CHAPTER V QUANTITATIVE TECHNIQUES FOR FERTILIZER MARRETING SYSTEMS

6.1

INTRODUCTION
Fertilizer industry has grown tremendously in the last twenty years .

The increases in production capacities, utilization of the installed capacities a s also the increases in the consumption have been phenomenal since 1980. The dependence on imports has significantly decreased with the steep growth in the indigenous production capacities although the consumption has increased. These are the basic requirements of developing an effective marketing system and draw up an optimization model for logistics. The availability of products from indigenous sources can be estimated and the requirement can also be forecasted under this environment. Quantitative technique in the area of product mix, consumption forecasting, inventory control, logistics management can be adapted for cost reduction and improved service to farmers. In this chapter quantitative techniques which can be adopted for sales estimatioq inventory control, transportation and warehousing are discussed. Optimization is the act of obtaining the best result under a given set of resource8 and constraints. The goal of optimization is either to minimize or

to maximize a n objective function under a given set of conditions. The objective function contains the variables and the associated co8tsJprices which should be maximized or minimized.

An Optimization problem can be stated as:

Determine X = ( XI., x2.., x3..., x,,)

, which minimizes f(X)

subject to: g (Xi) r 0 for i=1,2,3,4,..... Linear programming (L.P) and Transportation Problem, (T.P) are applicable for the solution optimization methods of Operations Research (O.R.) in which the objective function and the constraints appear as linear functions of the decision variables.
6%

TRANSPORTATION PROBLEM

In the chapter on marketing costs it has been brought out that over 30% of the total marketing cost is accounted for by transportation. The optimization model adopted has focused on the cost of transportation in moving the fertilizer products from the fertilizer plants to the consuming centers. The objective of this model is to minimize the aggregate cost of transportation. Transportation problem is an important class of L.P. As the name indicates that the T.P minimizes the cost of transportation.

T.P. is widely adopted in developing transportation plans for movement

of products from several sources of supply to several consuming centers at the least aggregate cost. Conceptional Frame Work of t h e t r a n s p o r t a t i o n model Transportation problem (T.P) is an important class of Linear Programming (L.P.). A transportation problem is one in which the objective of

minimization of cost of transportation of products from a number of origins (plants) to a member of destination is achieved. Suppose there are m origins (Fertilizer plants) and n destinations (consuming points-centroids). Let be the availability of product a t plant ai (i = 1 ....m) and bj the requirement at destination j (1.... ) Let Cii be the cost of transportation of fertilizer (urea) n. f o fertilizer plants (factoried i to centroid j, rm The problem is m Minimize f = n
Z xii

Z
i=1

j=1

Subject to

Z xu = aj, i = 1, ..... m, m.7 (fertilizer factories) : j=1

I x.. = b., j = 1, ..... n, n=71 (Districts)

i=l
U
J

Total availability = Total requirement

Consistency condition. In the illustrative example, seven fertilizer factories and seventy one demand points (Centroids) have been chosen as a sample. The purpose of developing this model for south India is to

illustrate the need for minimizing the cost of transportation by rationalizing the movement. The objective is to minimize the aggregate transportation costs and avoid the crisscross movement of fertilizer products through an rationalized allocation plan.

Transportation plays an important role in the fertilizer marketing aystem.In the total marketing cost transportation alone accounts for 4 % 0' Making the right product available to the farmers at the right place and time will be the objective of fertilizer marketing organizations. Since transportation cost is quite significant in the total cost of fertilizer marketing. The transportation cost can be minimized by allocating / moving the products according to a pre- determined plan developed based on transportation models. Transportation models deal with the transportation of products from the source of production (fertilizer plant) or the source of supply ( warehouse/ port) to a number of consuming points/ retail outlets1 ultimate storage points. The objective of the model is to satisfy the demands at final destinations, given the supply constraints at minimum cost. The transportation model can be formulated as a standard Linear Programming (LP) problem.
5.3

THE MODEL

Allocation of urea from different urea manufacturing plants in south India to the pre determined consuming centroids (Districts) in south by minimizing the total transportation costs to illustrate.

Report of the high powered committee on Fertilizer prices.

Data base: Table No.60 Product availability urea

r

S1.No.
1. 2. 3.
4. 5. 6. 7.

Source of supply MFL. Madras SPIC. Tutiwrin NLC. Neyveli

Availability of urea OO OT

FCI-Ram
NFCL, Kakinada MCF Mangalore FACT. Cochin Total availability

292 512 152 495 495 340 330 2616

Source: Fertilizer Marketing News, May 1992. Table No.61 Requirement (in terms of NPK) Andhra Pradesh Karnataka Tamil Nadu Kerala Total Source: Fertilizer Marketing News, May 1992. The details of the availability and requirement are received by the Ministry of Agriculture GO1 , every season drawing up the distribution plan under the essential Commodities Act (ECA). (OOOT)

1432 509 583 92 2616

The Optimization model has considered

Seven fertilizer plants located in south (Andhra Pradesh, Karnataka, Tamil Nadu and Kerala) and 71 centroids (demand points). Distances from each one of the fertilizer factories (MFL, SPIC, NLC, FCI-R, NFCL MCF and FAC) to each of the identified demand points (Centroids), have been adopted a s weights to obtain cost of transportation. Since the cost of movement is directly proportional to the distances between the supply points and the sources of supply. This is a balanced transportation problem. Let Xij represent the quantity of Urea transported from factory Pi to the centroid Cj : i = 1, .... 71, j = 1 .... 7

The distance between plant pi to the centroid Ci be dij

I Objective function; Z ( we aggregate cost of transportation) = ;: Xij x dij must be minimized

Subjected to; Availability : P1 t P2

t

P 3 t P 4 t P5t P6t P7 = 2616

Requirement : Cl+C2tC3+............... tC71 =2616

Table No.52 Solution of the Transportation Model Optimum allocation plan centroid wise

Tamil Nadu

Table No.65 Solution of the Transportation Model Optimum allocation plan Centroid wise

Table No. 54 Solution of the Transportation Model Optimum allocation plan - Centroid wise

Table No. 56 Solution of the Transportation Model Optimum allocation plan Centroid wise

Table No.56 Av.1Lhlllty and requirement h~ been bmhnoed

Comparison of Optimum allocation p l a n w i t h ECA Source of Supplies (factories)

State
Tamil Nadu Karnataka Kerala

ECA (1) FACT,SPIC & MCF FACT & SPIC

As p e r Model

FACT, MFC & SPIC MFL, SPIC, FCI-R & FACT MFL, SPIC, FCI-R, MCF & FACT MFL, SPIC, FCI-R, NFCL & FACI FACT & MCF

Andhra Pradesh FACT, FCI-R

Demand point wise allocation are given in the tables 48 to 52. Source (1) ECA Plan for supply of fertilizer finalized for Kharif 92 under ECA, by GOI. Published in Fertilizer Marketing News May 92. p 3. It is seen from the analysis and the model that the allocation under ECA significantly differs from the optimization model. While the allocation under ECA considers maximization of supplies to the state from the factories located in the state, the optimization model has adopted the least transportation cost to meet the requirement of the district (Centroids).

The model has minimized the transportation cost and has made complete allocation of the availability from the seven fertilizer factories considered for the model and the seventy one demand points in the four southern states. The model has therefore significantly minimized the Logistics
cost.

This model can be adopted for making season wise allocation of products from fertilizer factories on an all India basis for minimizing the logistics cost.
6.4

MODEL FOR MEASURING THE RELATIVE INFLUENCE OF SEVERAL FACTORS ON THE CONSUMPTION OF PHOSPHATES (P)

Demand for fertilizers depends on it's profitability. Among the msjor factors which can influence farmers ' response to fertilizer use are ; prices of fertilizer products and price of farm products (1).Other major determinant is the availability of irrigation facility. Uncertainty of the profitability is reduced under irrigated conditions availability of credit on time is another vital factor. A fertilizer demand function had been developed based on six key factors on the data for 70-71 to 92-93,Consumption of P is crucial for crop productivity among the Nutrients NPK , the price of P is the highest. An analysis has been made to estimate the relationship between the consumption of P and six variables: price ratio , rainfall , ratio of irrigated area to cropped area 0(3),Area served by retail outlets, Disbursement of credit

Rslhect, ratio of area under HYV to total cropped area (X6).

Price ratio = wt. average price of P index of wholesale price of food grains in the previous year. A time lag of one year has been adopted between
variation in price and the changes in demand, since most price changes have happened after the fertilizer application is over in a season.

Regreasion Out put: Constant Standard error of Y Est No, of observation Degrees of Freedom
-1.52

0.65 23 60

XI

&
X3 X4 Xc,
X6

- Consumption of P (kghect) - Price Ratio - Rainfall (mm) - % irrigated area to total cropped area - Area served by retail outlet - Disbursement of Credit (Rs./hect) - % Area HYV to total cropped area

Consumption of P is given by the relationship:

E x p l a n a t o r y n o t e a n d Interpretation In order to find out the relative significance of factors affecting the consumption of Phosphatic Fertilizers, the Multiple Regression Model has been developed for the data pertaining to the period 1970-71 to 93-94 (Compiled from Fertilizer News, March 93). Since the co-efficient of determination, R~ is 0.99, the estimated relationship between consumption of P and the identified factors X1 through X6 explains as high as 99% of the variation. Considering the estimates of the parameters, irrigation, price, rainfall and HYV have eignificant role to play in stimulating the demand for P.

Fertilizer use is inelastic to price when the procurement prices of the produce ie considered. hundred percent increase in price ratio will decrease the consumption only by 13.5%.

In order to increase the phosphate consumption, as per the Multiple Regression Analysis, HYV have to be promoted, irrigation facilities improved, the price ratio must be made high.
The above analysis suggests that fertilizer use is highly irrigation elastic with positive coefficient. This analysis indicates a significant bearing on policy decisions. Even if fertilizer prices are raised, a corresponding increase in farm produce prices/procurement prices to maintain the price-ratio will not significantly result in decline in fertilizer demand.
6.5

SALES FORECASTING SYSTEM

Developing realistic sales estimates is the basic for an effective marketing management, particularly the Logistics management. In fertilizer industry large volumes of sales data are being continuously generated, partly as for monitoring sales performance and partly to provide monthly returns to Ministry of Agriculture GO1 and to state govt under ECA statutory requirements. Further The fertilizer Association of India compiles Fertilizer Statistics & annual reviews annually. The regional ofice of the FA1 also publishes statistics pertaining to district levels These valuable data on the fertilizer industry has hardly been used for developing marketing strategies and programs and any optimization cases.

These statistics are valuable inputs for developing trends, relatiomhipa (correlations) and developing sales (consumption) forecasts at
micro & macro levels. Experiences over the years indicate that auto-regression model for short term forecasting of sales provides a good fit. Projecting demand is an important aspect of fertilizer marketing system. Realistic projection of demand is essential for developing transportation and warehousing plans. Demand projection is also required for other marketing efforts; promotion, pricing, product development, etc,.

It is considered essential to develop simple models for forecasting sales as reflected by the respondents when this topic was discussed with Fertilizer Marketing Executives.
The concept of Auto-correlation (functional relationship autoregression) implies that for some products there exists a correlation between the same variables at different points of time. This technique is suited to the forecasting of fertilizers. The consumption of fertilizers during the previous year(s) has a great impact on the immediate future consumption pattern. This technique is easy to understand and apply. It does not call for elaborate data on several variables but relays on the recent past trends and moving data. It is important to normalize the data for any unusual situations such as restriction of consumption due to non availability of products etc How ever if such occurrences are not unusual no normalization is needed. The model will take care.

For ahort term forecast this method is found to be simple and adequate. Aftar a great deal of checking and verification, this method was adopted for estimating off take of warehouse-wise product-wise volumes a t MFL. The technique has been found easy to understand and apply. A five year moving data is used as the basis for the trends. When t h e latest year data becomes available the earliest year data is deleted so that a constant data for five years is available for trend projections. As a sample case the short term projection of consumption have been made for each of the southern states for Urea, based on the five year data. Department of agriculture of the state govt can use this simple model for estimating the requirement for the seasons ( K h a r i f k b i ) . This can form a very useful input for zonal conferences to draw up supply plans. This model attempts to minimize the occasions of shortages and excess availability. At the micro level manufacturing units adopt this for district wise or warehouse-wise or dealer-wise estimates of consumptiordoff take.

A Linear trend function is developed based on the auto regression(time series) of the form Y=A+ Bt;
When the projection is made for the year it is split to months based on the last five year monthly off take. The following examples illustrates the method of developing short term sales forecasts state wise.

Table No.67 Consumption tren* in South India Consumption Urea (000T)

Year
1987-88 1988-89 1989-90 1990-91 1991-92

TN
578.9 648.5 639.8 645.8 639.5

KN
395.2 590.4 539.7 583.1 509.8

kP
882.5 1231.8 1619.1 1676.1 1520.9

KE
64.6 94.9 88.5 106.7 113.3

Source: Agricultural and Fertilizer Statistics 1993. FAI- Southern Region, Madras.

Tamil Nadu
Regression 0utput:for TN Constant Std E r of Y Est r
594.95 25.71585 0.414453 5 3 11.85 8.132066

R~
No, of Observations Degrees of Freedom

X Coefficient(s) Std Err of Coef.

Consumption function based on time series (linear);

Y= 594.95+11.85)(, consumption forecast for the year

1992-93 can be obtained by substituting X=6 and so on

...

Constant Std Err of Y Est

417.07 64.21508 0.589975 5 3 42.19 20.30659

R~
No. of Observations Degrees of Freedom

X Coefticient(s)
Std Err of Coef.

Consumption function based on time series for Karnataka:

Andhra Pradesh
Regression 0utput:for AP Constant Std Err of Y Est 869.75 214.2918 0.682560

R~
No. of Observations Degrees of Freedom

5 3
172.11 67.76502

X Coeficient(s)
Std Err of Coef.

Consumption fundion for Andhra Pradesh :Y= 869.75 +172.11X

Constant Std Err of Y Est

60.84 8.868220 0.834824

5 3

R~
No. of Observations Degrees of Freedom

X Coeficient(s) Std Err of Coef.

10.92 2.804377

Consumption function for Kerala:Y=60.84 + 10.92X Developing short term (one year1 one season ) sales forecast based on these functions will yield useful results for preparing marketing and logistics plan by fertilizer organizations. This concept can be applied for forecasting the demand for warehouses b a e d on the past consumption / off take pattern . Such estimates can be used for transportation and warehouse planning. This technique was adopted by Madras Fertilizers Ltd, Madras (1986) to draw up the logistics plan and significant saving was accrued.
6.6

INVENTORY MANAGEMENT IN FERTILIZER MARKETING

Inventory is one of the riskiest areas in logistical management. Commitment to a particular inventory mix and subsequent allocation to channels in anticipation of a future sales represent the vortex of logistical operations. Without a proper inventory mix problems of customer service & revenue generation would develop.

Inventory management is critical in marketing operations. Over stocking and stock out situations should be minimized. Inventory control seeks to achieve a balance between shortage and excess of stocks within a planning period characterized by risk and uncertainty. Inventory management considers the product mix, geographical spread of the marketing territory, seasonality, the order size, safety stock levels, cost of inventory carrying the self life of products etc. Utilizing the past consumption pattern of specified market territory, the costs of storage, order processing costs Economic Order Quantity (EOQ) for each storage location can be determined, EOQ=Square root of twice the cost per order processing multiplied by the sales volume in units divided by storage cost multiplied by cost per unit (Price). For a seasonal product like fertilizer Statistical Probability can be adopted. This involves analysing a sample data of lifting of a specific products during tile past similar seasons in for a given warehouse point to obtain the average and standard deviation (s.d) values. Average plus or minus 1.96 times the s.d. divided by the square root of the number of samples considered. This provides the best estimates of the possible sales . The other parameters of the EOQ formula are constants for a given period. This helps in managing the inventory levels on a warehouse to warehouse basis and assures 95% level of confidence of adequacy of stocks and the inventory level is minimum. Some simple but effective inventory management techniques which can be adopted in inventory management at in field warehouses are discussed here. This technique was adopted in a Fertilizer manufacturing unit in South for inventory control systems in 186 field storage points (1)

Discussion of s o m e inventory models:

Model I
The objective of this model is to help maintain adequate inventory levels a t warehouses to service the retailers, cooperatives and farmers; The data required for this model is a five year month wise product wise lifting statistics for the ware house. The statistics should be updated every adopting a 5 point moving average technique; adding the latest data and eliminating the earliest data and maintaining the constant sample size of 5. The level of safety stock can be obtained by adopting the following the statistical formula:

MODEL FOR OPTIMUM WAREHOUSE STOCK

The model can be adopted for determining the safety stock of Fertilizer products at warehouses. The level of stock necessary to meet the sales requirement a t warehouse location can be estimated by the statistical formula:
=

JR (o,~)+ s

~ ( ~ ~ ~ )

where a ,
: Inventory requirement for the month.
: Average time lag (days) between the order placed by

warehouselstock point, and the delivery of products at the warehouse.

a~
: The Standard deviation

6 . D ) of time lag.

S
0,

: Average Sales/month :

S.D.of Sales

AN ILLUSTRATION
Month : April '93 Warehouse : ...A. Product: Urea

Time Lag (days): Time elapsed between the order placing by warehouse/stock point and actual delivery of product at the warehouse: 10, 12, 10,8,10.

Year 88 89 90 91 92
Total

Sales(s)
t000T)

s-s*
0

(s-s')~

12 15 12
10 11
60

3 0 -2

-1

0 9 0 4 1
14

For 85% of service level the estimated maximum stock for April '93 should be 17,900T. This is a very simple and effective model which can be easily adopted for stock management at field warehouses. This mode was adopted by fertilizers manufacturing unit2 operating 210 warehouses. Substantial savings in terms of warehouse space reservation and inventory control was obtained.

Model I1
1 .

Warehouses should be classified in to A,B and C category depending on the through put on the basis of the turnover cumulating to 80% for 4 1 5 % for B and 5% for C categories. Data pertaining to the lifting pattern ( Tonnes of each product drawn by fertilizer dealers) during each month of the season be maintained. Average liftings (X) be calculated for each product and warehouse locations based on five sample data pertaining to the same month during the preceding five years.

2.

3.

' Madras Fertilizers Ltd. (1986).Lakshman Rao H.K.

4.

Standard deviation s.d. of the data for which the average has been obtained must me calculated.

The minimum and Maximum inventory levels to be maintained at the warehouse for the product during the month is given by : Lower limit: X s.d multiplied by 1.141 Upper limit: X+ 8.d multiplied by 1.141

5.7

CONCLUSION
In order to make the fertilizer marketing system effective and to

reduce the cost of marketing operations there is scope to adopt quantitative techniques in the area of planning implementation and control. Marketing programs and strategies can be evaluated and their relative impacts can be measured utilizing optimization tools and techniques. Software computer packages are available in all the areas discussed. In this chapter detailed discussions of the various quantitative and optimization techniques that can be adopted for fertilizer marketing system have been made with illustrative examples. In this chapter a Transportation model based on L.P. technique has been discussed. A logistics plan based on least transportation cost for seven fertilizer factories located in South India has been developed. The advantage of adopting this plan for minimizing the logistics cost has been brought out.