Where is My Profit

Where is My Profit?

Bharat Foods Limited (BFL) is one of the pioneer companies in the Indian food industry. It has long standing in the market with a very strong brand image in the product categories like tea, coffee and beverage. BFL has three production plants situated at Guwahati, Bangalore and Hyderabad. At€uwahati, it processes and packs tea, whereas, at other plants, the remaining products are produced. Its products are sold on a nationwide basis to the consumer and institutional markets. BFL sells its products to the institutional markets through direct distribution as well as through the brokers. For the consumer market, it has very extensive distribution system, as shown in Figure 1.

Fig. 1 Distribution System of BFL for the Consumer Market

Out of the total volume of sales, 30 per cent comes from institutional markets and the remaining from consumer markets. Institutional markets always ask for bulk packaging, which is done at the plants itself. For consumer markets, 250 gram and 500 gram of tea is packed in refill packs and 1 kg in a plastic jar. 100 gram and 200 gram of coffee are packed again in aluminium foil sachets and 500 gram in glass bottles. BFL always used glass bottles for its beverage products, because glass bottles always bring a highly sophisticated look and feel of the product than plastic in one hand and protect products from leaks on the other. The use of glass bottles has always caused a few logistical issues like breakage during transit, the weight needing sophisticated handling. It is the cause for an increase in the logistical as well as transaction costs.

All products of the company are shipped by roadways and, for this purpose,

each plant has 5—7 certified transporters who ship products from the respective plants to company-owned central warehouses on full truckload basis. Again, each of the central warehouses have their own contracts with local transport companies who ship the product again in a full truckload basis to different distribution centres. Distribution centers hire the services of local transporters for shipment of products as per the requirements taking into consideration the quantity to be shipped. That is why,

products which are ready for shipment to a particular stockiest/retail chain store may be detained for 2—3 days in the absence of a full truck-load; otherwise transportation cost increases by 5—10 per cent, depending on the distance. The replenishment cycle time of finished goods from plants to stockiest/retail chain store is 45—60 days, depending upon geographical locations.

The food business in India is worth about Rs 3,50,000 crore. India is the world's second largest producer of food after the US with the potential to become the first. In the domestic market, the market size and growth rate for the above three product categories has been portrayed in Table 1.

Table 1 Market Size and Growth Rate of Tea, Coffee and Beverages

Until 2000, the BFL prospered and expanded. Its sales growth was almost at par with the industry growth. The company also enjoyed profit growth according to the sales growth. At the end the year 2000, the management was quite optimistic about continued growth in both sales and profits. By the mid-2002, this optimism had given way to a serious situation. While the sales for all the product lines continued to grow, profits dropped sharply in 2001 and for the first two quarters of 2002, there was negative growth in the sales volume as compared to the figures of 2000 and 2001. There has been a loss for the first time in the 25 years history of the company whereas almost all major competitors are enjoying growth both in terms of sales and profits.

The situation became even more critical recently, when a few major institutional buyers as well as two leading retail chain stores threatened to abandon the trade due to poor logistical services in comparison with other suppliers. They argued that the other suppliers replenish goods within 2 days, whereas BFL needs 7—10 days, requiring more investment and space. That is why, they are not in a position to find a favourable proposition to deal with BFL. At the same time, stockout situations take place most frequently, resulting into lost of sales.

After analyzing the operating figures, it has been felt that increased costs of logistics constituted the major reason for the continued decline in profit and

further lead to loss. The details of figure of various elements of costs are shown in Table 2.

Table 2 Chilling Figures of Comparative Costs

Despite a rigorous cost control drive instituted in the second half of the 2001, the cost trend had not been reversed during the first half of the year 2002.

In mid-2002, it has been decided by the top management to recruit a logistics specialist as President-SCM, directly reporting to the CMD of the company, taking into consideration the sensitivity of logistical issues. In the first week of October 2002, Mr P.K. Gupta joined the organization on this post. He has an excellent track record as well as very rich experience of logistical functions of a leading FMCG company. By nature, he is a cool and soft spoken person but at the same, a very aggressive professional who has the commitment to revamp the whole supply chain process in general and logistics system in particular within two years and positive results will start coming by July 2003. Two major decisions have been taken in the first week of January 2003, after a careful analysis of whole situation, namely; separation of distribution function from marketing and sales functions, extensive use of information technology for order management, demand management, agile manufacturing, and complete visibility of inventory and its movement.

QUESTIONS FOR REVIEW

1. 1.What principles of logistics system design will be helpful to Mr Gupta?
2. 2.Do you feel that some of the logistical functions (especially running and maintaining 25 warehouses across the nation) should be replaced by outsourcing the services of 3PL? If not, how can transportation and warehousing efficiency and productivity can be improved?
3. 3.What is your opinion about the two decisions taken by Mr Gupta? Do you think that such decisions will give a new direction towards customer responsiveness capability of the firm in general and logistical cost containment in particular? Justify your view.