Backward Integration
INTRODUCTION
BBC news [2] on 21st October, 2013; revealed that, Tesco,
London had generated a food waste of 28000 tonnes in
the first six months of 2013. Out of which, 21% was fruits
and vegetables & 41% was bakery items. In India,
Reliance Fresh faced continuous loss for 7 years. It dealt
especially with perishable products especially. As per the
financial report of Reliance Fresh 2011-12, it posted a loss
of 283.8 Cr INR. Reliance Fresh shut down all of its stores
which were resulting in loss, in order to make a gross profit.
These are the live examples of improper inventory
planning and control of perishables. Improper supply
chain pattern is also responsible. Proper refrigeration is
also needed for fruits and vegetables and dairy products
etc. which will result in cost high electricity bills. Another
fact is that supermarkets get very less time to market those
products. Even some of the supermarket retailers fear to
sell these type of perishables having less shelf life period.
Supermarkets are currently using ASO (Advanced System
Optimizer) software for effective inventory control, but it is
not that much beneficial for vegetables, fruits, bread etc.
Fluctuation is very high in demand and sales for these
perishables. That's why it becomes risky to sell these type of
perishables.
Scope
As there is high fluctuation between demand and supply
of perishables having less shelf life period, automatic store
ordering software fails to predict the future demand with a
high accuracy. This report deals with minimisation of
fluctuation and use of alternate resources in an effective
manner. As per this report, supermarkets can use ASO for
perishables; they will get more time to market those
*-***-****-***** M.Tech Student, Department of Management Studies, Indian School of Mines, Dhanbad, India. ** Assistant Professor, Department of Management Studies, Indian School of Mines, Dhanbad, India.
ABSTRACT
Supermarkets are the one stop solution for urban consumers these days. Similar products having different brands,
colours, flavours etc are being available under a single roof. Supermarkets are specifically bulk purchasers. They try to
purchase the non perishables as well as perishables in a large quantity with a high discount; so that they can easily sell it to
the consumers at less price as compared to the local market. But, in case of short shelf life period perishables, this
strategy can't be implemented. Especially in the case of fruits, and ready to cook vegetables, supermarkets are not that
much really competent. In case supermarkets which purchase vegetables, and fruits in a bulk manner to get high
discount, it has to invest upon proper refrigeration, results in a huge electricity bill. High amount of food waste is done by
supermarkets. For eg. Tesco, London & Sainsbury, London; had faced lots of food waste as per BBC news. In India,
Reliance Fresh[13] had also faced loss for the last 7 years and was forced to shut down some of its centres because of
great loss. ASO (Automatic Store Ordering) software especially helps in case of non perishables and semi-perishables but
it fails in case of perishables having short term shelf life period. The major problem is the supply chain pattern of fruits and
vegetables. Supermarkets get very less time to market those vegetables, fruits, flowers, bread etc.
This report comprises of proper backward integration for vegetables and fruits that can be grown locally. It also deals with
effective disposal of these perishables.
Keywords: Backward Integration, Perishables, Bulk Purchase, Refrigeration Cost, Food Waste, Bio-gas Plant.
GYANENDRA MALLA *
By
MRINALINI PANDEY **
BACKWARD INTEGRATION OF SHORT SHELF LIFE PERIOD PERISHABLES AT SUPERMARKETS: A CASE STUDY
SURENDRA PRASAD ***
VAIBHAV WARSI **** CHANDRASHEKHAR KUMAR *****
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33li-manager’s Journal o Management, Vol. No. 1 ln 10 June - August 2015
perishables; supply chain or transportation cost will
reduce etc. All these happen only if a proper backward
integration of these perishables will get set up.
1. Classification of Perishables, Semi-perishables, Non-
perishables : A Literature Review
In this literature, the authors have categorized the
perishable items, in order to get the proper control over all
the perishable products, which are discussed in a group
wise manner.
Donselaar (2006) [8] has divided all the perishables into
two groups i.e. daily fresh product & weekly fresh product.
The products whose validity are 9 days is daily fresh
product and above 9 days are stated as weekly fresh
products. But in this report, the perishable products are
categorized in branded and non branded items. The non
branded items such as fruits, ready to cook vegetables
are to be cultivated in nearby lands and the branded
items are to be purchased from authorized wholesalers.
Because in case of branded items, IPR is also an issue.
In this paper, it is stated that super markets are losing their
maximum sales from perishable products because of
their improper timing. In the paper of Mahajan and Ryzin
(2001) [9], a single algorithm is defined which can meet
different customer choice models.
These are the items which remain fresh up to 10-12 days
without refrigeration and around 20 days with
refrigeration. Since it is a short span of time, marketing
becomes highly risky. Here, in this paper, self cultivation is
proposed which will result in high profit, high remaining
shelf life and less cost of refrigeration. People most
possibly go to super markets in weekends and they try to
get the perishable items for a week. Hence the
vegetables, dairy products, fruits are to be fresh and have
at least 5-6 days of RSL. The demand of the items should
be taken into account regularly in order to predict the
future sales. Most of the literature focus upon the
perishability instead of the demand substitution. Parlar
(1985)[11] has described this phenomenon. He has taken
both the perishability and demand substitution into
account. Nahmias(1982)[10], Raafat(1991)[12], Goyal &
Giri(2001)[4] has also focused upon the perishability of the
items.
Donselaar(2006)[8] has defined the weekly fresh products
whose RSL is more than 21 days. Here also the demand
substitution as well as perishability should be taken into
account. Some of the researchers have suggested for
direct delivery of the perishable items. Raman has
described it in his journal. He has assumed constant
demand in case of perishables. Kok and Fisher(2003)[7]
have also added an extra point to this. They have
suggested simulation based optimization.
The ASO system could be improved for the perishable
items. It should depend upon market demand,
occasions, weather, local area etc. The weekly food
waste should be recorded and year wise, as well as weekly
sales pattern sales data should also be taken into
consideration in order to minimize the waste.
Especially, the products are being categorized between
perishables and non perishables as per their shelf life. Shelf
life decides the time duration within which the product will
yield its best quality, for e.g., - we must have seen a
statement "best before 6 months of manufacture" upon
the soft drink bottles. That indicates that 6 months is the
shelf life period. In this case, the stated storing conditions
are to be strictly followed, i.e. the soft drink is to be
preserved at low temperature.
The dictionary meaning of “perishable” indicate things
which will perish rapidly if not refrigerated. As per
Donselaar (2006) [8], an item can be considered as a
perishable product only if it satisfies one of the following
two conditions,
Condition 1: The rate of deterioration must be quite high
at normal condition. Ambient storage conditions are
required for slow deterioration rate.
Condition 2: “The obsolescence date of the product is
such that reordering for the products with the same date is
impractical.” Donselaar (2006) [8].
In overall, a product can be classified as,
·Perishable product
·Semi-perishable product
·Non-perishable product
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34 i-manager’s Journal o Management, n l lVol. 10 No. 1 June - August 2015
The major factor which distinguishes the products in these
3 categories is the rate of deterioration.
1.1 Perishable Products
The rate of deterioration of perishables like fruits,
vegetables etc is shown in Figure 1. For such products like
fruits, ready to cook vegetables, milk, dairy products,
beer, medicine etc., the rate of deterioration is high and
conditioned environment is required to reduce the rate of
deterioration.
Figure 2 shows the rate of deterioration of perishables like
periodicals, newspaper, weekly/monthly magazines etc.
These types of products have a short shelf life period. After
that specific period of life, it becomes a piece of paper
only.
1.2 Semi-Perishable Products
The rate of deterioration of semi-perishables like potato,
ginger etc is shown in Figure 3. The rate of deterioration is a
bit less than that of perishable products; conditioned
environment is specifically not required.
1.3 Non-Perishable Products
Figure 4 shows the rate of deterioration of non-
perishables. For non-perishables, the rate of deterioration
is quite less, and conditioned environment is not required
at all. Few examples of non-perishables are soap, plastic
products, rice etc.
2. Logistics Model
2.1 Current Logistics Model
Currently, as shown in Figure 5, supermarkets deal with lots
of brands, lots of varieties etc. So, it never purchases
products from each and every individual manufacturing
unit. It always prefers to purchase from wholesaler/
distributors. Products come from manufacturing unit or
production farm to wholesaler, and from wholesaler to
supermarkets.
2.1.1 Pros
·Supermarkets don't have to deal with lots of
manufacturing units. It gets all the varieties from local
wholesaler. It's a time saving process.
·Supermarkets purchase items from wholesaler in a
bulk manner. So, they get more discount.
Figure 1. Rate of Deterioration of Perishables like Fruits, Vegetables etc.
Figure 2. Rate of Deterioration of Perishables like Newspapers, Weekly Magazines etc
Figure 3. Rate of Deterioration of Semi-Perishables like Potato, Ginger etc
Figure 4. Rate of Deterioration of Non-Perishables
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35li-manager’s Journal o Management, Vol. No. 1 ln 10 June - August 2015
2.1.2 Cons
·For short shelf life period perishable products (i.e.
Fruits, vegetables, milk etc.) this type of process is non-
beneficial. The process consumes a bit of that shelf
life period and supermarkets get less time to market
those products.
2.2 Proposed Logistics Model
Figure 6 shows the classification of products at
supermarkets. The proposed logistics model for Non-
Perishables, Semi-Perishables, Branded Perishables and
those perishables which can be locally produced are
shown in Figure 7 and Figure 8 respectively.
In the case of perishable products, short shelf life period is
the major problem. At the farm (Figure -9), when the
product is got cut from the plant, it has a RSL(X) (remaining
shelf life period of X).
When it comes to the wholesaler, its remaining shelf life
period get reduced and it becomes 'y' (RSL(Y)).
Now, supermarkets purchase it from wholesalers. When
these products go to the supermarkets, its RSL again gets
reduced. Hence, supermarkets get very less time to
market them. Sometimes, it results in loss.
This report proposes that, supermarkets should go for
backward integration specifically for these type of
products. Supermarkets will get the products with RSL(X)
and can get more time to market them. The products will
be more fresh when it come to the retailers.
2.2.1 Pros
·Products will be more fresh.
·Food waste or loss will be less.
·Electricity bill upon refrigeration will be less.
·Transportation cost will get reduced.
·Country's production will get enhanced.
·Supermarkets can apply more discount on fresh
products in order to attract more consumers.
·Lower class families can also access supermarkets.
3. Disposal of Perishables
3.1 Current Scenario
When RSL=0, perishable products get rotten. Before that,
the supermarket workers either consume it or it goes to the
municipality garbage yard. It leads them to a complete
loss. It is clearly shown in Figure 10.
3.2 Proposed Scenario
As per Figure 11, Supermarkets can cut fruits, vegetables
as per the proper inventory planning and control. ASO can
also be used in this case. Now if the products won't get
sold within the due date, it should not be sent to the
Figure 5. Current Logistics Model of Perishables at Supermarkets
Manufacturer/ Production Farm (all type of prod.)
Wholesaler/ Distributor
Supermarket Retailers
Figure 6. Proposed Classification of Products at Supermarkets
Figure 7. Proposed Logistics Model for Non/Semi/Branded Perishables
Manufacturer/ Producer
Wholesaler/ Distributor
Supermarket Retailers
Figure 8. Proposed Logistics Model for Locally produced Perishables
Figure 9. RSL analysis as per the Current Logistics Pattern of Perishables
RSL(X) > RSL(Y) > RSL(Z)
Products RSL(X)
Wholesaler RSL(Y)
Supermarket RSL(Z)
Supermarket retails
Start own farming
Bio-gas plant
Acquire Government's cultivable barren land on lease basis or private lands on sharing basis.
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36 i-manager’s Journal o Management, n l lVol. 10 No. 1 June - August 2015
garbage yard; it should be sent to the supermarket's own
restaurants. It may be termed as midway utilizations. In
case, it's not utilized, then it should be sent to the biogas
plant which must be situated at supermarket retail's own
farm. The workers who will be working over there at farm,
can use the biogas in cooking as well as illuminating bulbs
and the rest can be utilized as fertilizer in the farming. In this
way, it can be a waste free system for these type of
perishable products. Sainsbur y, London; a giant
supermarket is also using the bio-gas phenomenon.
3.3 Mid-way Utilizations
If supermarkets opt for backward integration, then it will
get some more time to sell these short shelf life period
perishable products. Here, as per Figure 12, when shelf life
period of the product comes down to 60% of its initial shelf
life, it is unable to attract consumers. But as per the quality,
it's quite good. These things occur as a loss in current
situation. But in order to prevent that, midway utilizations
can be implemented. Now-a-days supermarkets have
started their own "ticket restaurants". These ready to cook
vegetables, fruits etc are advised to be used in those
restaurants within 60-80% of initial shelf life period. It can
be used in various recipes, fruit salad, juice etc. In that
case, its marketing can be enhanced which will lead to a
loss reduction.
4. A Case Study : Big Bazaar, Saraidhela, Dhanbad
4.1 About the Organization
Big Bazaar is one of the largest hypermarket chain in India
having a total revenue of US$ 1.7 Billion. It started its
operation in the year 2001 having head quarter at
Mumbai, Maharashtra, India. At Big Bazaar, Saraidhela,
Dhanbad; the perishable items are being stored at
ground floor. According to the warehouse manager,
they were initially storing short shelf life period perishable
items like ready to cook vegetables, fruits, bread etc. But
they were unable to sell those products within due
period. Finally, the workers of Big Bazaar either
consumed them or it went to municipality garbage
yard. As per the company ’s point of view, its a complete
loss. At some of the other Big Bazaar retail centres, it was
seen that the vegetables were unable to attract
customers either as per the quality or selling price. The
perishables over there were having a minimum expiry
period of 45 days. It clearly showed their failure in case
of short term period perishables i.e. ready to cook
vegetables, fruits, bread, milk(not dair y products) etc.
4.2 About Dhanbad, Jharkhand, India
4.2.1 Geographical Location
As shown in Figure 13, Dhanbad is situated in between 0 0 0 0
23 37’30’’N - 24 56’N latitude and 86 8’23’’E - 86 50’18’’E
longitude of Jharkhand state in Eastern India. As per the
map, there are 2 rivers near the boundary of Dhanbad i.e.
Perishables at Supermarkets for selling purpose
RSL tends to zero
The workers of supermarkets either consume it before the perishables get completely out of order. (OR) It goes to
municipality garbage yard directly.
Yes
No
Figure 10. Current Disposal Process of Perishables at Supermarkets
Figure 11. Proposed Disposal Model of Perishables at Supermarkets
Figure 12. Details about Midway Utilization Process
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37li-manager’s Journal o Management, Vol. No. 1 ln 10 June - August 2015
Barakar river in the north and Damodar river in the south.
Two major reservoirs are there i.e. Maithon and Panchet.
Specifically, Dhanbad lies on the eastern part of
Chhotanagpur plateau. So, it's quite suitable for
cultivation. It is also known as the coal capital of India.
Dhanbad is surrounded by Giridih & Jamtara (Jharkhand)
in the north, Purulia (West Bengal) in south, Burdwan (West
Bengal) in east & Bokaro (Jharkhand) in west. The total
geographical area is 2996 Sq. Km. It is at a height of 232
mt. from sea level. Annual rainfall varies from 110 cm to 0 0
148 cm, and the temperature varies from 46 to 22 in 0 0
summer and 22 to 8 centigrade in winter.
4.2.2 Land Availability for Farming
As per the 'Brief Industrial Report [3] of Dhanbad 2010-11'
by MSME, Ranchi; the land details are as given in Table 1.
As per the data shown in Table 1, 57542.21 Hectares of
barren land is available at Dhanbad alone, which is
suitable for agriculture.
4.2.3 Rainfall & Underground Water Availability for Proper
Irrigation
Figure 14 shows the ground water level of Dhanbad. As per
the map, water availability is more than 95%(approx.) in
Dhanbad. Quite small places are marked as red in the
picture. As per the MSME 2010-11 report, the annual
rainfall ranges from 110cm to 148cm. Figures 15 and 16
gives a brief idea regarding availability of underground
water for irrigation purpose.
Figure 13. Geographical Location of Dhanbad, Jharkhand
Table 1. Cultivable Barren Land Details of Dhanbad, Jharkhand
Agriculture: Land details Year Unit Area
Total Area 2010-11 Hectares 201801.45
Agricultural Land 2010-11 Hectares 89200.25
Non-Agriculture Land 2010-11 Hectares 55058.96
Cultivable Barren Land 2010-11 Hectares 57542.21
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38 i-manager’s Journal o Management, n l lVol. 10 No. 1 June - August 2015
4.2.4 Predicted Annual Production of Dhanbad district
As per the Agriculture Contingency Plan[1] for the district
Dhanbad, the productivity information is as given in Table
2. As per the information given in Table 2, if we take the
case of cabbage only, Cabbages produced from 1
hectare is 16 kg. Cabbages can be produced from
Figure 14. Underground Water Map of Dhanbad, Jharkhand (Srivastava (2012) [14])
Figure 15. Pre-Monsoon Water Level Map of Dhanbad, Jharkhand (Srivastava (2012) [14])
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39li-manager’s Journal o Management, Vol. No. 1 ln 10 June - August 2015
57542.21 hectares of cultivable barren land, is equivalent
to (57542.21*16 = 920675.36) i.e. 920675 kg
approximately.
4.3 Current Logistics Pattern for Perishables at Big
Bazaar, Dhanbad
As shown in Figure 17, the local distributors collect the
perishables like vegetables, fruits etc from the respective
farms, and sell it to Big Bazaar and other retailers. Big
Bazaar never purchases items from farms directly. This is
because, it has to deal with variety of products and it
easily gets all the products from the wholesaler directly.
But in case of perishable items, the shelf life period matters
a lot especially in case of short shelf life period perishables
i.e. bread, vegetable, milk, fruits etc. So, Big Bazaar gets
less time to sell those products. The remaining shelf life
period decreases gradually. Hence, we should try for level
reduction in order to get more time to sell perishable
items.
4.3.1 RSL Analysis
RSL(P) > RSL(Q) > RSL(R) >RSL(S) > RSL(T) (1)
As per Figure 17, Big Bazaar gets the short term perishables
when the products have RSL(R). The more we reduce the
levels on the current supply chain, we will get more time
to market those products.
4.3.2 Profit analysis
In current logistics pattern, the wholesaler's profit margin,
inter-district transportation tax etc make a negative term
upon Big Bazaar's net profit. These things can also be
minimized or even eliminated.
4.4 Proposed Logistics Pattern for Short Term Perishables
at Big Bazaar, Dhanbad
As shown in Figure 18, Big Bazaar should have its own local
Figure 16. Post-Monsoon Water Level Map of Dhanbad, Jharkhand (Srivastava (2012) [14])
Table 2. Minimum Production per Hectare Details
Major Horticulture Crops Productivity (kg/hectare)
Cabbage 16
Potato 9.8
Onion 20
Tomato 20
Okra 14
Chillies 18
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40 i-manager’s Journal o Management, n l lVol. 10 No. 1 June - August 2015
production farm on lease or sharing basis. It can use
Government's cultivable barren lands for this purpose. A
bio-gas plant must be set up at the farm. Now, Big Bazaar
can use ASO for procuring perishables from its own local
lands. Usage of cold storage will get less. It will cut that
much the volume of vegetables which is required as per
daily demand basis. Products will be more fresh as
compared to the current scene. Big Bazaar can apply
more discount as compared to the local market in order
to attract more customers.
4.4.1 RSL Analysis
RSL(P) >RSL(Q) > RSL(R) (2)
Big Bazaar will get the perishable items at RSL(Q). As
compared to the current scenario, Big Bazaar was getting
Figure 17. Current Logistics Pattern of Perishables at Big Bazaar, Dhanbad
Figure 18. Proposed Logistics Pattern for Short Term Perishables at Big Bazaar, Dhanbad
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41li-manager’s Journal o Management, Vol. No. 1 ln 10 June - August 2015
the perishables at RSL(R). But in proposed method, it will
get the products at RSL(Q). As RSL(Q) > RSL(R), it is more
beneficial for supermarkets.
4.4.2 Profit Analysis
As compared to the current scene, the local distributor's
profit margin as well as inter district transportation tax
become positive factors.
Big Bazaar's proposed profit = current profit + local
distributor's profit margin + reduction in transportation
cost + inter district transportation tax.
Conclusion & Future Implications
Backward integration of supermarkets is quite beneficial
for country's production as well as supermarkets can get a
growing market in this field. Consumers can also get fresh
products at nominal price. Implementation of bio-gas
plant will make the whole system a waste less system. The
products whose remaining shelf life period becomes
completely zero i.e. it gets rotten, it can be used as an
input material in the bio-gas system. The output can be
used as a fertilizer in the farm and cooking gas and current
etc., may be saved. Sainsbury, London is using this bio-gas
phenomenon method in order to make it waste free. On
the overall, this proposal is quite beneficial for everyone.
References
[1]. Agriculture Contingency Plan for the District:
Dhanbad, www.agricoop.nic.in
[2]. BBC NEWS (2013). regarding food waste of Tesco,
London.
[3]. Brief Industrial profile of Dhanbad district 2011 by
MSME, Ranchi.
[4]. Goyal, S., Giri, B., (2001). “Recent trends in modeling
of deteriorating inventor y ”, European Journal of
Operational Research. Vol.134 (1), pp.1–16.
[5]. Ground water information booklet by Central
Groundwater Board.
[6]. http://en.wikipedia.org/wiki/Supermarket
[7]. Kok, G., Fisher, M., (2003). “Demand estimation and
assortment optimization under substitution: Methodology
and application,” Operations Research, Vol.55(6),
pp.1001-1021.
[8]. K. Van Donselaar, T. Van Woensel, R. Broekmeulen, J.
Fransoo, (2006). “Inventory Control of Perishables in
Supermarkets,” Science Direct, Vol.104(2006), pp.462-
472.
[9]. Mahajan, S., van Ryzin, G., (2001). “Stocking retail
assortments under dynamic consumer substitution,”
Operations Research, Vol.49(3), Vol.334–351.
[10]. Nahmias, S., (1982). “Perishable inventory theory: A
review”, Operations Research, Vol.30(3), pp.680–708.
[11]. Parlar, M., (1985). “Optimal ordering policies for a
perishable and substitutable product: A Markov decision
model,” INFOR, Vol.23(2), pp.182–195.
[12]. Raafat, F., (1991). “Survey of literature on
continuously deteriorating inventory model,” Journal of
the Operational Research Society, Vol.42, pp.27–37.
[13]. Reliance Fresh financial report 2011-12
[14]. V.K. Srivastava, Devendra Nath Giri and Pawan
Bharadwaj, (2012). “Study and Mapping of Ground Water
Prospect using Remote Sensing, GIS and Geoelectrical
resistivity techniques – a case study of Dhanbad district,
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ABOUT THE AUTHORS
Gyanendra Malla is M.Tech student (Industrial Engineering & Management) at Department of Management Studies of Indian School of Mines, Dhanbad. He was awarded first class with distinction for his outstanding performance in academics at institute level. His research interests include operations and supply chain management specifically based upon perishable items.
Mrinalini Pandey is Assistant Professor in the Department of Management Studies, Indian School of Mines, Dhanbad. She has more than a decade of academic experience in teaching various courses on Management both at PG and UG levels. As a member of leading professional bodies of management, she has contributed about ninety papers in management journals and presented papers in international and national conferences in India and abroad. She has won many awards which includes Two best paper Awards for her research work, best case study award and the prestigious Bharat Jyoti Award and a certificate of Excellence for Meritorious Services, and Outstanding performance.
Surendra Prasad is M.Tech student (Industrial Engineering & Management) in the Department of Management Studies of Indian School of Mines, Dhanbad and graduated in Production Engineering from BIT, Sindri in the year of 2013. He was awarded first class with gold medal for his outstanding performance in academics at institute level. Currently, he is working at TATA Steel India Ltd., Jamshedpur, Jharkhand. His research interests include Productivity Improvement, Man Power Planning, Supply chain management etc.
Vaibhav Warsi is M.Tech student (Industrial Engineering & Management) in the Department of Management Studies of Indian School of Mines, Dhanbad and graduated in Production Engineering from BIT, Sindri in the year of 2013. He was awarded first class with distinction for his outstanding performance in academics at institute level. His research interests include operations and supply chain management, Productivity Improvement etc.
Chandrashekhar Kumar is M.Tech student (Industrial Engineering & Management) in the Department of Management Studies of Indian School of Mines, Dhanbad. He was awarded first class with distinction for his outstanding performance in academics at institute level. He is currently working at Arvind Exports, Bangalore. His research interests include operations and supply chain management, Productivity Improvement etc.
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43li-manager’s Journal o Management, Vol. No. 1 ln 10 June - August 2015
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