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Design of an efficient potato supply chain

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Designing an Efficient Potato Supply Chain
Model

Under the Guidance of:

Prof. Inga-Lena Darkow

By,
Sampathkumar Walikar - 352143
Abinav Bhaskar - 352092
Swaminathan Rammohan – 352098

1
Table of Content

1. Introduction: ..................................................................... 4
1.1 Future Food: .................................................................................................................................. 4
1.2 Processing & uses .......................................................................................................................... 5
1.2.1 Food uses: fresh, frozen, dehydrated ...................................................................................... 5

1.2.2 Non-food uses: glue, animal feed, and fuel-grade ethanol ....................................................... 6

1.2.3 Seed potatoes: renewing the cycle .......................................................................................... 6

1.3 Scenario of potato in India: ............................................................................................................ 7

1.3 Potato usage in India: .................................................................................................................... 9

2. Case Study: PepsiCo Frito-Lay ....................................... 11

2.1 Company Overview: ..................................................................................................................... 11
2.2 The Organization of PepsiCo Frito-lay ......................................................................................... 12
2.3 Method of Selecting Outgrowers .................................................................................................. 12
2.4 Procurement / Distribution of Seeds and Inputs to Farmers........................................................... 13
2.5 Coaching / Training Contract Farmers.......................................................................................... 13
2.6 Technical Assistance / Monitoring of Contract Farmers................................................................ 13
2.7 Procurement Operations ............................................................................................................... 13
2.8 Further Planning of PepsiCo to Improve: ..................................................................................... 14
2.9 Further Recommendations by our team: ....................................................................................... 14

3. Supply Chain Operational Reference (SCOR) ................ 15

3.1 Level 1: Process Types: ............................................................................................................... 15
3.2 Process categories: ....................................................................................................................... 16
3.3 Process elements: ......................................................................................................................... 18
3.4 Michael Porters Value chain analysis:........................................................................................... 18

4. Efficient decisions using Mixed Integer linear

programming ...................................................................... 21
4.1 Physical Modeling of the Supply Chain........................................................................................ 21
4.2 MILP Modeling and Decision Making ......................................................................................... 22

2
 4.3 Use of Numerical values .............................................................................................................. 24
4.3 Constraints................................................................................................................................... 26
4.4 Results ......................................................................................................................................... 26

5. Conclusion: ....................................................................... 27
Bibliography ......................................................................... 29

3
1. Introduction:
ABC Ltd is a Multi-National Company based in Germany, which is into many business
segments such as logistics, banking, farm machinery and agro chemicals. They are trying to
expand their business and enter food supply chain business. They are focusing on developing
economies. Our team has been asked to prepare a report on the viability of setting up a food
processing unit in India with a special focus on potato products. The present report analyses the
pros and cons of setting up the unit and provides models to set up an efficient supply chain. It
comprises of three parts .The first part comprises of basic information regarding potato
production and its usage in India. In the second part we analyze an existing company, Pepsico,
which is operating in the Indian markets and manufactures food products from potatoes. We
have analyzed the problems associated with the existing supply chain and in the third part; we
have suggested possible solutions and models to design an efficient supply chain. The cost for
transportations and cold storage are an approximate assumption and they might differ in different
regions of the country.

1.1 Future Food:

The potato (Solanum tuberosum) belongs to the solanaceae family of flowering plants.
It originated and was first domesticated in the Andes mountains of South America. The potato is
the third most important food crop in the world after rice and wheat in terms of human

4
consumption. More than a billion people worldwide eat potato, and global total crop Production
exceeds 300 million metric tons.There are more than 4,300 varieties of native potatoes, mostly
found in the Andes. They come in many sizes and shapes There are also over 180 wild potato
species. Though they are too bitter to eat, their important biodiversity includes natural resistances
to pests, diseases, and climatic conditions. Potato is vegetatively propagated, meaning that a new
plant can be grown from a potato or piece of potato, called a “seed”. The new plant can produce
5-20 new tubers, which will be genetic clones of the mother seed plant. Potato plants also
produce flowers and berries that contain 100-400 botanical seeds. These can be planted to
produce new tubers, which will be genetically different from the mother plant.
Potato is considered to be one of the most important food for the future and has been declared as
the future food of the world by the Food and agricultural organization (FAO)of the United
nations. Potatoes have a wide variety of usage and can be eaten raw or used as a raw material for
the food processing industry..

1.2 Processing & uses

Potatoes are used for a variety of purposes, and not only as a vegetable for cooking at home. In
fact, it is likely that less than 50 percent of potatoes grown worldwide are consumed fresh. The
rest are processed into potato food products and food ingredients; fed to cattle, pigs, and
chickens; processed into starch for industry; and re-used as seed tubers for growing the next
season's potato crop.

1.2.1 Food uses: fresh, frozen, dehydrated

Fresh potatoes are baked, boiled, or fried and used in a staggering range of recipes: mashed
potatoes, potato pancakes, potato dumplings, twice-baked potatoes, potato soup, potato salad and
potatoes au gratin, to name a few. But global consumption of potato as food is shifting from
fresh potatoes to added-value, processed food products. One of the main items in that category is
frozen potatoes, which includes most of the French fries ("chips" in the UK) served in restaurants
and fast-food chains worldwide. The world's appetite for factory-made french fries has been put
at more than 7 million tons a year. Another processed product, the potato crisp ("chips" in the
US) is the long-standing king of snack foods in many developed countries. Dehydrated potato
flakes are used in retail mashed potato products, as ingredients in snacks, and even as food aid.

5
Potato flour, another dehydrated product, is used by the food industry to bind meat mixtures and
thicken gravies and soups.
A fine, tasteless powder with "excellent mouth-feel," potato starch provides higher viscosity than
wheat and maize starches, and delivers a more tasty product. It is used as a thickener for sauces
and stews, and as a binding agent in cake mixes, dough, biscuits, and ice-cream. In eastern
Europe and Scandinavia, crushed potatoes are heated to convert their starch to fermentable
sugars that are used in the distillation of alcoholic beverages, such as vodka and aquavit.

1.2.2 Non-food uses: glue, animal feed, and fuel-grade ethanol

Potato starch is widely used by the pharmaceutical, textile, wood, and paper industries as an
adhesive, binder, texture agent, and filler, and by oil drilling firms to wash boreholes. Potato
starch is a 100% biodegradable substitute for polystyrene and other plastics and used, for
example, in disposable plates, dishes, and knives.
Potato peel and other "zero value" wastes from potato processing are rich in starch that can be
liquefied and fermented to produce fuel-grade ethanol. A study in Canada's potato-growing
province of New Brunswick estimated that 44,000 tons of processing waste could produce 4-5
million liters of ethanol.In the Russian Federation and other east European countries, as much as
half of the potato harvest is used as farm animal feed. Cattle can be fed up to 20 kg of raw
potatoes a day, while pigs fatten quickly on a daily diet of 6 kg of boiled potatoes. Chopped up
and added to silage, the tubers cook in the heat of fermentation.

1.2.3 Seed potatoes: renewing the cycle

Unlike other major field crops, potatoes are reproduced vegetatively, from other potatoes.
Therefore, a part of each year's crop - from 5 to 15 percent, depending on the quality of the
harvested tubers - is set aside for re-use in the next planting season. Most farmers in developing
countries select and store their own seed tubers. In developed countries, farmers are more
likely to purchase disease-free "certified seed" from dedicated suppliers. The graph below shows
the edible energy available per unit of land used for growing potatoes. The results have been
formulated by American Agricultural Asociation.

6
Graph 1: Edible Energy per unit land (Kj/ha)

1.3 Scenario of potato in India:

1. India is the second largest producer of potatoes in the world after china.

2. One tenth of the world potato production is done in India.

Source : National Horticulture Board of India

Figure 1: Potato production trends in India

7
Since there is a single cold storage facility and the production of potato is concentrated mainly in
the eastern and northern regions, the price of potato is highly volatile across the states.
Surprisingly, even within the states there are high price fluctuations. Since India is
geographically big and wide spread, the fluctuations in the prices of commodities are
uncontrollable. The graph below shows the state wise price list of potatoes.

Source : National Horticulture Board of India

Highest prices of
potato are
observed in the
southern part
ofoIndia

Graph 2: Region wise potato price in India

8
Graph 3: Potato prices year wise per quintal

Graph 2 shows us that the prices across the states are highly volatile. This is because the potato
cultivation is mainly concentrated in the eastern and northern part of India. The cold storage
facility is available only at the northern part, a place named Agra. This causes the price hike in
southern parts of India such as Kerala, Andhra and TN. Graph 03 depicts that the spot prices
potato has been following a decreasing trend over the years and this provides a good opportunity
to set up a production facility in the potato producing regions as they provide the advantage of
lower raw material costs.

1.3 Potato usage in India:

Graph 4: Potato usage in India

9
Above graph shows that the major usage of potatoes has been done for table purposes up until
now and there lies a scope for setting up food processing units which add value to the product
and there has been a consistent demand of processed potato products in the country . This
demand has been on an increasing trend. The table below shows the existing players in the
processed potato food sector, their plant capacities and their main products. It can be analyzed
from the table that PepsiCo, one of the market leaders in the food and beverage sector has been
successful in the Indian market. They have analyzed all major problems and devised a strategy
which made them capture the Indian market and as well as made a positive impact on
transforming the life styles of many Indian farmers.

We are presenting a case study, on the strategy of Pepsi Co, the summary of best practices
followed by them.

Production capacity of Potato process Industries

Sno Manufacturer Product Capacity (kg/h)

1 Balaji wafers flakes,chips 500

2 Faber Leather flaks,chips 600

3 Haldiram wafers ,chips 400

4 McCain India Flakes ,french fries 1000

5 Pepsi foods/Fritto lay Chips 1600

6 Wimpy's Delhi French Fries 500

7 Welga foods French fries 500

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2. Case Study: PepsiCo Frito-Lay

2.1 Company Overview:

PepsiCo Frito-Lay, is a market leader in the field of food and beverages in the Indian market. It
has been a pioneer in the field of contract farming (CF). The company first established
outgrowing operations in India in 1989. Since entering Indian food market in 1989, PepsiCo has
grown to become one of the nation’s leading food and beverage companies. PepsiCo’s food
division, Frito-Lay, is the country’s leader in the branded salty snack market. PepsiCo’s three
food processing and packaging plants manufacture products like Lay’s Potato Chips, Cheetos,
Uncle Chips, Kurkure and Quaker Oats. The Frito-Lay India division employs over 48,000
people in India and generates over $1 billion USD in business. Depending on the season,
PepsiCo contracts up to 1,200 outgrowers / contract farmers (CFs) in order to procure more than
10,000 MT of potatoes for its chips factory (Lay’s Potato Chips). It holds about 40.8% of the
Market volume share compared to other similar product manufacturers.
PepsiCo has introduced six high-quality, high-yield potato varieties to more than 10,000 farmers
working in over 10,000 acres across Punjab, U.P, Karnataka, Jharkhand, West Bengal, Kashmir
and Pune, Maharashtra. PepsiCo began CF operations in the Pune area in 2001, procuring just 50
MT. In 2008, its outgrower operations produced more than 10,000 MT. The organizational
structure and the steps followed by the company in the subsequent sections.

11
2.2 The Organization of PepsiCo Frito-lay

PepsiCo has three Assistant Managers (AM), supervised by the General Manager of Operations
who oversee Contract Farmer (CF) operations. Eight Field Assistants (FA), agro-consultants paid
as contractors rather than as employees, support the AMs. The managers and FAs are responsible
for 100 to 1,500 CFs at a time, depending on the season and they oversee and facilitate the
procurement of 10,000 MT of potatoes per year. FAs are responsible for overseeing the fields of
six to seven villages each.

These AMs and FAs are responsible for:

1. Projecting and suggesting the purchase price (i.e., buy-back rate) to upper management,
Basing projections on experience and expectations.
2. Selecting and signing contracts with outgrowers.
3. Distributing seed to farmers.
4. Training CFs both formally and informally throughout the season.
5. Monitoring fields and providing appropriate technical support.
6. Establishing procurement schedules and procuring potatoes.
7. Using on-site labs at the field office and factory to determine quality.
8. Overseeing procurement and payment processing for the CFs.

2.3 Method of Selecting Outgrowers

PepsiCo selects CFs first by determining an appropriate area where soil and climate are
conducive to growing potatoes profitably. Because yield is the key to successful CF operations,
these factors must be considered.PepsiCo also recruits new CFs based on a referral system.
Progressive farmers may suggest and/or select other farmers for inclusion in the program.

12
2.4 Procurement / Distribution of Seeds and Inputs to Farmers
As stated above, PepsiCo supplies all outgrowers with its own high-quality reliable seed, grown
at its Punjab operation. The amount of seed produced is based on projections made five years
ago when PepsiCo began cultivating its own seed. Now, however, the need is greater than the
available seed and the company must purchase potatoes on the open market. Realizing that its CF
operations provide the best quality potatoes, PepsiCo’s goal is to become 100% reliant on CF for
its potatoes.

2.5 Coaching / Training Contract Farmers

PepsiCo organizes two major trainings every year: 1) pre-sowing training (including seed
handling and land preparations) and 2) pre-harvest training. PepsiCo staff finds that visuals such
as drawings and pictures are the most effective tools for training and trainers incorporate
audiovisual presentations and banners into their trainings and sometimes post several signs
around villages. They also encourage non-CFs to attend the trainings; PepsiCo views them as
potential CFs and understands how a neighboring farmer’s crop can affect the health of a CF’s
crop.

2.6 Technical Assistance / Monitoring of Contract Farmers

Not all training is formal and PepsiCo views the first training with farmers as an ice breaker and
requires field assistants to then spend quality time in the field with them, providing support and
building relationships. DuPont, an international input supply company with extensive operations
in India, provides CFs with both chemical kits and training and technical assistance, as needed,
particularly when chemical application is advised. PepsiCo field staff work hand-in-hand with
the DuPont field staff to ensure CFs receives needed support throughout the season.
In addition to training, demonstration plots also play a vital role. According to PepsiCo, one of
the most effective training methodologies is to have successful farmers tell their stories to others.
PepsiCo emphasizes a strategy of supporting farmers through 50% visual training and 50% field
assistance.

2.7 Procurement Operations

According to their contracts, outgrowers bring their harvest to the field office and/or designated
stations for grading and sale. Until the lot has been properly assessed (graded and tested) and the

13
proper paperwork has been signed and handed to the outgrower, the lot remains in the possession
of the outgrower. Once PepsiCo takes ownership at the field office, the company then takes
responsibility for transporting the produce to the factory near Pune.
PepsiCo conducts tests on samples from CFs’ harvests to evaluate potato dimensions, disease,
defects, dry matter and sugar content and asses them against the contract standards. PepsiCo
rejects potato lots not meeting these standards and does not purchase them. For lots it purchases,
PepsiCo requires 15 days to process payment from the procurement date. For CFs with loans, the
payment is made by wire transfer directly to the bank, which immediately recoups its loan and
interest (as per the MOU with PepsiCo).

2.8 Further Planning of PepsiCo to Improve:

PepsiCo distributes this highly dependable seed to its farmers to assure its food processing and
packaging plants receive both the quality and quantity of potatoes they need (quality seeds also
result in better yields), another key to its success. 60-70% of the potatoes procured in Pune are
from CFs, with the remainder procured on the local open market. In the near future, PepsiCo
intends to move to procure 100% of its potatoes from CFs, particularly because the local open
market quality is inferior and the price difference is not significant.
At the moment, PepsiCo is limited in its ability to increase its CF operations in the area due to
the limited availability of its own quality seed. In 2003, PepsiCo estimated how much seed it
would need, but its potato snack business has grown faster than projected and consequently now
it does not have enough of its own seed for the greater than projected number of farmers it works
with, forcing PepsiCo to purchase additional seed on the open market.

2.9 Further Recommendations by our team:

After analyzing PepsiCo’s strategies, we came up with more services, an organization could
offer to the Indian farmers that could transform their lives and establish themselves on Indian
market. These recommendations have been listed below :
• Educating farmers on “Scientific Farming” methods
• Monitoring the cultivation from transplantation to post harvest
• Renting or selling of farm implements

14
 • Providing transport services
• Providing value additional services. Example fertilizers, irrigation etc.
• Protecting the crops from natural disasters by insuring the crop
• Develop processes for production of animal feed from waste potatoes and processing
waste.
• Develop processes for extraction of dietary fiber from potato peel

We made a reference model by benchmarking the best practices of PepsiCo and our additional
recommendations using a SCOR (Supply Chain Operational Reference) model.

3. Supply Chain Operational Reference (SCOR)

SCOR is a qualitative tool for representing, analyzing, and configuring supply chains developed
by Supply Chain council (SCC). It describes supply chain with standardized terminologies. It
permits benchmarking and extracts best practices from processes. To analyze the potato supply
chain, we make use of the three hierarchical process categories

Level 1: Process Types

Level 2: Process Categories

Level 3: Process Elements

3.1 Level 1: Process Types:

It is highest level in the SCOR model consisting of five parts: plan, source, make, deliver and
return.

Plan: It involves the overall process of balancing of available resources with the potato demand
and communicating the plans across the entire supply chain..

Source: This step involves Supplier selection, measurement of KPI, delivery schedules, and
inventory management.

15
Make: Transforming raw materials into intermediates and to next stage, planned v/s actual
demand adherence, schedule activities, inspection, and packaging are the major “make
activities”.

Deliver: Order management, inventory reservation, warehouse management are the cream layers
of deliver phase.

Return: The defective or the excess goods are returned from the consumer.

The process types are indicated in the below in the figure 2.

FIGURE 2: PROCESS TYPES

3.2 Process categories:

The five process elements are decomposed to process categories. The structure is broken down
and the relationship between process categories and the main process types are indicated in the
figure below. The improvements made are:

1. The company shall act as the suppliers to the farmers and supply the seeds, farm
implements, and crops insurance, help them in getting financial supports, train
them on scientific farming methods and provide transport services.
2. The farmer sources resources from our company and utilizes them
3. Farmers cultivate potato to match our quality standards

16
 4. We source the potatoes from farmers.
5. Inspect the potato quality
6. Process the Quality Control passed potatoes to storage and further processing
7. In case of defects, they are sent to local markets for sales.
8. The company can not returning the defective potatoes to farmers because they
grows them to match our standards under our supervision and any defects which
appear in the potatoes might be a result of faults on our side.
9. Consumers/retail chains source our processed products.

This process has been depicted in Figure 3 below.

Figure 3: Process Categories

17
3.3 Process elements:
Tuning of supply chain is done at this level by further breaking the process categories to process
elements. The process elements are linked to the input stream and/or output stream. The figure
below shows the process categories of our potato supply chain.

FIGURE 4: PROCESS ELEMENTS

3.4 Michael Porters Value chain analysis:

18
Value chain analysis helps to identify the firm’s core competencies and distinguish those
activities that drive the competitive advantage. Porter’s value chain model consists of two types
of activities- Primary activities and support activities. As shown in figure it involves five primary
activities and 4 support activities to analyze a firms value chain.

Primary activities include:

1. Inbound logistics: materials handling, warehousing, inventory control, transportation.

2. Operations: machine operating, assembly, packaging, testing and maintenance.
3. Outbound logistics: order processing, warehousing, transportation and distribution.
4. Marketing and sales: advertising, promotion, selling, pricing, channel management.
5. Service: installation, servicing, spare part management.
Support activities include:
1. Firm infrastructure: general management, planning, finance, legal, investor relations.
2. Human resource management: recruitment, education, promotion, rewards systems.
3. Technology development: research & development, IT, product and process
development.
4. Procurement: purchasing raw materials, lease properties, supplier contract negotiations.

In order to achieve quantitative results from a SCOR model, to analyze the effectiveness of a
supply chain each component of the supply chain has to be analyzed based on previously set
benchmarks. In the next step a scale of 0 to 5 or 0-10 are chosen and a survey is conducted to
understand which activity matches the previously set benchmarks. These benchmarks can be
devised by considering supply chain ideology of a successful competitor or can also be taken
from the Supply chain committee (SCC).

In the present work we did not have the resource or time to conduct interviews for creating an
effective quantitative model . However , the KPI’s which can be utilized for performance
analysis of a supply chain have been formulated and are presented in the table below :

19
KPI for Performance measurement
Raw material availability
Inbound logistics Inventory Management
Effective communication management
Quality measurement of potatoes
Quantity measurement of potatoes
Supplier management
Defective potatoes
In time delivery
Production quantity
Production time
Processing
Quality Standard
Operation
Packaging
Networking
Maintenance
Cold storage
Marketing
Delivery pattern
Outbound logistics
Quantity of delivered part
In time delivery
Supporting factors Total Quality Management

20
 Financial Management
Staff training

4. Efficient decisions using Mixed Integer linear programming

4.1 Physical Modeling of the Supply Chain

The first step in developing a better solution to the challenges in the fresh produce supply chain
is to gain a deeper understanding of how the supply chain is structured and operates. This is best
done with a thorough mapping of the physical supply chain. Following the physical mapping,
information regarding the various costs associated in various steps should be gathered. This
information can be further utilized to create a more efficient model for creating a more efficient
supply chain. Figure below shows the physical supply chain being used by potato food

21
processing manufacturers in

India.

Figure 5 Existing supply chain of potatoes for food manufacturers

4.2 MILP Modeling and Decision Making

The second step is to develop a mixed integer linear programming model which represents the
supply chain dynamics and depicts the relationship between the location, transport, storage
,quantity of potatoes with the costs, revenues and satisfaction of the customer demands . Model
variables and parameters are listed below :

i: Index for the customers

j: Index for the cold storage units

k: Index for manufacturing plants

22
s: Index for the farmers

Bsk : Quantity of potatoes shipped from farmer s to cold storage j

fkl : Quantity of potatoes shipped from cold storage j to plant k

qji: Quantity of potatoes shipped from plant k to customer i

Dk: Capacity of cold storage unit j

Sups : Capacity of farmer s

Wj : Capacity of manufacturing plant k

di : Demand of the customer

cji : Transportation cost of potatoes from plant k to customer i

akj : Transportation cost of potatoes from cold storage j to plant k

tsk : Transportation cost for the potatoes from farmer s to cold storage k

Pj : Price of the onions being charged by the cold storage units to the manufacturers

S.P : Selling price of the finished goods for the customers

Rev : Total revenue generated by the company

The total profit generated by the company would be the sum total of revenue generated by the
company minus the costs incurred by the company in the process. Profit is the variable which
needs to be maximized and has been defined as the variable Rev . A mathematical formula for
the same can be written for it :

Profit :

- – - )

23
4.3 Use of Numerical values
A numerical model based on the above variables has been created and fed into excel for
better understanding of the methodology . In the first step four farmers with their individual
capacities have been selected for the analysis. Table 4.1 provides the details for the same.

Farmer Production In Quintals

A B C D Total Production
400 600 300 700 2000
Table 4.1

Four options for the cold storage units have been identified for these farmers and the
transportation costs for each of them has been shown in the Table 02 :

Farmer-Cold storage transportation costs /Quintal

Farmer Cold storage
P Q R S
A 50 52 54 60
B 30 40 50 60
C 40 50 55 65
D 35 56 60 80
Table 4.2

The amount of money charged by these cold storage units to the farmers has been listed In Table
4.3. It also provides the maximum capacity of each of the cold storage units. This acts as a
supply chain constraint.

Cold Storage costs /Quintal

Farmer Cold storage
P Q R S
A 70 85 70 80
B 70 85 70 80
C 70 85 70 80
D 70 85 70 80

24
Capacity 400 225 600 500
Table 4.3

In the next step two manufacturing units T, U has been considered which cater to the customers
in a certain region. Transportation cost of potatoes from these manufacturing units has been
depicted in Table

Transport costs from Cold storage to Manufacturer/ quintal

Manufacturer Cold storage
P Q R S
T 50 60 65 70
U 51 65 68 66
Table 4.4

The next table shows cost of transporting goods from the manufacturing unit to the customer.

Transport cost from plant to customer (in Quintals )

Customers
Manufacturer C1 C2 C3 C4
T 20 30 32 34
U 40 28 35 25
Table 4.5

The next step is to define various constraints which might be present in the supply chain in order
to produce a bounded solution with the motive of maximizing the profits for the organization. In
order to do so we have considered the optimization of the supply side of the potatoes as the plant
to customer costs form a very small part of the total cost to the company. Further, the
manufacturing units have been placed at strategic locations, which tend to offer certain
competitive as well economical benefits to the firm. Opening a manufacturing unit in a region
which is not economically developed allows companies to get subsidies from the government
and also helps in reducing the capital investment costs .It has been assumed that the production
facilities are purchasing potatoes from the cold storage facilities and allocation decision with
respect to the cold storage has been treated as the decision variable. It has been assumed that the

25
farmers are selling their goods at a fixed price of 310/quintal (taken from Indian market surveys)
to simplify the problem .This is very rarely true in practical situations as potatoes from different
cold storage units would have different base costs based on the transportation as well storage
costs levied to the farmer .Transportation costs from cold storage units to the manufacturing unit
has been considered to be the cost which needs to be reduced in this model. A more complex
model with high level of inter dependence between different players can be created ,which allow
optimization of more than one variable but we have used a freeware “what’s best “ and it allows
the optimization of a single variable. The next section contains definition of some of the
constraints which have been applied to the model for optimization.

4.3 Constraints
It has been assumed in the analysis that demand for the goods is infinite with respect to the
production capacity and it does not bind the solution process. There are few constraints related to
the cold storage capacity as well as the manufacturing plant’s capacity which have been listed
below sequentially.

1. Total purchase from a specific cold storage unit can not be more than its capacity.
2. Total purchase by the manufacturing unit can not be more than its production capacity.
3. A minimum amount of 30 quintals have to be purchased by the manufacturing units , in
order to adhere to the government regulations of the land.
4. Total purchase of potatoes by the manufacturing units can not exceed the total production
bein done by the farmers.

4.4 Results

Manufacturer cold storage Allocation

Manufacturer Cold storage

P Q R S
Capacity
T 205 195 570 30 1000
U 195 30 30 470 725
Table 4.6

26
Above table depicts how the resource allocation should be done in order to maximize profits
.The next tables provide data regarding the revenue, cost and profit generated by the company.
There is an attached excel sheet to give a better understanding of the entire model.

Total Cost for the Manufacturers

Transport and
Cost of Potatoes handling Total Cost
T 310000 371100 371100
U 224750 44955 269705

Total Revenue for the Manufacturers

Price / Quintal Sales volume Total revenue
T 900 1000 900000
U 900 725 652500

Total Profit for the Manufacturers

Revenue generated Total Cost Profit
T 900000 371100 528900
U 652500 269705 382795
911695
Table 4.7

5. Conclusion:
The inference which can be drawn from the above analysis is that in order to maximize
the revenues and to reduce the cost incurred .The company can use the alternative of opening
cold storage units integrated with the manufacturing plants and start purchasing directly from
the farmers. This would reduce the length of supply chain. This would in turn allow the
company to get a better price as the cold storage dealers charge a premium without adding
any value to the product. This model has been used by successful food processing companies
and apart from reducing costs of transportation, it prevents the companies from seasonality of
prices. The expected change in profits by removing the cold storage wholesale dealers has

27
been depicted below graphically. There has been an increase in the profit margins as the base
cost of potatoes decreases as the farmers sell them directly to the manufacturer. This decrease
can be to the tune of approximately 50 %.In order to make things simpler the operating cost
for the cold storage unit has not been considered. In order to arrive at a more accurate result
operating cost as well as the fixed investment and its time value should also be taken into
consideration.

The present model considers only one of the performance indicators, i.e cost. A similar
optimization model can be made for reducing the lead time and an integration of both these
models would provide us with the desired results. This report is a starting step in the decision
making process of designing an efficient supply chain and can be used as a reference.

Figure 6 A new supply chain model.

28
Bibliography

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APEDA:

Frsh fruits and vegetables in India.

Available online at apeda.gov.in.

Farm to Fork supply chain of potatoes in the state of Bihar,India

checked on 2/07/2013.

29
flusby:

A case study on PepsiCo Fritto lay Potato outgrown program in India

checked on 2/07/2013.

Food and Agricultural Organization:

Foreign direct investments in agricultural retailing in India

checked on 2/07/2013.

Govil, Manish; Proth, Jean-Marie (2002):

Supply chain design and management. Strategic and tactical perspectives.

San Diego: Academic Press (Academic Press series in engineering).

Jack G.A.J Van -der - Vorst:

Performance measurement of supply chain in agricultural food supply models

checked on 2/07/2013.

Joshua Matthew Merill:

Managing risks in Food and vegetable products

checked on 2/07/2013.

National horticulture board of India:

India Horticulture Database ,2011.

Available online at http://nhb.gov.in/area-pro/database-2011.pdf.

SFAC:

Baseline data for potato and onion 2012

checked on 2/07/2013.

30
 Stadtler, Hartmut (Ed.) (2005):

Supply chain management and advanced planning. Concepts, models, software

and case studies; with 56 tables.
rd
3 ed. Berlin, Heidelberg [u.a.]: Springer.

Turan paksoy:

Multi objective introduction to mixed integer linear programming model

checked on 2/07/2013.

Watson, Michael (2013):

Supply chain network design. Applying optimization and analytics to the global
supply chain.
Upper Saddle River, N.J: FT Press.

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