient production schedule,
product delivery and inventory pricing in the face of unstable demand. The model shall be
used to find the plan that provides the best co-ordination between procurement,
manufacturing and marketing. An optimization model is to be developed at the Plant level
to maximize the plant yield and net revenue of the chain by defining suitable harvest dates
and crop cycle lengths for a range of production units. This model will include cultivation,
harvest, transport and transformation costs and provide an optimum solution for harvest
scheduling, given the structure and capacity of the FSCM. The objectives thus are to link a
managerial view of SCM to a quantitative approach and to provide insight into sources of
uncertainty which restrict supply chain performance. Review of quantitative and more
qualitative, managerial literature identifies four clusters of sources of uncertainty: order
forecast horizon, input data, administrative & decision process and inherent uncertainties.
Several principles for improving operational performance are also identified for each source
of uncertainty. The model has to be well suited to the situation where the plant and its
suppliers are closely integrated. Basic modules of IFSCM which form the backbone of the
model are depicted in the Figure 5.62. Firstly the modules as indicated below will be
discussed individually, followed by the models to be used in each of these modules and lastly
integration of all models & modules as IFSCM model:

(a) Module 1 – Farmer / Cooperatives.

(b) Module 2 – Plant Procurement

(c) Module 3 - Production Plant.

(d) Module 4 – Sales Division.

(e) Module 5 – Wholesale/ Retail / Marketing.

190
FIGURE 5.6.2
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5.6.5 Module -1 (Farmer/ Cooperatives).

5.6.5.1 Farmer. A farmer is a person engaged in agriculture, raising living organisms for food
or some combination of raising field crops, orchards, vineyards, poultry, or other livestock. A
farmer might own the farm land or might work on land owned by others, but in advanced
economies a farmer is usually a farm owner, while employees of the farm are farm workers
or farmhands. In the model under formulation we assume that the farmer is the owner and
necessary coordination or tie up will be done in advance with the farmer on the following
issues:

(a) Land available for cropping, its development for the required or proposed crop. The
land will be surveyed in advance while planning the establishment of the plant and
identified for a particular cropping pattern.
(b) Crop planning as per land availability and pattern of requirement of various varieties
of items by the plant. To elaborate the point let us assume the plant is manufacturing
tomato sauce/ juice, wherein it requires different variety of tomatoes in a phased manner
so that it can manufacture the requisite variety of sauce or juice or let us assume in case
the plant requires mangoes to prepare soft drinks, concentrates, jam, jelly or any other
variety of product. It will require different variety of mangoes in a phased manner which
suits its input/ consumption requirements. The required tie up with the farmer will be
done in advance and to ensure consistency, everything related to growing will not be
left to the nature.
(c) The Project will identify, educate, and support farmers with agricultural experience
to establish their own economically and environmentally sustainable small farm
businesses in the region. The desired training to ensure the correct pattern & type of
produce will be coordinated with the regional farmers. The help to ensure and keep
farmland in production and strengthen rural communities, farmers markets and the
regions food system as a whole will also has to be coordinated. Farmers will have to grow
a range of high-quality, locally-grown farm products as required by the plant.
(d) The farmer will also be provided the following assistance to ensure regulated supply
of desired products:
(i) Provision of seeds, fertilizers, pesticides / insectides, water machines etc as per
crop planning for selected / nominated areas.
(ii) Bank loans / financial support, Rate finalization as per the quality of the
product. Support from Mandi operators to coordinate and supply the farm produce
to the plant.
(iii) Support from Research Centers and Institutes.
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5.6.5.2 Mandi Operatives. In Madhya Pradesh Mandi Board regulatory framework for
agricultural marketing is unique and consists of two distinct set of measures. One of these is
development and regulation of primary markets, popularly called "Regulated Markets" and
the second set is the regulation of market through a series of legal instruments. In
accordance with the recommendations of the Madhya Pradesh National Agriculture
Commission, the State Agricultural Marketing Board also known as Mandi Board has come
into existence since 1973 under the provisions of Madhya Pradesh Krishi Upaj Mandi
Adhiniyam 1972. The Mandi Board is a tiered organization of which the first tier consists of
regulated markets which are in the nature of physical and institutional infrastructure and act
as first contact point for farmers to encash their farm marketable surpluses thereby
eliminating middlemen from the process of agricultural marketing, adopting the Citizen
charter to ensure right of information to the public and installing the democratically elected
governing bodies in the Mandi committees. Mandi Boards also provides the following
assistance to ensure regulated supply of desired products:
(a) Crop planning & pattern advice by Government agencies.

(b) Provision of seeds, fertilizers, pesticides, water, machines etc.

(c) Bank loans / financial support.

(d) Rate fixing as per the quality of the product.

(e) Technical support from Research Centers and Institutes.

5.6.5.3 Supply to Plant. The farmers themselves ideally will be responsible for transporting
the produce to the plant and receive their payments. This system may not be viable for all
types of products grown by them. Short life food products if not supplied in time may get
spoiled or rot and be of no use to the plant. The losers in this case will be both the sides,
farmer for not getting the returns and the plant for not getting the raw material in the
desired condition or desired quantity. There is a requirement of cold storage warehousing to
obviate the envisaged problems of short product life, as raw food variety grown can be held
for a long time to get better rates and supply the items as and when required by the plant. In
this case the cost of product may go up; however the plant will not be holding the inventory,
so there is a bit of saving as well. This option will be part of the model as it always remains a
channel of procurement of raw materials for the plant in case the farmers do not wish to
come through Mandi or Cooperative.
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5.6.5.4 Co-Operative Farming. Factors like increasing pressure of population on land,

uneconomic size of holding, primitive and unscientific methods of cultivation, inequitable
distribution of land, poverty and ignorance of the peasantry, etc., are the major
impediments that stand in the way of implementation of the planned agricultural
production. However, co-operative farming which implies pooling together of the scattered
and uneconomic holdings of land and their joint management goes a long way towards the
progress of agriculture. There are four types of co-operative farming societies in India such
as, Better Farming Society, Tenant Farming Society, Joint Farming Society and Collective
Farming Society as discussed below:

(a) Better-Farming Society. The basis of the Better Farming Society is to educate
farmers and to encourage co-operative farming with the main object being to educate
and acquaint the farmers to new systems of farming by way of demonstrations of
improved methods, use of improved seeds, manures and implements. Number of other
activities such as disposal of farm produce at reasonable prices, purchase of occupational
requisites, etc., is also undertaken. Under this type of co-operative farming, the
ownership and management of land rests with the individual.

(b) Co-operative Tenant Farming Society. The Society provides its members with
facilities such as finance, implements, seed, etc. The society owns the land or gets it on
lease, but does not undertake farming, the land is divided into blocks and each block is
given on rent to cultivators who cultivates according to the plan laid down by the Society.

(c) Co-operative Joint Farming Society. The joint-farming societies are suitable to
solve the problem of fragmentation of land and the cultivation of uneconomic holdings.
The land of small owners is pooled together thereby increasing the size of the unit of
cultivation. The members of the society work jointly on the pooled land according to the
programme of the society.

(d) Co-operative Collective Farming Society. The society owns the land or gets it on
lease (Government waste lands) and is collectively cultivated by its members. Members
get wages for their work and in case of profits a bonus is also paid in proportion to their
wages. The members of the collective farming society do not have any ownership or
proprietary rights on the land.
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5.6.5.5 Agricultural Cooperatives. The agricultural cooperatives are setups

where farmers pool their resources in certain areas of activity. In India, for example the
production of sugar from sugarcane mostly takes place at cooperative sugar mills owned by
local “farmers the shareholders” which includes all farmers, small and large
supplying sugarcane to the mill. This is particularly true in the state of Maharashtra, wherein
large numbers of farmers have got together and formed sugar cooperatives in their
respective local areas. The system is viable and is envisaged to be followed in the proposed
IFSCM Model. There are basically two types of Agricultural Service Cooperatives, Supply
Cooperative and Marketing Cooperative as given below:

(a) Supply Cooperatives supply their members with inputs for agricultural production,
including seeds, fertilizers, fuel, and machinery services.

(b) Marketing Cooperatives are established by farmers to undertake transportation,

packaging, distribution, and marketing of farm products. Farmers widely rely on credit
cooperatives as a source of financing for both working capital and investments.

5.6.5.6 Agricultural Supply Cooperatives. The Supply Cooperatives aggregate purchases,

storage, and distribution of farm inputs for their members, by taking advantage of volume
discounts and utilizing other economies of scale. Supply Cooperatives bring down the cost of
the inputs that the members purchase from the cooperative compared with direct purchases
from commercial suppliers. Supply cooperatives also provide inputs required for agricultural
production including seeds, fertilizers, chemicals, fuel, and farm machinery by operating
machinery pools that provide mechanical field services (e.g., plowing, harvesting) to their
members. The plant before being established will work out the assessment of its capacity,
likely requirement of raw crop supplies for processing and the tie up with Supply
Cooperatives to plan and implement the growth pattern, areas to be covered with the
required variety of crop, collection and delivery to the plant. Supply Cooperatives will
organize collection from the farms/ orchards and provide necessary transportation,
weighing, warehousing, as well as fix the rates of various varieties to be paid to the farmers.
The supply of the raw material for the plant production ideally should be a regular flow to
avoid compilation and degradation.
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5.6.6 Module-2 (Plant Procurement).

5.6.6.1 Raw Material Procurement. The timing of commodity purchases has a significant
influence on unit costs for a firm. It represents an area on which food manufacturer focuses
in order to improve profit, service and/or quality and to withstand pressures to reduce price.
The basic function of commodity-procurement department is to maintain regular commodity
supply in order to meet production demands. Managing supply risk and Cost Minimization
are very important factors and are accomplished by developing an optimal procurement
strategy for each commodity depending on a variety of factors such as volume needs,
associated risk, and potential costs as discussed below:

(a) Commodity Strategy. It provides the strategy with specific details and outlines the
actions to be followed in managing the commodity for the long term. The two primary
categories of commodity-procurement strategies followed are, Spot-Market Transactions
and Forward Purchasing Mechanisms.

(b) Spot Market. The Spot or Cash Market is the traditional procurement instrument and
purchase is done in a predefined, general quality category on the cash market, take
possession immediately and have no direct contact with the supplier. Spot markets offer
negligible lead time, but often comes at a higher price and incurs greater price uncertainty
in food manufacturing, this strategy is employed as a simple urgent replenishment
strategy e.g., when inventory drops below a pre-determined threshold level.

(c) Forward Buy. The purchase and possession of a commodity done in this model is in
advance of manufacturing needs and purchase is tightly coordinated with production
needs. The points kept in mind while deciding commodity-procurement decisions are
market efficiency, perishing ability, seasonality, storage requirements, commodity cost
share, budget constraints, cooperative involvement, limited supply, price risk, storage
availability, traceability, and volume.

(d) Forward Contracts. To sustain the plant production forward purchasing mechanism
will be used with the farmer /cooperative involving delivery of a commodity at future
dates, specifying quantity, commodity type, delivery time / place, and price
determination. Forward contracts offer the opportunity to procure commodities for
future processing without holding physical inventory and with little or no payment in
advance of delivery. A disadvantage of forward contracts is the possibility that the
supplier fails to deliver either the desired quality or quantity. However, the likelihood of
contract default is less and legal recourse is available.
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(e) Commodity Procurement Decisions. The procurement decisions are effected due to
the following constraints:

(i) Product Constraints. These depend on Market Efficiency, Perishing ability,

Seasonality, Storage Requirements and Commodity Cost Share.

(ii) Company Constraints. The constraints are based on, Budgets, Cooperative/
Investment, Limited Supply, Price Risk Strategy, Sales Forecast Accuracy, Storage
Availability and Volume.
(iii) Service Constraints. These are Special Promotions, Supplier Service Level and
Traceability Commodity.

5.6.6.2 Vendor Identification/ Selection. Purchasing or procurement has a direct impact on

the cost factor or cost saving leading to profit earning. Procurement mainly and most
importantly gets related to selection of the right vendor for the required material,
component, part or product and determining the quantum of order to be placed to each
vendor. Selection of desired farmers and cooperatives is dependent on conflicting criteria
which spreads from price quoted, quality of supply, following of delivery time schedule,
quality of service provided, order processing, following up of orders, reliability and rating
of vendors based on past performance. The purchasing process commences by
identification of suitable farmers and cooperatives who are capable of growing the desired
products to be used as raw material, followed by qualifying and placing of order on the
identified farmers and cooperatives, subsequently monitoring and managing the delivery
process and evaluation of purchase and the suppliers. The quality of food material and
timely supply also has a significant impact to meet the aspirations of consumers. The
objectives of purchasing are as given below:-

(a) Provide timely flow of raw food materials and supplies as required by the firm.
Maintain adequate quality standards for the maintenance of standards for quality control.
(b) Minimize inventory investment and losses by optimizing the listed requirement.
Standardize items bought if possible as it is a major factor in maintaining standards.
(c) Develop competent vendors capable of fulfilling desired requirements at set
standards. Purchase required items/ services at the lowest price to maintain good profits.
(d) Purchasing strategies to be implemented are to ensure, Supplier Optimization, Total
Quality Methods, Global Sourcing, Risk Management, Vendor Development and Green
purchasing.
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5.6.6.3 Inventory Management. Inventory holding will be resorted to only as hedge against
various external and internal factors, as a precaution, as an opportunity, as a need and for
speculative purposes. There is a need to setup VMI throughout the plant as part of the
model being formulated. Inventory planning and control shall largely follow vendor
selection. Inventory control decisions will focus on the order quantity, quality and supply
timings between the orders. The basic considerations being lead time, ordering cost,
inventory carrying cost, transportation cost, shortage cost, in-transit inventory carrying cost
and the level of service in terms of allowable inventory or shortage. The ultimate objective
being on cost cutting and optimum consumer satisfaction. However as both these aspects
are conflicting in nature there is a need to have economic trade-off between inventory levels
and customer service levels. Inventory control decisions in a SCM to include stock locations,
product mix and planned inventory strategy which could be either, “JIT”, “Push” or “Pull”.

5.6.6.4 Raw Material Inventory Management. The raw material inventory warehouses will
be nearer to the cooperative farms so as to have a regular sustainable supply and also nearer
to the production facilities where raw materials, consumables and packing materials are
stored and issue for production on JIT basis. The holding of inventories will basically cater for
Variation in Production Demand, also cater for Seasonal Demand, ensure economy in
procurement scale, price increase / quantity discounts, reduced transit cost & time and
ensure that long lead and high demand items are held in Inventory. There is also a need to
balance the inventory levels based on the demand pattern which creates the need for
inventory into two types of demands mainly being Independent Demand and Dependant
Demand for inventories. This differentiation is necessary because the inventory
management systems and process are different for both categories. While finished goods
inventories which is characterized by Independent demand, are managed with sales order
process and SCM processes and are based on sales forecasts, the dependant demand for raw
materials and components to manufacture the finished goods is managed through Material
Resources Planning (MRP) or Enterprise Resource Planning (ERP) using models such as JIT
and other concepts. MRP as well as ERP planning depends upon the sales forecast released
for finished goods as the starting point for further action.

5.6.6.5 IT Inputs. The Plant Procurement setup will manage complete inventory by entering
all inputs of materials received and issued as per model software as discussed above and
they will also get inputs from plant as to quantity of products produced. The sales division
will provide information with respect to quantities of bulk items sold so as to create a picture
as to what shall be the likely future requirement.
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5.6.7 Module-3 (Plant Production).

5.6.7.1 Plant Setup. The plant setup is designed for manufacturing / processing and
preserving the organoleptic, physical and aromatic characteristics of the processed fruit in
order to produce a juice of high quality in color and clearness. Fresh juices have short life,
are best in taste and color and are best to be consumed fresh. The efforts to preserve them
and to ensure their quality, various techniques are to be adopted including various process
and preservation methods. The most important aspect is to ensure that such methods help
in retaining the properties to the maximum extent. The plant in the model is for processing
of fruits like mango, orange, apple, pears, etc. and for making juice concentration, paste,
jam, jelly, ketchup, etc. The plant size ranges for consumption of raw material up to 100 -
150 Tons/day or even more depending on availability of fruits. To produce juice concentrates
vacuum evaporation is another step in fruit processing line and the final concentrate can be
filled in aseptic bags or in drums for export purposes. Clear Juices can be formulated,
blended and spray dried at best conditions to convert them into readily soluble powders.
The most important steps involved in processing of juices and beverages are:

(a) Selection and preparation of fruits.

(b) Extraction of Juices.

(c) Straining, Filtration and clarification.

(d) Blending Pasteurization.

(e) Filling, Sealing and sterilization.

(f) Cooling, Labeling and Packing.

(g) Packing for sale in wholesale/ Retail.

(h) Updating of inventory for the raw material used.

(i) Maintaining of inventory for salable items produced.

(j) Projecting demand for raw material in time to ensure nonstop production.
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5.6.8 Module – 4 (Marketing and Sales).

5.6.8.1 Warehousing & Inventory Control. The finished and packed products will be moved
to warehouses within the plant and the warehouse will be managed by Warehouse
Management System (WMS) as discussed earlier in warehousing. Material direction and
tracking in a warehouse will be coordinated by database driven computer program and use
the WMS to improve warehouse efficiency by directing pathways and to maintain accurate
inventory by recording warehouse transactions. Warehouses will be automated and will
require only operators to work and handle all the tasks. Pallets and product will move on a
system of automated conveyors, cranes and automated storage and retrieval systems
coordinated by programmable logic controllers and computers running logistics automation
software. These systems will be installed in refrigerated warehouses where temperatures
are kept very cold to keep product from spoiling, especially in warehouse where they require
specific temperature to avoid damaging the food products, and also where warehouse has
space constraints, as automated storage systems can use vertical space efficiently. The
warehouse so as to function efficiently will be properly slotted with slotting addresses and a
storage medium wherein a product can be picked from pallet rack or carton flow, and
method of picking can be pick-to-light, pick-to-voice, or pick-to-paper. A proper slotting
plan can ensure a warehouse to improve its inventory rotation requirements—such as First
in, First out (FIFO) and Last in, First out (LIFO)—control labor costs and increase
productivity.

5.6.8.2 Order Selection & Supply. Software based stores require less physical retail space
and smaller warehouses to store goods. The warehouse will be able to fulfill many small
orders directly from end customers rather than fewer orders of many items from stores.
Having a large and complex supply chain containing many warehouses can be costly. It can
be beneficial for a company to have one large warehouse per continent, typically located
centrally to transportation and at these continental hubs; goods may be customized for
different countries. For example, goods get a price ticket in the language of the destination
country. Small, in-warehouse adjustments to goods are called value added services. The
marketing and sales will maintain variety details of plant production and stock position. The
market requirement will be met from the stocks and feedback of sales which shall generate
the requirement of plant production will be given to the plant. Endeavour has to be made to
maintain just adequate stock to ensure a continuous flow of stocks so that there does not
exist a situation of over inventory or under inventory. This balance to be maintained is quite
complicated and the model software will be modified accordingly.
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5.6.8.3 Automated Storage and Retrieval System (ASRS) will also be used where there is
high volume of loads being moved into and out of storage; storage density is important
because of space constraints; no value adding content is present in this process; accuracy is
critical because of potential expensive damages to the load. ASRS can be used with standard
loads as well as nonstandard loads. ASRS systems as we are aware are devices designed for
automated storage and retrieval of packets and items in manufacturing, distribution, retail,
wholesale and institutions. They are compact units that utilize the unused overhead space of
a plant or warehouse, and convert to live storage of product. Items can be placed on trays or
hang from bars, which are attached to chains/drives in order to move up and down. Space
savings, increased productivity/reduced labor, increased accuracy and reduced inventory
levels are achieved. Storage & Retrieval Machine (SRM) will also be used for rapid storage
and retrieval of material. SRM are used to move loads vertically or horizontally. SRM can
also move laterally to place objects in correct storage location. The trend towards JIT
production often requires sub-pallet level availability of production inputs, and ASRS is a
much faster way of organizing the storage of smaller items next to production lines.

5.6.8.3 Transport Planning & Coordination. Transportation will include both inbound
movement of material from Farmers / Cooperatives to Plant warehouses, followed by
processing or production stage and outbound movement of finished product to the
consumers directly or through distribution centers. Transportation encompasses a wide
spectrum of planning coordination and operational aspects. The same transport bringing in
materials can also be used to transport finished goods. The freight transportation will have
to be used optimally for cost savings with revolutionary changes. Successful transportation
also implies need to provide prompt pickup, excellent customer service, swift, complete and
damage-free delivery. The motor carrier industry forges a critical link in a multimodal SCM
system and must compete against time and service to be cost effective. Shippers move cargo
over whatever mode provides the best service. Less-than-truckload (LTL) motor carriers
provide good competition. Parcel carriers constantly increase their maximum shipment
weight while truck load carriers will have to accept partial trailer loads as small as 500 Kgs.
Shorter cycle times mean better service. Customers' needs have also changed. The growth of
JIT and Quick Response inventory management and third-party SCM requires all participants
in the SCM chain to consider shorter cycle time a competitive advantage.
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5.6.9 Module – 5 (Whole Sale/ Retail Supply).

5.6.9.1 Marketing Management. Marketing management shall include advertising,

promotion management, business-to-business marketing, consulting, market management,
marketing research, new product development, product and brand management, retailing
and wholesaling, sales management, and managing a family business. The marketing
concept is based on the management belief that customers will long those products that
they need and the key task of the management thus is to identify customer needs and wants
and design products accordingly. The marketing concept underlines the following principles:-
(a) Identify the needs and wants of the customer.
(b) Design the products and services to fulfill the same.
(c) Use promotion techniques to communicate the benefits of the product.
(d) Realizing the profit by satisfying customer needs over a long term.

5.6.9.2 Marketing Strategy. To achieve the desired objectives, market strategy will be
formulated typically to identify one or more target customer segments which are to be
pursued and these customer segments will be selected as targets. Once the strategic
objectives have been identified, the target market selected and the desired positioning for
the product or brand has been determined, marketing manager’s will focus on how to best
implement the chosen strategy keeping in mind the product management, pricing, place,
promotion and politics, which affects marketing in a significant way. Effective
implementation of strategy will require management of both internal resources and a
variety of external vendors and service providers, such as the firm's advertising agency.

5.6.9.3 Area Distribution. The Marketing Managers will have to work to design and improve
the effectiveness of core marketing processes, such as new product development, brand
management, marketing communications, and pricing. Managers will have to employ the
tools of business process reengineering to ensure these processes are properly designed and
use a variety of process management techniques to keep them operating smoothly. The
Area Distribution plan will be formulated as per envisaged demand of variety of products
keeping the following aspects in mind:
(a) Market Segmentation. Requirement of segmentation arises so that the marketer is
clear about as to where to compete and place the product/ service. There are different
bases for segmentation, namely, Customer-based Segmentation, Product-based
segmentation and Competition based segmentation.
(b) Standardization. It is important for the company to maintain product standards,
product price and communication medium for all segments.
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(c) Differentiation. The firm differentiates the product packaging from small, medium to
large etc. to cater for the needs of different segments and the pricing would be different
in these segments. The Indian Railways differentiates its service into several categories
like AC 2-tier, AC 3-tier, Sleeper and general coaches depending upon the various segment
needs.
(d) Product Mix. The area distributers will also be provided with a mix of products with
an aim to cover maximum segments and ensure gap free supply.

5.6.9.4 Retail Stores. Area Distributors will ensure provision of supplies to the Retail stores
with the desired variety mix as per demands. The factors to be considered are as follows:
(a) Requirements projected by retail stores are fulfilled in time.
(b) Daily feedback system based on daily sales to generate requirements.
(c) The system to use bar codes/ POS/RIFD systems to generate information inputs.
(d) Guard against building of inventories or have excess capacity.
(e) Life cycle of the product will be kept in mind while stocking.
(f) Improved and effective SCM is a must.

5.6.9.5 Market Analysis. Market analysis of the industry and the market in which the firm
operates focusing especially on their relative competitive strengths and weaknesses,
economics and competitive strategy are important. Brand audit gives the current position in
an industry compared to its competitors and the examination of its effectiveness by asking
five questions, as to how well the business’ current brand strategy is working, what are the
company’s established resource strengths and weaknesses, what are its external
opportunities and threats, how competitive are the business’ prices and costs, how strong is
the business’ competitive position in comparison to its competitors, and what strategic
issues are facing the business. The market analysis will help in the following:

(a) Product acceptance by consumers.

(b) Product Competitors, rates and popularities if any with reasons.

(c) Market trends and future requirements of various varieties.

(d) Avenues to improve own products, to enhance popularities, as also schemes and ideas
to improve sales.
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5.6.9.6 Data Analysis. The IT revolution has significantly accelerated development in the
recent past; astonishing gains in PC computing speed, e-commerce, the power and flexibility
of data management software’s have created / promoted a range of applications.
Implementation of Enterprise Resource Planning (ERP) and systems offer homogeneous,
transactional databases that facilitate integration of supply chain activities. Moreover,
competitive advantage in SCM is gained not simply through faster and cheaper
communication of data, but also due to ready access to transactional data which
automatically lead to better decision-making. A guiding principle is: To effectively apply IT in
managing its supply chain, a company must distinguish between the form and function of
Transactional IT and Analytical IT. The model will have an Integrated IT based management
system. Inputs to this will be generated at all levels from Plant Procurement to Plant
Production, Sales Division, whole Sale and Retail. The model will have a mix of variety of
models dovetailed into one system and produce outputs after due analysis of required
inputs at all levels in desired formats. Some of the aspects which can be managed by using
software are;
(a) Purchasing management.
(b) Master production schedule.
(c) Production resources data/ Manufacturing technical data.
(d) Item master data and Bill of materials (Technical data).
(e) MRP, Inventory control, Inventories and orders.
(f) Shop floor data collection Shop floor control and Lot traceability.
(g) Capacity planning or capacity requirements planning (CRP).
(h) Standard costing, Cost reporting / management (Cost control).
(i) Business planning.
(j) Contract management.
(k) Sales analysis and forecasting and finite capacity scheduling.

5.6.9.7 Analysis of Information / Data Generated. The analysis of all the information
highway and data generation results in achieving the following:
(a) Better control of inventories.
(b) Improved scheduling.
(c) Productive relationships with suppliers.
(d) Improved design control.
(e) Better quality and quality control.
(f) Reduced working capital for inventory.
(g) Improved cash flow through quicker deliveries.
(h) Accurate inventory records.
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5.6.9.4 Replenishment of Stocks. Successful use of IT to speed up the movement of

freight is only possible if the carriers have low cost methods to accurately gather and
disseminate data. Bar code and radio frequency technologies provide the tools for LTL
carriers to survive and thrive as discussed below:-
(a) Bar Codes. Traditional bar codes uniquely identify every package in the pipeline.
Scanning the packages confirms custody transfer from warehouse to carrier to consignee.
Radio communication from the truck cab to central operations also informs dispatchers of
incoming freight. Similar scanning during delivery shortens the billing cycle and provides
positive confirmation of delivery.
(b) Communication. A combination of radio communication and bar code scanning
immediately delivers control information to people who need it. Every member of the
team in the loop receives immediate information. The system tracks movement of all
packages from inbound docks through staging to outbound docks. The IT based
management systems ensure the delivery of the right equipment to the right location at
the right time. Real-time communication between drivers, hub managers, and
information support systems provides positive control of all moving stock.
(c) Information. Reliable information allows managers to optimize their physical and
human resources. While maximum benefit comes to those who implement a consistent
information strategy throughout their operations. Each phase provides immediate
economic benefits, while improving the strategic position of the plant.

5.6.10 In-Bound IFSCM Model.

5.6.10.1 In-Bound Aspects. In most of the Food Supply industries the cost of raw materials
and component parts from external vendors constitutes the main part of the total product
cost and in some cases it can account for up to 80 % of the total product cost. Supplier
selection and cost minimizing for this reason becomes one of the most important tasks in
every industry. In the proposed IFSCM Model which can be sub divided into,” In Bound –
Intra Bound – Out Bound Model”, we have so far examined the functioning concept,
analysis of the IN –BOUND part of the model as given at Figure 5.63 is discussed in the form
of mathematical model.
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IN – BOUND

FARMER / COOPERATIVE

Land Identification/Selection by Procurement Department

Crop Planning & Coordination by Procurement Department

MANDI OPERATORS (Collect Farm output, Weighing etc. & supply to the
plant)
COOPERATIVES (Land coordination, Crop Planning)
(Coordination, Finance, Machines, Growing Pattern, Rate Fixing etc.)
Collection, Warehousing, Transportation and Delivery

Payments and Accounting

Plan Future Crops, Requirement / Variety / Schedule /Projection and Rate
Fixing,

FIGURE 5.6.3
5.6.10.2. Supplier Selection. It is well known that basically there are two kinds of supplier
problems; First being Supplier selection when there is no constraint or when all suppliers can
satisfy the buyer’s requirements for demand, quality, delivery, etc. Second type of supplier
selection problem is when there are some limitations on suppliers’ or the farmers’ capacity,
quality etc. In this model we find that no Supplier (Farmer/ Mandi operator / Corporate) can
satisfy the total requirements of the plant and there is a need to purchase partly from one or
more Supplier to compensate for the shortage of capacity or low quality. The enterprise will
have to decide which Supplier it should contract, and also determine the appropriate order
quantity for each Supplier selected. The endeavour is to present a cost minimizing model for
Supplier selection with price breaks.

5.6.10.3 Cost Minimizing Model. The existence of variable prices offered by the supplier
usually complicates the selection process for procurement. The change in prices depends
upon the various factors besides the size of the order. When variable prices are combined
with capacities or limited conditions of delivery then supplier selection get complicated.
 206
Assuming the following:
Quantity required of a particular product over a fixed planning period is amount - D
Number of Suppliers that can meet the said demand - n
Order quantity of the product placed - xi with supplier - i, where
n
xi D (1)
i 1
Supplier i can provide up to i units of the product over the planning period, i.e.

xi i (2)

It is assumed that the aggregate amount of the product available from this multiple-sourcing
network is sufficient to satisfy quantity D, i.e.
n

i D (3)
i 1

Depending on the type of product, aggregate supplier performance measures of quality and
delivery will be meaningful to the buyer. Thus the order quantity must therefore satisfy:
n n
q i xi QD and l i xi LD (4)
i 1 i 1

Where:
qi Quality of a unit of the product of supplier I,
Q Buyer’s minimum quality requirement for a unit of a product,
li Lead time from the supplier that is needed to fulfill an order,

L Deadline measured from the order date.

Let pi ( xi ) be the price that the buyer must pay to the supplier i for supplying the order

quantity xi and assuming that the suppliers offer some type of price breaks. The net
n

price that the buyer must pay for D is then p i ( xi ) , which the buyer desires to
i 1
minimize.
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The supplier selection problem of the buyer may then be modeled by the following
mathematical program:
n

Min p i ( xi ) (Objective: minimize the buyer’s price for ordering D) (5)

i 1

n
q i xi QD (Aggregate quality constraint) (6)
i 1

n
l i xi LD (Aggregate delivery constraint) (7)
i 1

n
xi D (Demand constraint) (8)
i 1

xi i i = 1,……, n (Supplier constraints) (9)

xi 0 i = 1,……, n (Non-negativity constraints) (10)

The objective function is nonlinear due to the presence of price breaks.

A special case for supplier selection is cumulative price breaks. Suppose each supplier offers
all-unit price breaks. This implies that the cost of purchasing xi units from supplier
i, pi ( xi ) will be
pi ( xi ) pij xi if bi , j 1 xi bij ,1 j m(i) (11)

where: pij is the unit price for level j.

bij are the quantities at which price breaks occur,

m(i ) is the number of quantity ranges in vendor is price schedule. If pij is a decreasing
(increasing) function of j , then quantity discounts are being offered.
We define a more specific set of decision variable that describes the order quantities:
xij is the number of units purchased from supplier i at price level j .It follows
m (i )

that x i is related to these xij by xi xij , i 1,......n. (12)

j 1
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Since xij can be non zero only if

bi , j 1 xij bij , (13)

It follows that the objective function then becomes

pi ( xi ) pij xij (14)

This is nonlinear.
To circumvent this nonlinearity, we have binary integer variables y ij in the
following way:
0 if xij 0
y ij . (15)
1 if xij 0

This definition can be realized by adding constraints of the form

bi , j 1yij xij bij* , j 1,........m(i)

(Lower and upper quantity range constraints) (16)

bij* is a number slightly lower than bij introduced to realize

xij bij yij (17)

For all i and j 1,.....,m(i) 1 . And bi*,m (i ) D (18)

For all i, since D is the most quantity any supplier can supply.

Actually, for i 1,.......,n , the constraints

bi 0 y i1 xi1 (19)

are redundant, since bi 0 and x i1 is defined to be non-negative. A further constraint

for each supplier is that at most one price level can be chosen, i.e.
m (i )
y ij 1, i 1,.........n (Price level constraints) (20)
j 1
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The situation can be even more complex. Namely, let xijk be the number of units of the
good k (the kind of material required) offered by supplier i at price level j. At the same time

there are n different suppliers, (i 1,.........n), l kinds of goods (k 1,.......,l ), and each

supplier offers m(i)( j 1)) price levels, where the numbers of different discount
categories depends on each supplier.

Let us assume that the producer requires the total quantity of goods D, therefore the following
relation must be valid.

n m (i ) l
xijk D
(21)
i 1 j 1 k 1

At the same time there are individual requirements for each kind of goods D k , i.e. the

following relation must be valid:

n m(i ) l
xijk Dk Dk D.
and (22)
i 1 j 1 k 1

If we consider in this way all kinds of goods required together, the model will become
extremely complex, with a great number of variables and constraints. The model thus
can be subdivided into a number of small models, each to be separately solved, which
makes the problem simpler.
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5.6.11 Intra-Bound & Out Bound IFSCM Model.

5.6.11.1 Performance Enhancement. The basic aim of any model is performance

enhancement and reduction or elimination of uncertainties. This results in improving the
performance of the chain and the sources of uncertainties which are basically in Order
forecast, Input data, Administrative and Decision Process and certain Inherent
Uncertainties. It may also be noted that each source of uncertainty has several improvement
principles. The proposed Simulation IFSCM Model is built to help quantify the effects of
alternative configurations and operational management concepts. Comparison of the
simulation study with a pilot study will help in validation of the model against real data. The
reduction of uncertainties can improve service levels significantly, although current supply
chain configurations restrict possible benefits. A supply chain as a system to be effective
ideally should have, ” In Bound - Intra Bound & Out Bound” setups linked together via the
feed forward flow of materials and the feed back flow of information as shown in Figure
5.6.4 below:

GOODS AND INFORMATION FLOW

FIGURE 5.6.4
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5.6.11.2 Information Flow. Production schedule information or Inventory information

sharing creates feed forward flow of information and on the other hand Reverse logistics,
Remanufacturing and Product recovery, creates feedback flow of materials as shown in
Figure 5.6.4 above. The traditional way of coping with uncertainties, caused for example due
to, quality variation, supplier unreliability and unpredictable customer demand in each stage
of the supply chain, has been to build inventories or provide excess capacity; however these
are costly and inefficient methods. The ideal way is to have the ability to respond rapidly to
end-consumer demand. Thus SCM has to recognize end-customer service level requirements
and decide as to where and what quantity of inventories are to be positioned along the
supply chain. To attain this we need to develop appropriate policies and procedures for
managing the supply chain as a single entity. In order to create a lean and responsive supply
chain, uncertainties which restrict operational performance on the chain level should be
systematically and jointly tackled at all stages. The objectives thus are to link a managerial
view of SCM to a quantitative approach and provide insight into the sources of uncertainty
which restrict supply chain performance. To have better understanding, quantification of all
relevant logistical processes has been done in each stage of the supply chain.

5.6.11.3 Uncertainties in SCM. The demand for products across a supply chain as
depicted in Figure 5.6.4 commences with the purchase order. The uncertainty arises as the
internal data is not known to the suppliers, regarding, sales patterns, stock levels, stock
rules and planned deliveries, however even when the demand is stable, Institutional factors
or random factors also tend to make the demand as expressed to be more cyclical and
extreme in variation. This phenomenon, in which orders to the supplier tend to have larger
variance than sales to the buyer and the distortion propagates upstream in an amplified
form is called the bullwhip effect having cost implications e.g. the manufacturer incurs
excess raw materials costs or material shortages due to poor forecasting or incur additional
manufacturing expenses by excess capacity or inefficient utilization and overtime or excess
warehousing expenses due to high stock levels. This effect is a consequence of industrial
dynamics or time varying behaviors of industrial organizations and the lack of correct
feedback control. The bullwhip effect is due to identified four major causes: demand signal
processing; order batching; price variations and shortage gaming. The effect is caused by
reactions to uncertainties in demand or supply and the complexity and structure of current
decision processes.
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5.6.11.4 Sources of Uncertainty.
(a) The first source of uncertainty is order forecast horizon, which refers to the time
period from placement of an order (Order 1) to the receipt of goods of the following
order (Order 2) as shown in Figure 5.6.5 below. When generating Order 1, all sales and
waste estimate within this total time frame need to be taken into account. The order lead
time is the time that elapses from the moment an order is placed to the point in time
when ordered goods are received. In this time period, we consider five elements: first
the information lead time, second the administration or decision process time, third the
time needed to produce the products, fourth the distribution lead time and fifth the
waiting time between processes. The order sales period represents the time period
between two successive deliveries.

ORDER FORECAST HORIZON

FIGURE 5.6.5
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(c) The second source of uncertainty is related to available input data for decision, as
available information and transparency has the potential to radically reduce costs and
increase customer service. Information on the status of impending production, provided
by a supplier producing in fixed production cycles enables a retailer to reduce inventory
costs by up to 30%. Data timeliness and data applicability are prerequisites when
exchanging information. Inventory control systems have to be up-to-date and well
managed in order to provide current information on stock levels and stock availability or
else the order forecast horizon, becomes bigger.

(d) The third source of uncertainty pertains to Information on consumer demand,

which ideally should be in the right format as when a producer receives sales data of a
certain product group, he would like to know how much of each particular product has
been sold so that he can plan his production accordingly. Similarly, a raw material supplier
of a juice/jam producer has no use for this consumer demand data of juice/ jam of retail
outlets as he cannot translate the information into quantities of fruits as raw material,
especially more so as he may not be the only supplier to that particular producer. The
specification and format of data received if not in usable format becomes a source of
uncertainty.

(e) The fourth source refers to administrative and decision process and in particular
to decision policies as well as the human behaviour. The decision of ordering the
production and fixing of production rules with fixed batch sizes, use of available local
demand, inventory information and comparison of internal costs with local service
provided at fixed points in time, leads to sub-optimization. Additional uncertainty is
created by ignoring or aggregating information in administrative or decision policies.

(f) The fifth source of uncertainty in food supply chain is inherent uncertainty in
demand, process and supply. The variations may be due to weather changes and
changing consumer preferences. Inherent process uncertainty refers to fluctuations in
process outcomes and production times due to variable process yield, perishable end
products, machine breakdowns, scrap, etc. Inherent supply uncertainty can be caused by
fluctuations in supply performance due to natural variations in quality, seasonal
patterns, variable yield, etc.

(g) SCM can reduce the effect of inherent uncertainties marginally by increasing the
information exchange up and downstream in the supply chain and by adapting
procedures to it. The main benefits of SCM are obtained in the reduction of the all
sources of uncertainty.
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(h) The improvement principles and their possible contribution to the improvement
of supply chain performance have not been directly correlated with a source of
uncertainty. The trade - off of different measures and combinations of several measures
also has not been investigated in detail nor have all relevant performance indicators been
taken into account. The main aspect is the integral affect of possible improvement
principles in food supply chains, from a modeling perspective as well an organizational
perspective.

(i) The proposed IFSCM Model / IT Software Model as brought out earlier will be fed
with inputs at all levels along with outward flow of material and inward flow of
information after the sales of the goods. This information for different users is of no use
if not available in a usable format. Thus particular information at different stages has to
be projected in different manner so as to suit the user requirement and reduce the
uncertainties as well as the bullwhip effect. The software has to be modified at each user
end to covert the information into usable form and counter all variety of uncertainties.

(j) To discuss further we analyze the supply chain for fruit juices based on a case
study, in which we quantify the hypothetical benefits of uncertainty reduction by applying
a combination of one or more improvement principles in a simulation model and in real
life. The result of the model study is compared with real benefits obtained in the study.

5.6.11.5 Simulation IFSCM Model based on Supply Chain for Fruit Juices. A chain reference
model for an existing supply chain for fruit juices is simulated wherein it consists of a
producer, Retail Distribution Centre (DC) and approximately 100 Retail outlets as shown at
Figure 5.6.6 below. In the projected situation the producer supplies the Distribution Centre
(DC) with approximately 60 different products twice a week, with an order lead time of
three days for each delivery. The Retail DC supplies the Retail outlets with fruit juices
simultaneously with other fresh products, three times a week from stock, thereby having an
order lead time of one day according to pre-set delivery schedule. The average inventory in
the Retail DC covers approximately 4.0 days of sales and in the outlets 6.8 days of retail
sales. The Retail DC order policy is based on basically actual outlet orders, sales patterns and
present inventory levels.
 215

OUT BOUND SCM

FIGURE 5.6.6

In Retail Outlets the managers try to forecast their sales by looking at the sales figures of
previous weeks, but basically order for supplies to fill up available shelf space. All stages of
the supply chain experience a great deal of demand uncertainty, mainly caused by long order
forecast horizons of 6 days for the Retail DC and 3 days for a Retail Outlet and the duration
and quality of current administrative and decision processes. The intensified competition in
the market including many promotional activities also enhances demand uncertainty. The
highly perishable and seasonal nature of the products, further increase uncertainty which
can be negated by closer collaboration. The research project aims at understanding the
prerequisites and potentials of some of the sub concepts of ECR; namely continuous
replenishment and related concepts such as Cross Docking and Computer Assisted Ordering.
As the project focuses on physical distribution, the attention given to the producer at this
point is limited to order entry, inventory control and expediting goods to the Retail DC.

SOURCES OF UNCERTAINTY
SOURCES OF UNCERTAINTY AND CORRESPONDING IMPROVEMENT PRINCIPLES
SOURCES OF UNCERTAINTY
Order -Information lead time
Forecast -Administration or decision
Horizon process time
-Manufacturing and
distribution lead time
-Waiting time
-Order sales period
Information availability
and transparency
Input
Data - Data timeliness
-Data and definition
accuracy
-Data Applicability
Decision
Process
-Decision policy
-Human Behaviour
FIGURE 5.6.7
216
IMPROVEMENT PRINCIPLES
 Use Electronic Data Interchange (EDI).
 Use decision support systems; e.g., Computer
Assisted ordering in retail outlets or production
planning systems.
 Decrease process throughput times, by
creating parallel processes.
 Reduce set-up times, batch sizes and ensure
co-ordination of physical and administrative process.
 Eliminate or reallocate processes, e.g., VMI.
 Co-ordinate the process timing, increase
delivery frequencies and reduces batch-sizes.
 Increase frequency of decisions/processes.
 Create information flow in and over various
stages of the supply chain by providing usable
information.
 Use real-time / dynamic management systems.
 Co-ordinate standard definitions and create
information transparency in the supply chain.
 Use information systems to register and
exchange information.
 Diminish data translation problems by
providing the right information in the right format.
 Eliminate decision or redesign procedure.
 Co-ordinate procedures to smoothen the
supply chain.
 Eliminate or reduce human influences by
central chain control or elimination of decision
process.
 217

Figure 5.6.7 above shows Sources of Uncertainties and Logical Improvement Principles. In
the food chains, product freshness is considered to be a major performance indicator. The
general logistical objective of this chain partnership is thus improvement of customer
service, reduction of the number of out-of-stocks; fresher products and better assortment at
lower total chain costs viz. lower inventories, higher sales and fewer write-offs, which should
result in higher sales and better profits for all chain participants. To measure the
effectiveness and efficiency of alternative chain structures, this objective can be translated
into the following performance indicators as per the product:
(a) Product Cost.
(i) Costs related to average stock level at distribution centre and retail outlets.
(ii) Costs related to all relevant processes at all stages in the supply chain.
(iii) Costs of product write-offs and necessary price reductions.
(b) Service Effectiveness.
(i) Number of out-of-stocks at the retail stores.
(ii) Number of missed sales caused by stock-outs.
(iii) Delivery reliability of producer and Retail DC.
(iv) Average remaining product freshness.
(v) Utilization degrees of transport carriers.
(vi) Product assortment.

5.6.11.6 Research Methodology. The research methodology followed comprises of four

phases as shown in Figure 5.6.8 below:
(a) The first phase is defined by a Process Flow Analysis including objectives and
performance indicators of relevant processes. In developing detailed process models,
emphasis is placed on analyzing current role and tasks in the supply chain, determining
constraints for executing those roles in a chain perspective, and evaluating current IT
infrastructures and operations management. The relationship between processes is
described, including the timing and place of each process in accordance with the
elements of Figure 5.6.5 as above. This analysis results in the determination of possible
alternative configurations of roles and tasks performed in the supply chain and the co-
operation and integrated planning of these operations within the control configuration
established scenarios.
 218

MODEL FLOW ANALYSIS

FIGURE 5.6.8
(b) The second phase contains of three parallel steps. The first step (Pilot study) is
the construction of a Simulation Model which can be used to quantify each of the
performance indicators for relevant processes and evaluate them according to logistical
objectives. The detailed process models of the first phase constitute an ideal starting
point for supply chain modeling. The second step is the implementation of one simple
scenario in a pilot project to identify organizational consequences and restrictions to the
information infrastructure in all stages of the supply chain, and to measure chain
performance. The configuration of the pilot study ideally should be based on preliminary
results of simulated scenarios. Because of risks and costs involved, it is impossible to test
all scenarios in practice. The third step is the definition of a number of relevant
scenarios, for which the improvement principles presented in Table 5.6.7 can be of help.
(c) The third phase is the validation of the simulation model based on the results of
the pilot study.
 219
(d) The fourth phase of the simulation model is used to evaluate the relevant
scenarios, based on pre-defined performance indicators. This phase, together with the
findings of the pilot study, results in a recommendation for implementation of one
scenario in the supply chain.

INVESTIGATED IMPROVEMENT PRINCIPLES IN IFSCM

MANAGEMENT IMPROVEMENT PRINCIPLE SOURCE OF
LEVEL UNCERTANITY
Strategic / Implementation of Computer assisted Data Timeliness
Configuration ordering system in retail outlets. Information lead
time
A real time inventory system at the Decision process
Retail DC and EDI with the producer time

Order sales period

Increasing delivery frequency Data Timeliness
between DC and producer from 2 to 5 times
a week & between DC and outlets from
3 to 6 times a week
Waiting times
Operational
Management Order lead time
and Control Shortening lead time to one day;
altering the timing of each process. Data accuracy&
applicability

Both partners agreeing to relevant Ordering policy

performance indicators, including the
definitions.

Simplifying the DC ordering policy;

FIGURE 5.6.9

5.6.11.7 Analysis. The process flow analysis gives out the improvement principles and
corresponding sources of uncertainty as listed in Figure 5.6.9 above. These options as shown
above can be divided into two levels. Firstly at Strategic Management involves the designing
of the chain configuration and related information systems and secondly Operational
Management and Control. It is also evident from the analysis that the timing of activities,
the infrastructure and information availability are responsible for the greatest part of
existing uncertainty. The results of the process flow analysis are used in designing the pilot
study.
 220

5.6.11.8 Pilot Study. Consideration of three factors namely, firstly insights obtained from
literature on ECR, secondly preliminary simulation results giving indications of what
performance improvements to expect and thirdly the participation of companies. A scenario
chosen for the pilot study encompasses the implementation of maximum delivery
frequencies from Supplier to Retail DC and from Retail DC to retail outlets. In the pilot
project the improvement principles as given in Table 5.6.9 above were implemented in two
outlets; the only distinction between the two being that one began ordering with the
assistance of Customer Assisted Ordering (CAO)-system (CAO-outlet) in which the system
tries to order at pro-actively expected sales, and the other continued ordering in the
traditional way (Traditional outlet).

INVENTORY LEVELS IN THE DISTRIBUTION CENTRE

FIGURE 5.6.10
In these two outlets, out of the 100 outlets the delivery frequencies were increased and lead
times shortened. One additional outlet of comparable size was chosen in which no
modifications were made (Standard outlet). Before commencing the pilot project, detailed
information was collected and recorded by the participating companies concerning relevant
performance indicators mainly for 12 representative products. During the pilot period a real-
time inventory control and EDI were simulated at Retail DC by manually increasing inventory
levels in the information system some time before the actual arrival of ordered goods and
by receiving details from the producer indicating data of the to-be-delivered products.
 221
Target inventory levels for all products were determined based on peak weekly demand and
a percentage of safety. The information availability stock for the sum of targets of the 12
selected products was 400. The Figure 5.6.10 above shows the decrease in inventory levels
at the Retail DC which was mainly caused by the increased delivery frequency of the
producer. The figure demonstrates that minimum inventory levels were still too high, leading
to the conclusion that safety stock levels could be further reduced, particularly so for fast
moving articles as one traditionally takes extra precautions with them and if a fast-moving
article becomes out-of-stock it has serious implications and all outlets will suffer. Results of
the pilot study for the main performance indicators in the Retail DC and the CAO- outlet are
compiled at Table 5.6.11 below:

RESULTS OF THE PILOT STUDY

__________________________________________________________________________P
ERFORMANCE INDICATOR CONSEQUENCE OF PILOT STUDY
__________________________________________________________________________
Inventory level Retail DC Decreased by 55% (to 1.9 days of stock)
Product freshness in Retail DC Increased by (3.8 days)
Inventory level CAO-outlet Decreased by 38% (to 4.2 days of stock)
Product freshness for consumer at CAO Outlet Increased by (5 days)
_______________________________________________________________

TABLE 5.6.11
The improvements were mainly realized for fast-moving articles. The overall decrease in
outlet out-of-stocks was estimated to be approximately 50 %. In the pilot study, orders of
pilot-outlets are given high priority in the event of shortages and if possible they receive
100% delivery. In the traditional outlet the inventories hardly decreased due to non
deviation from traditional working practice thereby emphasizing on organizational
consequences of changing SCM. The standard outlet revealed no changes in inventory
however an increase in product freshness of approximately 3.8 days was recorded as in the
Retail DC. The product freshness did not increase during the pilot period of the products
delivered by the producer as the inventories turned over almost daily. Further, we can
conclude that increasing the frequency of delivery to the CAO-outlet, together with the
CAO-system, resulted in an additional increase of 1.2 days in product freshness. The case
study amplifies that the main barriers for improving the supply chain performance are the
current information technology infrastructure and the reliance on decision makers. EDI and
real-time control systems seem necessary on the one hand, and training and education on
the other.
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5.7 MODEL VALIDATION AND FINDINGS

5.7.1 Model Validation. Comparison of the results of the pilot study with the simulation
results of the equivalent scenario can justify the outcomes of the simulation model. However
this gets complicated due to some factors. Firstly the CAO-system in the outlet is very
difficult to model, similarly as the ordering policy used by the Retail DC in the traditional
situation. In actual fact the peaks in demand are smoothed by manual interference in the
CAO-system by eliminating demand distortions. Secondly, the simulation model was fed
with sales data which showed more demand variability than sales data during the period of
the pilot study. Lastly in the model the inventory levels are calibrated to 100% delivery
performance, which virtually increases inventories. The model showed fewer benefits to be
obtained than actually realized in practice as shown in Table 5.7.1 below. Incidentally the
outcome does not match exactly for the reasons as discussed however the model does
predict probable trends and order of magnitude of potential benefits to be obtained in
different scenarios.

COMPARISON OF THE RESULTS

COMPARISON OF THE RESULTS OF THE PILOT STUDY WITH THE SIMULATION STUDY
Performance Indicator Pilot Study Simulation Model
Inventory level DC Decreased by 55% Decreased by 41%
Inventory level CAO-outlet Decreased by 38% Decreased by 16%
Product freshness for consumer Increased by 25.0 days Increased by 23.7 days

TABLE 5.7.1

5.7.2 Simulation and Evaluation of Scenario. In the simulation study we quantify

consequences of different scenarios with respect to relevant performance indicators for
selected representative products for specified weeks of consumer demand at retail outlets
and the cost of all individual activities per unit product. The settings will differ for different
supply chains. In the model twenty weeks of demand was sufficient to arrive at an almost
steady-state situation which provides good estimates of the benefits to be obtained. The
total chain costs are calculated by extrapolating these results to the total product
assortment. When the producer's lead time is decreased to one day it is found that the
inventories decrease by 13% and a 0.7 day increase of product freshness is achieved in the
Retail DC. The results are as reflected in Table 5.7.11 above, which shows the comparison
of the results of the pilot study with the simulation study.
 223

CHANGES EFFECTED BY ALTERED DELIVERY FREQUENCIES

FIGURE 5.7.2

The results shown in Figure 5.7.2 are of scenarios in which the delivery frequency is
increased between all three sections, and the lead time in all scenarios is set at one day. To
compare average inventory levels and throughput times of different scenarios, the
simulation model is tuned to a delivery performance of 100% wherein creating a trade-off
between stock-outs and write-offs while minimizing inventory levels. It is noted that at lower
delivery frequencies, it is not possible to set safety stock levels at which no out-of-stocks and
no write-offs occur. If stocks are too high, write-offs are unavoidable. Simultaneously if
stocks are too low then out-of-stock occurs. Costs include stock holding costs and the costs
of all logistical and administrative processes. In the Figure 5.7.2 the key 2 _ 3 represents a
delivery frequency of two times per week from producer to Retail DC and a frequency of 3
times per week from Retail DC to outlets. In case when the delivery frequency of the
producer is increased to three times per week (left figure), Retail DC inventory levels
decrease by 21% and throughput times by 18% whereas total chain costs only rise by 1% due
to higher picking and transportation costs. In case if the delivery frequency of the Retail DC
(right figure) is increased to four times per week then benefits are realized as the outlet
inventory decreases by 21%, throughput times decreases by 13%, and total chain costs rise
3% despite the decrease of inventory. Fast-moving articles reveal significantly better results
than slow moving articles, also further increasing the delivery
 224

frequency seems to be practically useless as the current distribution unit load which equals
the minimum ordering batch size and on average contains 12 products restricts better results;
the turnover of most products is only three or four unit loads per week. Implementation of
CAO-system further reduces inventories, if the right parameters concerning the validation are
chosen. Simulation shows that a relative performance improvement may be achieved to the
standard scenario of 10% to 20%. If the distribution unit load is set at one individual
consumer product with batch size one, higher delivery frequencies become more beneficial.
The simulation shows that these settings may result in 26% to 38% additional improvements
in inventory levels and product freshness, compared to current unit loads.

5.7.3 Evaluation of the Case Study. The analysis and results of the case study assist in
concluding that:

(a) Reduction of uncertainties may improve service levels significantly, although current
supply chain configurations restrict possible benefits. Comparable trends in results were
obtained in a pilot project and with simulation studies, thereby validating the trends
predicted by the simulation model.

(b) The scenario a chain chosen also depends on the trade-off between service levels and
total chain costs. The product freshness can be seen as an order winner and reduction of
throughput times and is therefore very important. It is not possible to take all benefits
into account in the simulation model.

(c) Inventory reduction creates additional shelf space, which can be used for assortment
expansions. Fewer out-of-stocks results with higher sales and higher product freshness
will improve customer service. Analysis showed that these additional benefits easily
compensate for chain cost increases.

(d) To realize these improvements in practice, some operational restrictions have to be

overcome. During the pilot study, EDI and dynamic inventory control were simulated, but
proved to be essential in obtaining the benefits.

(e) The settings of the CAO-system determined the extent to which improvements could
be made. IT as well as training and education of decision makers, is therefore a necessary
condition with an enabling technology to capitalize on the benefits of SCM.
 225

5.7.4 Discussion. In practice there is a continuous need to redesign chain processes in order
to improve efficiency and satisfy consumer demands better. However by generation and
evaluation of alternative chain designs all scenarios cannot be tested and evaluated in
practice due to costs and risks involved. Thus as a consequence, there is a need for a
modeling approach such as a simulation model that supports decision makers to generate
and evaluate decision alternatives. The research done has been by redesigning two supply
chains for fresh juice products, where a simulation modeling approach was developed.
However numerous questions from both a theoretical and a practical point of view have not
been answered adequately. The development of a model is a continuous process and an
attempt has been made to show that the reduction or elimination of uncertainties in supply
chain decision processes can significantly improve supply chain performance, because the
control of problems becomes more manageable. Three main clusters of sources of
uncertainty have been identified which restrict operational performances viz. order forecast
horizons, input data, and administrative and decision policies. To simplify each of the
sources of uncertainty, principles for improving the performance were introduced. However
it can be concluded that an organization should preferably start SCM-activities in
conjunction with optimizing its internal control design. This case study has been conducted
within the parameters of IFSCM. The exact benefits to be obtained are highly dependent on
the characteristics of the supply chain and the objectives formulated.
FINDING’S
AND
CONCLUSION
 227

6.1 FINDINGS

6.1.1 Model Formulation. Model formulation for FSCM in Food Supply Industry as we have
understood involves an in-depth analysis of the broad issues involving the process of planning,
organizing and controlling the flow of materials and services from supplier to end users or the
consumers. FSCM also encompasses a set of interdependent aspects that are interlinked and
work closely together to manage the flow of goods and services along with the value-added
chain of agricultural and food products. The supply chain includes the farmer, processor,
suppliers, transporters, warehouses, retailers and the customers. Three main clusters of
sources of uncertainty have also been identified which restrict operational performances viz.
order forecast horizons, input data, and administrative and decision policies. To simplify
each of the sources of uncertainty, principles for improving the performance were introduced.
The development of a model is a continuous process and an attempt has been made to show
that the reduction or elimination of uncertainties in supply chain decision processes can
significantly improve supply chain performance, because the control of problems becomes
more manageable. However it can be concluded that an organization should preferably start
IFSCM activities in conjunction with optimizing its internal control design. This case study has
been conducted within the parameters of IFSCM. The approach was to highlight the impact of
individual strategies on the efficiency of the chain as a whole. The model formulation was
attempted in two parts. In the first part the theoretical framework used for FSCM analysis was
reviewed to formulate a modeling approach for flow of material. The second part described
method of implementing this approach in the Food Supply industry. The IT Software based
IFSCM Model endeavored to integrate and coordinate various activities of the modules
formulated and discussed so as to:-

(a) Provide coordination between procurement department and various vendors for
procurement of raw material viz. type, schedule, quantity, rates, etc.

(b) Provide coordination between warehousing, inventory management and

production / plant manufacturing.

(c) Provide coordination between marketing, warehousing, inventory management,

transportation and retail.
 228

(d) Provide coordination between retail marketing, effective management of

consumer demand and consumer satisfaction.

(e) Coordinate all planning facets, such as financial aspects, procurement, plant
production, inventory sales and market spread.

(f) Provide flexibility of accepting different inputs and assist in taking variety of
decisions by searching all permutations or combinations of various possibilities.

(g) Achieve the set goals or a set of objectives. Provide inventory solutions. Solutions
proposed by model must be feasible and amenable to the constraints of the SCM.

(h) Lead to quick solutions for ideal decision making.

6.1.2 Model Flexibility. The objective of the model was to create a flexible model by utilizing
a mix of various models and improve the IFSCM, by simplifying the decision making process
involving aspects such as, procurement, production, transportation and inventory
management which are the main logistical drivers of a SCM. The problems as proposed could
only be resolved by different types of models such as, Mathematical mixed Integer
Programming model, VMI, ERP, Analytical and Simulation model. Multiple software programs
are used with different approaches and models as developed for obtaining solutions from the
developed models. Integrated models also serve the purpose of multi decision planning
horizon, wherein some of the models are so shaped for only single echelon decision planning.
Mode of transportation assumption is also different in different model scenarios. The exact
benefits to be obtained are highly dependent on the characteristics of the supply chain and
the objectives formulated.
 229

6.1.3 Lessons.

(a) Shortcomings. It was found that the existing models with their characteristics as
analyzed along with dynamically evolving legislative framework hinder the task of
managing IFSCM efficiently. The essential ingredient of a good and effective SCM was
to satisfy the end-consumer by providing the right product, in right condition at the
right time. Shortcomings noted were as follows:-

(a) Traditional models were incapable of taking into account the impact of regulatory
legislations prevalent in the changing environment.

(b) Short life of food product created uncertainty for the buyer with respect to
product quality, safety and reliability, thereby affecting the quantity of supply as
well as uncertainty for the seller in locating a buyer.

(c) The perishable products generally had to be moved to the marketplace at the
earliest to avoid deterioration and thus the sellers at times are unable to store the
products.

(d) Food products usually exhibit high seasonality in raw materials availability and
therefore required efficiently designed storage facilities.

(e) Food safety issues have profound ramifications on the design of the supply chain.

(b) Design. Model design was made in a manner to facilitate the following:-

(a) Enhancing decision-making process for capacity planning of multi-echelon supply

chains in such uncertain environments by studying the long-term behavior of
FSCM.

(b) Offer a generic methodological framework that could address a wider spectrum
of strategic FSCM related problems.
 230

(c) Provide standard methodologies for the analysis of FSCM and the steady state of
the system.

(d) Cater for important products with shorter life cycles and larger demand variability,
for which the utilization of the traditional methodologies may lead to considerable
errors.

(c) Effectiveness. The model proposed and discussed above is a mix of different models
based on IT inputs and makes an endeavor to fulfill the set aim and objectives as
discussed. The efficacy of the model will have to be measured with changing inputs
and due modifications incorporated accordingly. Model to be effective was made to
be flexible and was a mix of various models so as to provide the following:

(a) Provide flexibility of accepting different inputs and assist in taking variety of
decisions thereby enhancing decision-making process for capacity planning of
FSCM in such uncertain environments.

(b) Achieve the set goals or a set of objectives.

(c) Provide inventory solutions and offer a methodological framework that could
address a wider spectrum of strategic FSCM related problems.

(d) Provide methodologies for the analysis of FSCM and the steady state of the
system. Help in search of all possible permutations or combinations of various
possibilities.

(e) Lead to quick solutions for ideal decision making.

(f) Solutions proposed by model must be feasible and amenable to the constraints of
the supply chain.
 231

6.2 CONCLUSION

6.2.1 IFSCM Paradigm. SCM is found to encompass all such like activities, functions and
facilities which are involved in producing and delivering a product or service, from suppliers to
the customers. The IFSCM paradigm is totally geared towards optimizing each component of
operations management viz. production, warehousing, inventory, transportation and
distribution etc. Till date numerous models for production and operations control and
management have been developed: viz. Inventory management models, JIT model, VMI
model, Zero Inventory (ZI) model etc. These models focused on the optimization of a sub-part
of the SCM whereas the optimum aim is at the optimization of the full chain. Availability of
the inputs for materials such as food products is uncertain and irregular; the factory may need
to ensure smooth and continuous production. Regional stocking may permit reductions in
transportation costs through increased shipment consolidation, as well as expanded sales
through better delivery performance.

6.2.2 Coordination. Coordination issues occur in an organization mainly due to the nature of
interdependency among supply chain members. It leads to more formal relationships and an
understanding of compatible missions among supply chain members. A supply chain has been
found to be integrated in terms of information and processes so that it is coordinated.
Coordination in supply chain as seen is concerned with aligning all decisions to achieve global
system objectives. It can be achieved through proper integration of three important
disciplines, viz; Business Strategy (BS), Business Information System (BIS) and SCM. IFSCM
models effectiveness can be seen while performing the task of downsizing or right-sizing and
re-engineering of the organizations thereby transforming the setups into lean and mean
competitive units. This as understood is only possible by cost cutting, process simplifications
and tailor making an enterprise as well as involving optimization in terms of the quantum of
persons involved, time taken, complexity of the work etc. The strategies thus followed with
the help of appropriate models lead to enhanced productivity and profitability of the
organizations. The advantages of these soon get nullified and the approaches to the way
organizations work needs to be reviewed periodically. The players in the chain of SCM are
suppliers, sub-contract suppliers, in-house product processes, transportation, distribution,
warehouses, and lastly the customer. Generally all of them perform mutually exclusive tasks
and do not compete directly with each other but complement each other.
 232

6.2.3 Facilitators. The decision makers in any organization always require a broad framework
of guidelines for facilitating in making critical decision and thus the need arises for
comprehensive models to act as facilitators. The models should be capable of analyses of the
extended intricacies of SCM to be able to guide in efficient decision-making, as well as
enhance the profits of the entire chain. Determination of optimal network configuration,
inventory management policies, supply contracts, distribution strategies, supply chain
integration, outsourcing and procurement strategies, product design, and information
technology are some examples of strategic decision-making that affect the long-term profits
of the entire supply chain. Despite of notable advancements in IT and enhanced technology
management, SCM still remains constrained in adequately addressing many practical aspects.
Importantly the inadequacies are due to the interdependencies among various players /
departments / operations existing in the chain.

6.2.4 Models for Decision Making. The different types of simulation models are spreadsheet
simulation, system dynamics, discrete event simulation etc. The type of simulation model to
be applied depends on the type of problems and questions to be answered by the model. The
methodological issues of concern are validation and verification, sensitivity, optimization, and
robustness analyses. This sensitivity analysis yields a shortlist of the truly important factors in
large simulation models with may be a hundred factors. The robustness analysis optimizes the
important factors controllable by management while accounting for the noise created by the
important non-controllable, environmental factors. It is seen that a simulation model has the
following characteristics:

(a) It is a quantitative, mathematical, computer model.

(b) It is a dynamic model wherein it has at least one equation with at least one variable
that refers to at least two different points in time.

(c) The model is not solved by mathematical analysis; however the time paths of the
dependent variables such as output are computed subject to given initial state of the
simulated system and given the values of the input variables.
 233

(d) The simulation model also does not give a ‘closed form’ solution. Instead, the simulation
analysts experiment with different input values and model structures to see what
happens to the output or the so called sensitivity analysis.

6.2.5 Software & Technology. Availability of technology today such as internet, intranet,
extranets and group wares facilitate sharing of information using common databases. This
technology availability allows sharing of the information not just within the functional
divisions of an enterprise but upstream and downstream in the supply chain. EDI is effectively
used to place orders share inventory database between the manufacturer and the supplies for
efficient implementation of JIT inventory and VMI. The internet and EDI can be used by the
customer to monitor the status of the order placed, request changes in the order and vice-
versa, this may also be used to inform the customers about the status of their order, besides
being used for billing etc.

6.2.6 Internet Facilities. SCM has become not just a question of efficient logistic process but is
also related to the growth and survival of any organization. Present day customers are
becoming more and more demanding in their requirement of services from the suppliers. The
construction of an efficient and IFSCM thus has assumed paramount importance. IT plays a
major role in the formation of the supply chain. Efficient dissemination of information
upstream and downstream is a major requirement for the implementation of the supply
chain. IT provides this with internet and other application software’s. The decision support
provided by IT products such as ERPs, Network construction tools etc. can help the decision
makers in the development of the supply chain process and in implementation as well. The
dissemination of the demand forecast information throughout the chain can lead to
avoidance of the “Bullwhip” effect. Organizations can gain supply chain related benefits
through the use of internet, as discussed below:

(a) It is more collaborative and can result in timely product development through
enhanced communication between functional departments, suppliers, customers and
even regulatory agencies.

(b) Reduction of channel inventory and product obsolescence owing to closer linkage
across the supply chain and better insight into the demand signals to drive product
schedules and ultimately achieve build-to order capability.
 234

(c) Reduction in communication costs and customer support costs with more interactive,
tailored support capability inherent with internet technologies.

(d) Provides new channel capabilities to reach different customer segments and further
exploit current markets.

(e) Ability to enhance traditional products and customer relationships through

customizations driven by internet connectivity and interactivity.

6.2.7 The SCM paradigm can provide the mechanism for the survival of the FSCM enterprises
in the changing global scenario where the globalization of the world economy and the
liberalization of the economy is no longer a buzzword but a fact. The failure of any enterprise
can be traced to the ad-hoc and the non-application of efficient managerial practices. This is
not to say that these enterprises have lost their relevance in the present scenario. The
enterprises have to adopt “change management” i.e. to change their style of functioning and
to form strategic alliances with partner public sector enterprises.
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