Backward Integration

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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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42 i-manager’s Journal o Management, n l lVol. 10 No. 1 June - August 2015

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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