Strategic Network Optimization

Introduction
Mr. Gagan Khanna, the head of Supply Chain of Tetra India was having his evening coffee in his
office on a Monday. The last quarter was a disastrous one with supply chain costs spiraling
exponentially. Mr. Khanna was wondering whether the supply chain of the company was
optimized.
Tetra India is a public limited company engaged in the business of marketing food and food
ingredients to consumers and institutional customers.
Their vision is to become the Best Performing Most Respected Foods Company in India
Their driving motto is that we should be "Nourishing families... Enriching life"
Their call to action - "ACT NOW" - and it means being empowered, being agile and making a
difference with a sense of urgency!

Sales and Distribution

Tetra India reaches towns across the length and breadth of India and retail stores sell the products
(traditional trade stores, visited by consumers at a high frequency).
The company has a strong presence and a pro-active stance with respect to modern trade. There
are direct selling agreements in place with key accounts like Reliance Retail, Food Bazaar,
Aditya Birla (More and Trinethra), Heritage, Food World, Spencers, Bharti-Walmart, Tesco,
Hypercity, D-Mart etc.

Manufacturing
The competitive edge has been maintained by their unique manufacturing process at 3 locations
across India. The factories are located in Delhi (Factory 1), Mumbai (Factory 2) and Hyderabad
(Factory 3).
In order to assure consumers of the highest standards of food safety and hygiene, they are
engaged in supporting co-packers in implementing world-class quality standards based on

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
Copyright - Sandeep Chatterjee, KPMG, 2014. All rights reserved.

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HACCP principles. The resolute commitment to globally benchmarked quality standards enabled
them to rapidly gain market standing in the two brands.
Processing is based on Lean Manufacturing Concept i.e. customer will not pay for the mistakes,
but only for the value of the product or the service they receive. The impact on this thinking is
huge on the manufacturing process. It changed the way people looked at the manufacturing
process. It made people to define value of the product from the customer's point of view, not
from the internal manufacturing point of view.
Tetra India has two products: Edible Oil 1 and Popcorn 1.

Exhibit 1 has the Bill of Material details.

UOM Qty UOM Conversion
Edible Oil 1 Litre 1
RM 1 Ton 0.0015 1 Ton=1000 litre
RM 2 gm 5 1 litre =1000 gm
RM 3 gm 4
RM 4 gm 6

UOM Qty UOM Conversion

Popcorn 1 Packet 1 1 Packet = 50 gm
PM 1 Ton 0.06 1 Ton=1000 gm
PM 2 gm 2
PM 3 gm 1
PM 4 gm 1.5
EXHIBIT 1: Bill of Material of Edible Oil 1 and Popcorn 1
UOM: Unit of Measure

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
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Supply Chain Management and Purchases
The Supply Chain Management & Purchases Organization is organized under following sub-
functions:

Demand Planning (DP)

Supply Planning and Sales & Operations Planning (S&OP)
Distribution Requirement Planning (DRP)
Supply Chain Operations - Warehousing & Transportation
Materials Requirement Planning (MRP)
Purchasing
Imports & Exports

Demand planning function performs the Long Term and Short Term Sales Forecasting. Sales
Forecasting is the starting of the Supply Chain process. Through this process, it is estimated -
what will be customers requirement, what qty and when is the demand? This process considers
the periodicity of demand to reflect the right demand at the right time. The output of this process
is used by Supply Planning, Financial Planning, Sales Planning and Marketing.

Supply Planning and S&OP process determines how the demand as forecasted by Demand
Planning would be met. This function ensures that right product is produced at the most optimum
manufacturing location at the right time. This function also ensures that right inventory levels are
maintained and no obsolescence gets generated. S&OP Process is a collaborative approach,
through all functions Sales, Marketing, Manufacturing, Quality, SCM and Finance come
together and ensure that Customer demand is met in a most cost effective way. The output of this
process is the week wise and factory wise Production Plan and estimated FG Inventory Cost.
Distribution function works to distribute the products at all 10 warehouses across the country to
meet the customers demand on time and in most effective way. It tries to optimize the
transportation cost while meeting the customers demand at the right time.

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
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SCM Operations function chooses the right Transporters and the Warehouses using the Third
Party Logistics Providers (3PL). This function is responsible for Primary Transportation, CFA
operations and the Secondary Transportation. If the Planning function is the brain of SCM, the
Logistics function is hands and feet of the SCM function. This function performs the movement
and storage of FG.

Materials Requirements Planning (MRP) function determines what inputs (Raw Materials and
Packaging Materials) are required when and at which factory based on the Production Plan in a
short term and based on the sales forecast in a long term.
Purchasing Function selects and nurtures good quality of Vendors who are reliable, quality
conscious and dependable. They also negotiate the right price with Vendors and are responsible
for maintaining a good Vendor base. In day to day operations, purchasing places the PO for the
required materials and ensures that all factories get the right quality inputs at right time.

The company and two suppliers and Exhibit 2 gives details of the Purchase price.

Commodity UOM Supplier 1 Supplier 2

RM 1 Ton Rs. 40000 Rs. 37000
RM 2 gm Rs. 2 Rs. 3
RM 3 gm Rs. 3 Rs. 3
RM 4 gm Rs. 2.5 Rs. 3
PM 1 Ton Rs. 30 Rs. 31
PM 2 gm Rs. 4 Rs. 4.5
PM 3 gm Rs. 2 Re. 1
PM 4 gm Rs. 3 Rs. 3
EXHIBIT 2: Purchase Price of Raw Materials

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
Copyright - Sandeep Chatterjee, KPMG, 2014. All rights reserved.

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The lead times are given in Exhibit 3.
Commodity UOM Supplier 1 Supplier 2
RM 1 Ton 2 days 3 days
RM 2 gm 1 day 1.5 days
RM 3 gm 1 day 2 days
RM 4 gm 1 day 1 day
PM 1 Ton 3 days 2.5 days
PM 2 gm 1 day 1 day
PM 3 gm 1 day 1 day
PM 4 gm 1 day 1 day
EXHIBIT 3: Purchase Lead Time

Exhibit 4 gives details of the factories, warehouses and the corresponding distances
Factory1 Delhi Distance Factory 2 Mumbai Distance Factory3 Hyderabad Distance
Depo 1 Delhi 5 km Depo 1 Delhi 1162 km Depo 1 Delhi 1264km
Depo 2 Srinagar 677 km Depo 2 Srinagar 2201 km Depo 2 Srinagar 2374km
Depo 3 Jaipur 274 km Depo 3 Jaipur 1142 km Depo 3 Jaipur 1403km
Depo 4 Mumbai 1161 km Depo 4 Mumbai 2 km Depo 4 Mumbai 710 km
Depo 5 Bangalore 1745 km Depo 5 Bangalore 1012 km Depo 5 Bangalore 568 km
Depo 6 Chennai 1761 km Depo 6 Chennai 1031 km Depo 6 Chennai 626 km
Depo 7 Hyderabad 1262 km Depo 7 Hyderabad 707 km Depo 7 Hyderabad 3 km
Depo 8 Kolkata 1482 km Depo 8 Kolkata 1960 km Depo 8 Kolkata 1605km
Depo 9 Lucknow 416 km Depo 9 Lucknow 1422 km Depo 9 Lucknow 1289km
Depo10 Gawahati 1840 km Depo 10 Gawahati 2746 km Depo 10 Gawahati 2370km
EXHIBIT 4: Factories and Warehouses

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
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Exhibit 5 gives the manufacturing costs.
Edible Oil Popcorn 1
Factory 1 Rs. 5/Litre Re. 1/Packet
Factory 2 Rs. 4/Litre Rs. 1.5/Packet
Factory 3 Rs. 3/Litre 35 paise/Packet
EXHIBIT 5: Manufacturing Costs
The storage cost at factory and warehouse is 10% of the item cost.

Exhibit 6 gives the manufacturing capacities.

Edible Oil Popcorn 1
Factory 1 100 litre 1000 Packets
Factory 2 50 litre 700 Packets
Factory 3 200 litre 2000 Packets
EXHIBIT 6: Manufacturing Capacities per day

Exhibit 7 gives the storage capacities at the factories. The storage capacities are distinct and
commodities cannot be intermingled.
Edible Oil Popcorn 1
Factory 1 1000 litre 10000 Packets
Factory 2 500 litre 7000 Packets
Factory 3 2000 litre 20000 Packets
EXHIBIT 7: Storage Capacities at the factories

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
Copyright - Sandeep Chatterjee, KPMG, 2014. All rights reserved.

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The storage capacity is given in terms of litre and packets in Exhibit 8. The volume occupied by
1 litre of Edible Oil 1 is equal to the volume occupied by 2 packets of Popcorn 1. Mingling of
commodities is allowed.
Edible Oil 1 Popcorn 1
Depo 1 Delhi 20000 litre OR 40000 packets
Depo 2 Srinagar 10000 litre OR 20000 packets
Depo 3 Jaipur 30000 litre OR 60000 packets
Depo 4 Mumbai 20000 litre OR 40000 packets
Depo 5 Bangalore 40000 litre OR 80000 packets
Depo 6 Chennai 45000 litre OR 90000 packets
Depo 7 Hyderabad 20000 litre OR 40000 packets
Depo 8 Kolkata 70000 litre OR 140000 packets
Depo 9 Lucknow 25000 litre OR 50000 packets
Depo 10 Gawahati 35000 litre OR 70000 packets
EXHIBIT 8: Storage Capacities at the warehouses

There are 2 types of trucks available: 9 Ton and 16 Ton. The average speed of the trucks may be
assumed to be 40 km/hr to arrive at lead times.

The transportation cost per km per unit weight is 1 paisa for 16 Ton Truck and 1.5 paise for 9
Ton Truck respectively.. Both commodities can go in the same truck. In terms of volume, 1 litre
of edible oil is equivalent to 2 packets of Popcorn 1. In terms of weight, 1 litre of Edible oil 1 is
equivalent to 1000 gm of Popcorn 1.

There is a VAT benefit given by the government if the commodity is produced and sold in the
same state. The benefit is Rs. 10 per litre for Edible Oil 1 and Re.1 per packet for Popcorn 1.

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
Copyright - Sandeep Chatterjee, KPMG, 2014. All rights reserved.

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Exhibit 9 gives the price of Edible Oil 1 and Popcorn 1 at the depos.
Edible Oil 1 Popcorn 1
Depo 1 Delhi Rs. 200/litre Rs. 40/packet
Depo 2 Srinagar Rs. 300/litre Rs. 50/packet
Depo 3 Jaipur Rs. 170/litre Rs. 40/packet
Depo 4 Mumbai Rs. 200/litre Rs. 40/packet
Depo 5 Bangalore Rs. 250/litre Rs. 40/packet
Depo 6 Chennai Rs. 200/litre Rs. 40/packet
Depo 7 Hyderabad Rs. 150/litre Rs. 35/packet
Depo 8 Kolkata Rs.145litre Rs. 30/packet
Depo 9 Lucknow Rs. 200/litre Rs. 40/packet
Depo 10 Gawahati Rs. 300/litre Rs. 40/packet
EXHIBIT 9: Prices at various depos

Exhibit 10 gives the demand pattern for Edible Oil 1 at the various depos for the next 6 months.
January February March
(ltrs) (ltrs) (ltrs) April (ltrs) May (ltrs) June (ltrs)
Depo 1 Delhi 30000 25000 27000 30000 30000 32000
Depo 2 Srinagar 10000 10000 10000 12000 10000 10000
Depo 3 Jaipur 10000 10000 10000 10000 10000 10000
Depo 4 Mumbai 30000 30000 30000 30000 30000 30000
Depo 5 Bangalore 20000 20000 20000 20000 20000 20000
Depo 6 Chennai 30000 30000 30000 30000 30000 30000
Depo 7 Hyderabad 20000 20000 8000 20000 20000 12000
Depo 8 Kolkata 20000 20000 20000 20000 20000 10000
Depo 9 Lucknow 20000 20000 18000 20000 20000 20000
Depo 10 Gawahati 10000 10000 10000 10000 10000 10000
EXHIBIT 10: Demand Pattern for Edible Oil 1

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
Copyright - Sandeep Chatterjee, KPMG, 2014. All rights reserved.

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Exhibit 11 gives the demand pattern for Popcorn 1 at the various depos for the next 6 months.
January February March April May June
(packets) (packets) (packets) (packets) (packets) (packets)
Depo 1 Delhi 300000 250000 270000 300000 300000 320000
Depo 2 Srinagar 100000 100000 100000 120000 100000 100000
Depo 3 Jaipur 100000 100000 100000 100000 100000 100000
Depo 4 Mumbai 300000 300000 300000 300000 300000 300000
Depo 5 Bangalore 200000 200000 200000 200000 200000 200000
Depo 6 Chennai 300000 300000 300000 300000 300000 300000
Depo 7 Hyderabad 200000 200000 80000 200000 200000 120000
Depo 8 Kolkata 200000 200000 200000 200000 200000 100000
Depo 9 Lucknow 200000 200000 180000 200000 200000 200000
Depo 10 Gawahati 100000 100000 100000 100000 100000 100000
EXHIBIT 11: Demand Pattern for Popcorn 1
Edible Oil 1 has a shelf life of 3 months while Popcorn 1 has a shelf life of 4 months.

Mr. Gagan Khanna has the following questions to answer:

1. Which commodities should be produced at which factory to minimize the supply chain
costs?
2. Which all demand should be met to maximize profits?
3. How much raw materials should he buy from each supplier to minimize cost?
4. Which factory should cater to which warehouse?

This case has been written by Sandeep Chatterjee, IIM Kozhikode (Batch of 2003) and Associate
Director, KPMG. No part of this text may be reproduced in any form by any electronic or mechanical
means (including photocopying, recording, or information storage and retrieval) without permission in
writing from the author except for reading and browsing via the World Wide Web.
Copyright - Sandeep Chatterjee, KPMG, 2014. All rights reserved.