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Objectives

To develop value-added processes that deliver innovative, high-quality, low cost products on

time with shorter development cycles and greater responsiveness than before, and simultaneously

reducing inventory and operating costs.

Issues

There are several problems that eventually led to NGL market share nose dive of 21% in the last

decade. The foremost issue is the disintegration of supply. There are the differences of priorities

among various sections of supply chain. NGL is in an extensively competitive environment

developed by “brown baggers” who are stealing market share from NGL. This situation got

worse when the average sale price of hybrid seeds market decreased sharply last year. The root

cause of the entire dilemma faced by supply chain is wrong demand forecasting that leads to

either high inventory cost or stock outs. These stock outs cause heavy financial losses to the

company. The higher inventory cost and transportation cost are due to remote location of

production site. There is also a concern of task conflict among different departments which result

in an inefficient system. Another concern is the relationship with vendors and sales force that is

decreasing productivity. The last, but not the least, is the dealing with Nokalb Seeds Shops. Thus

it is within such factors that NGL is striving to regain its balance as a profitable company.

Assumptions

The revised forecast and winter production forecast is done by marketing manager in

coordination with general manager. The price per ton is taken as an average of Rs.700. Nokalb

seeds shops keeps a minimum of 3 days inventory.

Analysis

NGL lost its large market share to “brown baggers” in the past few years. These brown baggers

are small farmers who produce seeds by planting Nokalb seeds and selling them as generic

hybrid seeds. Their production cost is very low as they are not producing a standardized product.

Their packaging cost is also low due to no branding. They can price their product very low

because of these specific advantages. This price war has an adverse effect on NGL as it had to

decrease the prices of products to capture the market share. This step eventually put pressure on

the supply chain department to increase its productivity.

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A lack of cross-functional cooperation and communication is a result of the nature of conflicting

objectives and the presence of counterproductive measures. Initiatives are tied directly and

immediately to the individual’s incentives and profit-and-loss statements of the company. People

are acting as a barrier to information because of their functional perspective. The goals, decision

making priorities and measure to achieve those goals are remarkably departed among functions

as shown in Exhibit-1. This misalignment is a big hindrance in the path of integrating the whole

supply chain.

The major concern for Nokalb is demand forecasting of cotton seeds as this is affecting the

whole supply chain of the product. The main predicament in forecasting is the variability in

sales. This variability is due to the factors like infestation the year before, financial condition of

farmers, expected crop prices, performance of our sales team, efforts of the franchises, and

timing of rainfall. NGL is also offering large number of products (21 in 44 SKUs) that also

further complicate the forecasting as shown in Exhibit-4 & 5. Sales forecast starts eighteen

months before the actual sale and contains systematic and random fluctuations. The information

flow during the forecasting process along with risks involved is shown in Exhibit-2. The overall

forecasting model at marketing manager level is adequate. He takes inputs from area mangers’

estimates, farmers’ feedback, competitor prices, and general manager insights. He also reduces

the targets by 5-10% of the forecast. But the forecasting process in the company at lower levels

is not taken seriously. The regional sales managers ask the warehouse in-charges to do the

forecast instead of doing it themselves and involving the territory sales in charges (TSI) in the

process. TSI are at direct contact with the customers so they have the better understanding of

demand. The warehouse in-charges’ forecast is not reliable due to their scant knowledge and lack

of enthusiasm shown by regional managers. Thus, this makes the chain neither customer driven,

nor supplier driven. The improper forecasting results in significant cost in production phase and

a high supply-demand mismatch cost. Exhibit-7

NGL post harvest production plant is located in Multan in the proximity of clusters of seed

growing fields. The cotton growing fields are dense in Multan and Bahawalpur. This strategic

location of plant gives advantage to save in finished goods inventory. NGL keeps two days (3000

tons) of inventory in its warehouse shown in Exhibit-2. NGL have 443 franchises outlets and

86% of those are located in Punjab as shown in Exhibit-5. The transportation cost of those 14%

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outlets is very high due to their distant location far away till Hyderabad. NGL should revise their

marketing strategy as they are concentrating their outlets in Punjab but about 30% market of

cotton growing fields exist in Sind as evident from Exhibit 3 of case. In this way, NGL is giving

competitors opportunity to capture the market by limiting their own presence in that market.

Minor changes in product design cause adversely in production. Moreover, the hybrid seeds can

expire as their shelf life is two years. NGL have significant obsolescence cost as their product

return at the end of the season. Also they cannot sell left over product in the next season due to

change in packaging design and customer preferences about the product.

Historically, NGL’s attitude towards vendors has been very cooperative. They helped their

vendors in mutually benefiting activities such as reducing defect rates, investing money for twin

packing machinery, helping give quality training and sending inspectors to their plant frequently

to optimize their processes. They categorized the vendors on their performance and awarded

business on their performance. Quality improvement drives and joint sessions with vendors

enhanced two-way communication at that part of supply chain. But even with this sort of

extensive communication, the problem of placing above capacity orders to them by NGL is still

present. Moreover, the shift of ordering decision to vendors from production to purchasing

department within NGL creates problems. The dealing with vendors at dual level hurts

productivity as lot. Purchasing department’s goal of cost reduction is different from production

department’s goal of quality. This creates task conflict between purchasing and production

departments as shown in Exhibit-1. The purchasing department’s goal helps in reducing overall

packaging cost but hurts NGL’s long term relationship with vendors. This also results in bad

quality of product which increases defect rates, late deliveries and stock outs. All these issues

result in high supply demand mismatch cost.

The incentives given to Territory Sales In-charges (TSI) are also creating problems. Their 70%

of annual compensation is fixed salary. While the remaining 30% of annual compensation, is

divided between sales targets and promotional activities i.e. 60% and 40% respectively. That

represents 18% of their annual compensation is tied up with achieving sales targets and 12%

with promotional activities. This clearly depicts very little motivation for TSI to achieve sales

targets. They have no motivation to high performance as they never try to sell above 10-15%

their targets.

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The Nokalb Seeds Shops (NSS) are categorized in four groups by NGL on their sales. Almost

50% of the shops fall in category C and D which depicts that half of the NSS performing below

average as shown in Exhibit-5. There is also an issue of payment to franchises by the company.

There is no clear demarcation between high-performers and low-performers as NGL is paying

fixed and uniform rates to NSS. The ineffectiveness of this part of supply chain is inherent in the

system. The major portion of their payment is tied up with their orders instead of their sales. This

gives NSS very much motivation of stocking piles with them.

Recommendations

Efforts should be made to align objectives and share resources within and across companies to

deliver greater value.

The responsibility of providing the best possible customer demand information should

fall on the Seed shops closest to the end customers (Exhibit-2).Forecast should start from

the seed shop owners in Q I of previous year as they can estimate the sales this year with

an accuracy of 20%. The forecast revisions should be made in Q IV as seed owners can

estimate the sales with an accuracy of 10% in December.

In order to ensure cross-functional communication and cooperation, value added bridges

should be built between the companies. Focus must be on the collaborative efforts on

building tighter relationships with supply chain partners. A cross-functional inter-

organizational team is the best solution. Top management must commit to collaboration

by investing in the creation of a team oriented culture. Team must cultivate common

vision, an understanding of individual roles, an ability to work together, and a willingness

to adjust and adapt in order to create superior value.

TSI compensation should have four components2, a fixed amount, a variable amount,

expense allowances and benefits. The structure of pay should be Base Salary, Variable

sales targets (Exhibit-10), Periodic incentives tied to short-term goals, Annual Incentives

tied to longer-term sales activities, Commission-based incentives and Perquisites like

forecasting to facilitate sales efforts. A Sales performance dimension (Exhibit-11), must

be included for the evaluation of the TSI.

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Nokalb needs to build agility, adaptability and alignment with suppliers within its system.

The changes in product design, etc that can have a major impact on customer’s

perception or product itself should be made after coordination with the supplier and

vendor. The suppliers can give important feedback that whether the changes can result in

more sales or lost sales and it would also build their trust on the company.

Long term Contracts should be made with ‘A’ Category Franchises. Extra efforts should

be made to create value by frequent communication across multiple levels, inter-firm

teams, integrated information systems, aligned performance measures and collaborative

training. Efforts should also be made to convert ‘B’ category franchises into ‘A’ category

franchises. (Exhibit 8 & 9)

An accurate response system approach should be used for the forecasting process which

provides a way to figure out what forecasters can and cannot predict well, and then

making supply chain fast and flexible so that managers can postpone decisions about

their most unpredictable items until they have some market signals. Accurate response

system takes into account two new elements in forecasting process: missed sales

opportunities plus the distinction of predictable and unpredictable products. It requires

being more resourceful in using demand indicators to improve forecasts and having a

system for tracking forecasting errors.

A new Post-Harvest Production Plant should be built in the southern areas of Pakistan as

presently the Multan Plant is running on Full capacity, i-e running 24 hours a day and 7

days a week. A backup is needed as any accident in the plant can restrict the production

which would result in lost sales. The transportation cost builds up as the product moves

from Multan to Karachi. The plant also has one warehouse with a limited capacity of

3,000 tons which can store only 2 days production. They should also increase their

franchise outlets in that vicinity. (Exhibit 6)

The inventory holding cost and stock out cost can be minimized by changing the

invoicing and payment structure across franchises. The commission should not be on

invoice value but on actual sales. In this way the franchises would only order what they

can sell.

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Production Plant Warehouses Seed shops Customers

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Exhibit-1: Conflicting Objectives and Counterproductive Measures

Exhibit-2: Product Flow

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VENDOR

Goal• Maximize Price

Decisions• Highest purchase price

• Single source• Long term

Committment• No. of orders

Measures• Margins• Volumes

PURCHASING

Goal• Minimize price

Decisions• Lowest purchase price• Stable requirements

• Multiple sourcing• Frequent bidding

Measures• Cost orientation

• Yr-to-yr purchase price

QUALITY

Decisions• According to specification• Capibilities

• Single sourcing• Supplier Relations

Measures• Delivery Record

• Yr-to-Yr Quality Index

PRODUCTION

Goal• Minimize Production

Cost

Decisions• Less number of SKUS

• Standardised Procedures

• Zero accidents• Raw Material &

Finished goodsMeasures

• Production Costs• Meeting Schedules

MARKETING

Goal• Sales/market

share$$

Decisions• High service levels

• High inventory• Dispersed inventory• Short delivery times

• Quick responseMeasures

• Market orientation• Sales/share growth

SEED SHOPS

Goal• Maximize Profits

Decisions•Large number of SKUS

• Long term committment• Exclusive franchises

• Quality products• Less Competition

Measures• Margins

• Sales quantity

Trucks & containers Rented Vans

Location: Multan- Products: 21- SKUS: 44- Storage: 3,000 tons

7 Warehouses located all over Pakistan 443 Shops

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Exhibit-3: Forecasting Information Flow

Information Flow Jan'98 March'98 April May Dec Jan'99 Feb March Apr May~June

Activites Start Forecasting Planning Planning Planning

Field Prod.

Field Prod.

Field Prod.

Field Prod.

Field Prod.

Field Prod.

Post Harvest+Winter Prod

Post Harvest+Winter Prod

Post Harvest+Winter Prod

Post Harvest+Winter Prod Winter Prod

Distribution + Shipping

Distribution + Shipping

Distribution + Shipping

= Risks

= Information

June~Nov

Agronomists

Contract Seed Growers

Production Mgr

WareHouse

Regional Mgr

Area Mgr

Marketing Mgr

Product Mgr

General Mgr

-Forecast not taken Seriously-W/H incharge make the forecast

Risks: 1) Unreliable because of low estimates. 2) Scant kowledge

Available Information: 1) Performance infield. 2) Competitors. 3) Availibility of parent inbreds. 4) seed field yield history. 5) current seed supplies.

- Feed back from Farmers (perception surverys)-Competitor Prices

- Targets < (5~10) % of of product forecast

Acreage Allocation

(After Agreement)

- Risk: 1) Seeds field Isolation.2) Infestation. 3) Weather Condition

- Revised forecast because of more information available (Infestation level)

- SKU forecast (Product category)

- Winter production Decision based on revised Dec forecast

Warehouse Incharges

Jan'98

Regional Managers

Jan'98

Area Managers

March'98

Marketing Manager

March'98

Forecast Decision

May'98

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Exhibit-4: Product related Characteristics

Category Wheat Seeds Cotton Seeds

Demand More Predictable Less Predictable

Sold October-January June-August

Exhibit-5: Categorizing Franchises

Franchise Category No. of FranchisesA 96B 128C 215D 4

Total Franchises 443

Total Sales =443*2.6=1,151,800,000

Punjab Sales(Total *0.86) 990,548,000

Other Sales(Total*0.14) 161,252,000

Exhibit-6: Warehouse Capacity

Production Days Warehouse Inventory1 1411.22 2822.43 4233.6

Exhibit-7: Lost Revenue

Year Title Tons Loss (Rs.)2000 Stockouts 350 245,000 2000 Lost Sales 200 140,000

2001- 200x Subsequent Year Loss = (350+200)*3 = 550 385,000 2000 Inventory Cost = 14-15 % (600 million) 84,000,000

Approximate Total Loss 84,385,000

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Capacity: 3,000 tons

LowHiLow

Hi

RELATIONSHIP

Low

HiLow

Hi

Other Concerns

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Exhibit-8

Solutions for Relationship and Task Conflicts:

[Vendors, Nokalb, Contactors, Franchises]

Exhibit-9

Solutions for Relationship and Task Conflicts

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TASK

Self Concerns

4

Smoothing

1

Mediation/ Negotiation

3

Avoiding

2

Confrontation

4

Win-Lose

1

Win-Win

3

No-Win

2

Win-Lose

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Exhibit-10

Sales Performance

Exhibit-11

Sales Performance1

Sales Performance = Readiness x Productivity x Efficiency x Effectiveness

Common Metrics

References

http:// kguru.blogspot.com/

2http://salesforcecompensation.blogspot.com/

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Current Selling capability of Territory Sales In-charge

Level of productivity of sales resources as measured by unit effort

How efficiently Territory Sales In-Charges are spending their time

The effectiveness of the Territory Sales In-Charges on closing of sales

Turnover Training Sales Capacity Employee

Satisfaction Headcount

Revenue per TSI Margin per TSI Revenue/Expense Average Deal Size

Time Utilization Sales Cycle Time Expense

Win/Loss Customer

Satisfaction