Procurement Management

End-Term Question Paper

PGDM (ABM), Batch of 2021

Time: 2.5 hr Maximum Marks: 50

Instructions:
 This is an open book applied exam. Students can use books, internet resources to
answer the questions.
 Read the case-let 1 and answer all the questions with proper justification and
reasoning.

Case-let: 1
Procurement of Gherkins – Learning from Global Green Company

Introduction
Gherkin (Cucumis anguria) means small cucumber and is related to gourds, pumpkins
and melons of Cucurbitaceae family. Gherkins are consumed in fresh as well as in
pickled form. Global market of gherkins during 2001-02 was estimated at 2.3 million
tonnes of which 1.8 million tonnes were consumed in processed/pickled form. USA is a
major producer and consumer of gherkins. During 2001-02, US consumption was
believed to be 900,000 tonnes which accounted for nearly 40 per cent of the world
market. Thirty eight per cent of US demand was met through imports. European
countries together consumed about 780,000 tonnes of gherkins of which 29 per cent
was imported.

Hungary, Turkey, Madagascar and Morocco were the major suppliers to Europe. As the
ability of these countries to supply at reasonable cost was nearing saturation, the
importers looked for alternative sources of supply. One of the leading importers
identified Sri Lanka as a potential supplier at cheaper cost and explored the possibility
of introducing the crop in the mid-1980s. However, due to the internal conflict in the
island nation the experiment was given up. Later the possibility of introducing the crop
in South India was mooted and the area around Bangalore was found suitable. The
importer along with his Indian partners introduced the crop in the area in the early
1990s. The promoters faced the following constraints:
a. The crop was new to the country and there was no local consumption. Hence
domestic market had not developed.
b. The crop had to be processed within 10-12 hours of harvesting.
c. The importers insisted use of only those pesticides permitted in the importing
countries and keeping the residue to recommended levels in those countries.

Confronted with these difficulties, the company had to organize production under
contract farming. Assured market, remunerative price, input supply and less marketing
hassles under contract farming for the crop caught the imagination of farmers. The
activity soon spread in the area, in a couple of years and other players entered the arena
of gherkin processing and exports. Cultivation was extended beyond Karnataka to the
border districts of Andhra Pradesh and Tamilnadu. The area under gherkins increased
from 14,000 acres during 1997-98 to 19,500 acres in 1999-00. Karnataka remained the
major producer and processor. There were 16 gherkin processors who were members of
the Indian Gherkin Exporters Association and 12 of them were operating in Karnataka.

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The ideal temperature for cultivation of gherkins ranges from 15 to 32 degrees
centigrade. This temperature range is prevalent in many districts of Karnataka and
some districts of Andhra Pradesh and Tamilnadu throughout the year. This enables the
farmers to take several gherkin crops in rotation with different crops in different
seasons of the year. The crop begins to yield fruits in thirty-five days and continues for
five weeks. Thus the crop cycle is completed in 70 days. Though in a year, the farmer
can grow gherkin many times, successive crops are not taken on the same plot to avoid
adverse effect on yield due to pests and diseases. As the crop needs to be processed
within 10-12 hours of harvesting, the processing plant should be located within a
reasonable distance from the growing area. There are two types of gherkins produced in
India. One, the crop having small size fruits is trellised to avoid oversight while picking
and the other crop having bigger size fruits is allowed to spread on the beds.
The entire gherkins produced in the country were for exports and there was no
domestic consumption of the product. In recent years however, the fast food restaurants
like McDonalds started using small quantity of gherkins. All the exporters produced and
processed gherkins on custom basis and had no brands of their own. They got orders
from the importers for specific quantity with a time frame ranging from six months to
three years. After the orders were secured the processors organized production on
individual farms on contract basis. Processing and packaging were done as per the
specifications of the importers.
Global Green Company Limited
Global Green was established by Thapars jointly with a Swiss company in 1992.
Subsequently, it was converted into a subsidiary of Thapars. The company produced
gherkins and paprika and small quantities of jalapenos, white onion, baby com and
green bell peppers. All these crops were produced under contract with the farmers
primarily for export market. Gherkins dominated the portfolio of the company
accounting for more than 80 per cent of its resources and revenues. The company had a
research and development wing headed by a highly qualified agronomist. Research
team conducted experiments for different varieties in different localities to assess their
suit- ability and performance. The major focus of research was to evolve a package of
agronomic practices for different varieties to realize the potential yield at the least cost.
The Contract
Once a farmer evinced interest, the company entered into a written agreement with him
(Annexure 1). The contract was in the vernacular language. After negotiating the price,
quantity, quality and the period of supply, the company began the process for selection
of area, villages and farmers. As the crop was to be processed within 10-12 hours of
harvesting, it played a crucial role in the selection of the area. Important considerations
were agro-climatic factors, (namely, soil, rainfall, temperature), proximity to the
processing plant, potential to grow multiple rotations with gherkins, irrigation
especially minor irrigation (pumps), potential supply (at least three tonnes per route),
competing crops, labor availability, etc. After identifying the area, the company initiated
steps to identify the villages. The criteria followed for selecting villages were cropping
pattern, labor availability, nearness to collection centre, approach through motorable
road besides suitability of the soil and irrigation facilities, etc. Farmers were selected on
the basis of the suitability of his land, ownership of irrigation pumps, previous crops
grown in the field (potatoes, tomatoes, sunflower and cucurbits should not have been
grown). The cooperation and the attitude of the farmer were also taken into account in
the selection process. The company adopted cluster approach to procurement. It
identified certain key villages as the cluster centers and the growing villages within a 2
kilometer radius brought the greens to these centers for delivery at scheduled time of
days fixed for collection. Each of the clusters was to supply at least 7.50 quintals of
greens in a single trip. The key village and the cluster of other villages were connected
with all-weather roads.

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The company had made conscious decision not to have a large presence in areas
dominated by horticulture crops. Though the market for vegetables was volatile,
farmers had the tendency to switch the area back and forth with the market trends
expecting higher income. For instance when tomato price crashed, farmers cut back the
area under tomato and when it rose they increased the area. This behavioral pattern did
not suit the company's plan for steady supply of gherkins. Therefore, the company
strategically selected the villages in the interior with very little horticultural activity.

In the initial years the company made lot of efforts to convince the farmers to take up
gherkins production. Once a village was selected, they identified influential people in
the village and through them organized meetings in the night so that the farmers'
presence is ensured. The company explained about the crop, its commitment to buy
back their production, the advantages of gherkin crop over the existing crops in terms of
revenue and other non-monetary factors such as less transport and no marketing
hassles. The relative economics of the crop over the competing crops (as given in Table
1) was explained. By convincing the farmer to take up the new crop through contract
farming, the company was able to procure gherkins of desired quality on a regular basis.

Table 1: Cost of Cultivation of Gherkins and some Competitive Crops

(Rs./acre)
Particulars Gherkins Groundnut Maize Ragi Gherkins
(Trellised)
Input cost 6950 4740 2300 1470 11400
Labor cost 6460 2820 3010 2000 16200
Total cost 13410 7560 5310 3470 27600
Yield (qtl.) 5.1 7.5 14 10 4.9
Price (Rs./qtl) 340 1500 490 500 680
Net returns 3930 3690 1550 1530 3720

The company procured seed of gherkin from different seed companies such as
MAHYCO, Royal Sluis, Sungrow, Peto, etc. These companies mostly imported the seed
and supplied it to Global Green. The company supplied the seed at cost to the farmers.
It neither charged any premium nor passed the dealers commission to the farmers. The
retention of the dealer's commission helped the company to bear the cost of supplying
seed as the cost of seed had to be recovered from the farmers at the end of the crop. The
technical staff of the company regularly visited the field to monitor the crop and
ensured that the farmers followed the recommended practices. Farmers must use only
those plant protection chemicals supplied by the company. The chemicals were those
agreed upon with the overseas buyers and were permitted in the importing country.

The supply of seed, pesticides and fertilizer helped to build the confidence of the
farmers. The adoption process followed the typical "s" shaped curve with few farmers
taking up the activity initially and more followed later on. When the company increased
production, it necessitated the increase in area in the same location or gone to new
areas. Also to remain competitive, the company looked for new production areas. In
addition to night meetings, the company organized tours of interested farmers to the
current growing villages and allowed the farmers to interact with the growers in order
to learn first hand experience of growers about the crop, cultural operations and
benefits.

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The firm was growing two types of gherkins the small ones (from trellised crop) and the
bigger ones (from non-trellised crop). The trellised crop was for smaller size greens
which were primarily exported to France. The non-trellised crop was for bigger size
fruits which were preferred by Russian and American markets. As the trellised crop was
highly labor-intensive the company did not give the program for more than one acre to
any farmer. Normally a company would like to deal with small number of large farmers
in order to reduce their transaction cost. However, the primary aim of Global Green was
to maintain quality as per the specification of the clients. Therefore the company
strategically decided to work with small farmers preferably those having sufficient
family labor to work in the fields. The company had 2900 contract farmers with 2050
acres under gherkins during 2000-01. The average area per farmer under gherkins was
only 0.7 acres.
Passbooks
Once the farmers entered into the contract, a photo identity card and a passbook were
given to them. The passbook was a vital record with the farmers. It contained the details
of the inputs supplied such as seed, pesticide, and the supply of greens. The application
of pesticides as and when done was also recorded in the passbook in order to keep track
that the farmers strictly used the recommended chemicals and in stipulated quantity.
The quantity of gherkins of different grades supplied was entered in the passbook along
with the date of supply. This formed the basis for payment to the growers. The passbook
was closed when the harvest was complete and final payment was made to settle the
account.
Procurement
An appropriate place in the key village was designated as buying point. The growers
who were registered with that centre brought the harvest to the buying point from the
nearby villages. At the buying centre gherkin fruits were graded on the basis of their
diameter. The grades of gherkins were standardized and there was no room for
subjectivity in grading. For the trellised crop (small size) the four grades based on girth
were (i) up to 14.5 mm, (ii) 14.6-17 mm, (ill) 17.1-28.5 mm, and (iv) above 28.5 mm. The
price offered to the farmers depended on the grade. The preferred yield of grade mix for
trellised crop was in the ratio of 45:25:20:10 for the first, second, third and last grade
respectively. In the non-trellised crop, the ideal grade mix was 80:10:10 for the three
grades. For the first grade the girth size of fruits was up to 28.5 mm, for the second
grade between 28.6 mm and 30 mm, and the last grade above 30 mm. The grade mix a
farmer got depended on the adoption of recommended cultural operations by him. For
example, if a green was picked a day late due to oversight of the pickers, it may become
second grade rather than first. As the company's processing margin was linked to the
supply of first grade liked most by the overseas buyer, the selection of committed
farmers was important. Different sized sieves were used to separate the grades while
buying. Further, the company supplied plastic moulds of different sizes and girth so
that the farmers themselves know the grades. There was little room for the buying staff
to manipulate with quality and grades as there was another set of staff for quality check
of the material at the processing plant and any variation was linked to the salary of the
field staff who had graded the produce.
The graded fruits were filled in crates grade-wise. A yellow slip known as green tag was
placed in each crate containing the details of the quality, date and time of purchase,
village, farmer code and the buyer's (staff) name. This helped the company in tracing
any quality problem to the origin. Once the greens were weighed and transferred into
crates it became the property of the company. The crates were loaded in vans/ trucks
and transported to the processing plant within the stipulated time. Buying the greens at
the village or nearest point to the village freed the farmer of the head- ache of daily
transporting the harvest. For the company arranging the transport and collecting the
produce from the farmers helped in scheduling its operations.

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Gherkins which were cut, muddy or having vegetative and non-vegetative growth were
rejected. Deformed gherkins such as nubbin, crooked, twin, curved, etc. were generally
not accepted. Sometimes these were accepted at a nominal price of 0.50 paisa per kg to
ensure some returns to the farmer. These were not processed. The different grades of
gherkins supplied by the farmers and their weight were entered in the passbook date-
wise by the buyer (staff). At the end of the crop, the farmer submitted the passbook to
the company for verification with records and making payment to the farmer. Farmers
were paid in cheque. The cheques were drawn on nearest bank branch to the village.
From the first payment, the cost of seed and other inputs supplied to the farmer was
deducted. The entire payment was made in two-three installments. The entire system of
weighing, grading and payment was transparent that the farmers were in the know at
each stage. This was a major factor in gaining the farmers trust and they did not suspect
any foul play at any stage. In case a farmer did not supply to the company or supplied
only part of expected output, he was classified as red farmer. The reason for his not
supplying was investigated and if it was found not genuine, he was black listed and was
denied the program in future. Loyal farmers who performed well in terms of yield were
put in a "farmers' bank" and were given the program on priority on a regular basis. In
the company's other contract programs for baby com, jalapenos, white onion, paprika,
these farmers were given preference.

The firm used an advanced software package "Crop Forecast and Review" to monitor
the crop position. They made weekly forecast of the crops. If the firm expected a
shortfall in crop production to meet its obligation, it looked for alternative source of
supply. The company contacted the agents known as facilitators. The price, quantity
and quality of gherkins to be supplied were negotiated with them. Though the
interaction was between the farmers and the agent and the agent and the company, the
extension staff of the company regularly visited the plots to ensure proper quality
parameters followed. The facilitator was responsible to bring the produce to the
processing plant. The facilitators supplied to any company that approached them. They
performed a crucial task by enabling the companies fulfill their obligation without
default.

Questions:
1. Identify and analyze the salient features of the contract farming system in this
case.
(20 Marks)
2. What are the possible reasons for success of contract farming in Global Green?
(15 Marks)
3. Comment on the nature of contract between the farmers and the company.

(15 Marks)

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 Annexure -1
Global Green Company Limited
Letter of Agreement
(Translated from Kannada)
On _____________________day_______________ month_____________
year, Global Green Company Limited, 220, AGIL Campus, White Field, Bangalore -560
066 and the resident of _______________ Village
________________________Taluk, Shri. ___________who is _____years of
age and the son of Shri ______________ has made an agreement.
1. Farmer agrees to grow the crop on _____________________acres of his
irrigated land.
2. Farmer shall carry out all the operations like sowing, harvesting, and grading
according to the technical guidance provided by the company.
3. Sowing shall be carried out on the date fixed by the company.
4. Farmer shall grade according to the company's instructions and product shall be
delivered at the place specified by the company. If there is no proper grading,
company shall take final decision on buying.
5. Farmer shall not stop the vehicle carrying the product for any reason. If any act by
the farmer resulted in company incurring losses, company may cancel the agreement
or impose fines or company has power to withhold the money. In case of company
unable to purchase the gherkins due to tempo strike, farmers can make arrangements
to send directly to the company. Company shall pay the transportation cost.
6. Farmer shall not sell the crop to any other company without the consent of the
company.
7. Company shall provide seeds of good varieties to farmers. Farmers shall spray the
pesticides given by the company on the gherkin crop. For no reason farmers shall use
the pesticides other than prescribed by the company's officers. The cost of pesticides
shall be deducted from the first installment. Farmer shall give in writing as a proof
that the pesticides used were the ones provided by the company at the time of
maturity of the group.

8. Farmers are being provided with gauge and gherkins model in order to facilitate
grading and cost of these shall be deducted in the settlement.

9. Company shall provide sieves in order to facilitate grading. Farmer shall return the
sieves after completion of the crop. In case he is unable to return the sieves, cost
shall be recovered from the final installment.

10. Company shall deduct the cost of transportation of gherkins from the final
settlement.

11. Eighty per cent of the amount due shall be paid 30 days after the supply of the
gherkins. Final settlement shall be paid 15 days later after the completion of the
crop by showing the passbook or receipt.

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12. Supplied gherkins shall be in conformity with the company's specification. Company
shall not purchase pest damaged gherkins. Company shall provide extension
services to prevent pest attack. The fruits with following defects shall not be
purchased: (1) curved, (2) white, (3) ring, (4) pest attacked, (5) with stalk, (6) like
ball, (7) with flower, (8) twins, (9) chopped, (10) no juice, (11) mud coated, (12)
fungus attack, (13) rotten, and (14) other than prescribed gherkins.

13. This agreement is based on mutual trust and belief.

14. In case of any dispute it shall be solved through mutual discussion. If there is no
solution, then rules under Indian Act 1940 will be applicable for resolving the issue.

15. This agreement is under the jurisdiction of Bangalore court.

16. Company shall change price with prior intimation to farmers according to the
fluctuations in the international market. Farmers are expected to cooperate in this
respect.

17. Prices for different grades of gherkins are mentioned as follows:

Grade Diameter Rs. Per Kg.

1 14.50 mm 10.50
2 17.00 mm 6.50
3 28.50 mm 2.00
4 C and N 0.50

The signatures of witnesses from the company and the farmers are as below:

Signature of the Company’s Officer Signature of Farmers

Witnesses
1 1

2 2

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