Where is my Profit?

Bharat Foods Ltd (BFL) is one of the pioneer companies in the India 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 Guwahati, 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 the brokers. For the
consumer market, it h as very extensive distribution system 3 plants, 5 central warehouse, 20 distribution centre,
stockiest, local whole seller, retailer, consumer and retail chain store.
Out of the total volume of sales, 30% comes from institutional markets and the remaining from consumer markets.
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 grams and 500 grams of tea is packed in
refill packs and 1 kg in a plastic jar. 100 grams and 200 grams in coffee are packed again in aluminium foil sachets
and 500 gram in glass bottles. BFL always used glass bottles for its beverages products, 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 centers. 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 or 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 %, depending on the
distance. The replenishment cycle time of finished goods from plants to stockiest / retain 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 worlds 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 is as under
Tea - market size Rs. 6,500 crore growth rate 10 %
Coffee - market size Rs. 1,000 crore growth rate 5 %
Beverages - market size Rs. 1,000 crore growth rate 8 %
Under 2000, the BFL prospered and expanded. Its sales growth was almost at par with the industry growth. The
Co. also enjoyed profit growth according to the sales growth. At the end of 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 ti me in the 2.5 years history of the Co. whereas almost all major
competitors 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
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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, the stock out 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. 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 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 Co. 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 f unction from marketing and sales functions,
extensive use of information technology for order management, demand management, agile manufacturing, and
complex visibility of inventory and its movement.
Questions
1) What principles of logistics system design will be helpful to Mr. Gupta?
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) 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.