Prudential Fruits Processing Company

Prudential Fruits Processing Company Limited (PFPCL) was established as a

joint venture between Kentucky Company, U.S.A and Harayan Agro Industries
Corporation. They set up a tomato processing plant at Kapura in Jind district of
Harayana. The plant had a rated capacity of processing 30 tonnes of tomato per
hour for three shifts of eight hour each per day and a processing season of 60
days. The other well established companies in tomato processing in India are
Kissan, FSL, NAFED and Volfarm but none of them had capacity of more than
4,000 tonnes per season.

Harayana is not a traditional tomato production area as its climate did not suit
the existing tomato varieties for high yields. The average yields of tomato grown
in the region were recorded at about 19 tonnes per hectare. In the year 2005
tomato production in the state was recorded at 15,000 tonnes from about 800
hectares. The prices ranged between Rs.700 to Rs. 4000 per tonne over the
period of 90 days. Accordingly, a well thought of strategy was formulated and
implemented to increase the tomato yield to 30 tonnes per hectare to give better
returns to the farmers. Increase in productivity made tomato cultivation more
remunerative than the competing crops. Whereas the net returns per hectare
from tomato cultivation were Rs. 20,000, these were Rs.13, 000 from sunflower
and sugar cane and Rs.6000 only from wheat. With the assurance of higher yield
and assured price of Rs.1,200 per tonne, the company contracted the supply of
tomato with identified contract growers in five districts divided into nine
production zones. To ensure quality of raw material, the company-raised
seedling on its own (leased) farm and distributed them to the growers.
Demonstrations were also given to the growers on the package of practices
covering all stages from planting to harvesting.

Devi Lal who took over as Executive Director of the Company in charge of tomato
processing activity in October 2006 was quite confident of achieving the full
utilization of capacity in 2007. His optimism was based on the area contracted,
price behaviour for last two seasons and expected yield. However, just at the
beginning of the tomato harvest season in 2007, the price of tomato in the open
market started rising. It reached Rs.1700 per tonne compared to the contracted
price of Rs. 1200 per tonne. As a consequence, the procurement got disrupted
causing occasional shut down of the plant and under utilization of its capacity. At
the end of the season, the total procurement stood at 17,000 tonnes compared to
23,000 tonnes in 2006 and 25,000 tonnes in 2005, respectively. Devi Lal was all
the time wondering as to what he should have done to procure more quantity of
tomato. He was not sure about the measures to be taken to check future
occurrence of similar situation. In August 2007, he called a meeting of senior
managers dealing with tomatoes (research and extension, contracts and
purchases, production, finance and marketing) to chalk out a strategy for the year
2008. Devi Lal made the following remarks:

“We are aware that due to adverse climatic conditions and spread of
disease, the tomato yields were reduced considerably. But these uncertainties are
1
known in agriculture and we should have managed the contract better. As we
have not been able to meet our export commitment to buyers of tomato paste
abroad, it could have damaged PFPCL’s reputation as a reliable supplier of
quality product. We have to rebuild the reputation. Keeping in view the
competitive international price of tomato paste, offering a higher price than Rs,
1,200 per tonne for quality tomato would take away our competitive advantage.
Gentlemen, I need your input so that a sound strategy could be formulated for the
coming season.”

In response to Devi Lal’s request, the Marketing Manager wanted to impress that
un-reliability in supply of paste would damage the reputation of the company
among the international clientele. He, therefore, suggested paying a higher price
to buy tomato from the open market if such circumstances arise in future. The
Manager Production scanned the tomato environment and pointed out that
immediate action should be taken to increase the area under tomato and also
introduce new hybrids to extend the availability of tomato for over 60 days for
processing. The Manager Contracts and Procurement pointed out that
procurement was highly sensitive to market price. It goes down with the rise in
market price. Some growers partly diverted their production to market instead of
supplying to PFPCL. This phenomenon was more pronounced during 2007
irrespective of well-coordinated procurement efforts. Manager R & D informed
that efforts were on to evolve disease resistant early and late maturing hybrids for
all regions of the state and also for the adjoining states of Rajasthan, Punjab and
Himachal Pradesh. Success in procurement of tomato for 2008 season posed a
challenge to Devi Lal.

1. Point out the salient features of PFPCL procurement system?

2. Is the present system of procurement adequate? Do a SWOT analysis of the
present strategy.
3. Should the company continue with the present procurement system? If yes,
how you can make it more effective?

EXHIBIT 1

PFPCL: Procurement Operations

The PFPCL opted for contract production to manage procurement. It was an

integrated “laboratory – farm – factory – market “ approach and was the largest
private sector transfer of technology effort hitherto in India. It was to increase
productivity to such an extent that tomato cultivation becomes superior to any
other competing crop grown by the farmers. Under the situation, naturally the
farmers would prefer to enter into contract with the company. The following were
the components of the strategy adopted by the PFPCL.

1. RESEARCH

Developing hybrids of tomato with high yield was the first priority. As the yield
levels were very low and harvest season very short (only about 30 days), the
2
objective of research was to develop hybrids with; a ) high yield , b) longer
harvest season, c) resistance to pests and diseases, d) quality of tomato to meet
exacting processing requirements, e) suitability for winter crop and f) reduced
duration of crop.

Knowledge available to PFPCL from Kentucky Foods Company (KFC) was quite
helpful. KFC spends about $200 million annually on research and holds 300
patients in biotechnology. All this wealth of knowledge was brought to India.

PFPCL invested substantial amount in building infrastructure of research. Its

research team consisted of a well-qualified and experienced agricultural scientist
from Haryana Agricultural University (HAU).

They were supported by internationally known experts in plant breeding. This

team identified and screened a dozen hybrids having adaptability to Haryana and
nearby states. PFPC L had 50-hectare research farm compared to 3-acre farm for
tomato research at HAU.

2. EXTENSION

“Quality mind set” inculcation was the basic approach in extension and the other
things followed easily. Haryana farmer had already tasted fruits of technology in
wheat, paddy, potato, cotton and other crops. Besides, profits were quickly
realizable. Extension activities included: a) supply of seedlings from company
nursery b) fixing harvesting schedule, c) supervision at various stages of plant
growth, d) guidance to farmers in agronomic, harvesting, plant protection and
transportation practices. The company also provided improved implements. At
different stages of plant growth field visits for farmers were organized at two of
its research firms in order to demonstrate improved cultivation practices. The
proof of all these could be seen from the fact that in 2002 and 2003, only PFPCL
farmers survived the blight and fruit rot which affected the tomato crop in several
parts of the state.

3. MARKETING

As farmers had an assured market at a predetermined price, uncertainty due to

price fluctuations did not bother them. They, however, would grudge the increase
in market price beyond the contract price. But PFPCL had given the farmers the
freedom to sell excess production over and above the quota contracted to PFPCL.
If the production was low, still the farmer had to supply the agreed quota. Non-
compliance may result into exclusion of farmer from the growers list for future.
All farmers were expected to deliver a minimum of one third of the expected yield
of 30 tonnes per hectare. A minimum 3 hectare tomato area per farmer was
targeted.

The company took several precautions to ensure quality raw material for
processing. These included a) stopping irrigation 7 days before harvest, b)
avoiding harvesting in early morning, c) plastic crates for safe transportation, d)
transportation in stipulated time to plant, e) testing total soluble sugars, brix, pH
3
and colour at farm and at factory gate, and f) rejection of tomatoes not suitable
for processing.

PFPCL entered into contract with farmers using the Agreement Form (Appendix
A). Though the agreement was legal and provided punitive measures, the
company believed in managing contracts through incentives rather than getting
into litigation. The idea was to develop long-term relationship with the growers.

The supplies to PFPCL plant was monitored by a planting-harvesting schedule in

such a way that each farmer was designated to supply a particular quota to obtain
over 700 tonnes of tomato every day (see Appendix B).

Table 1.1: Number of Days and Quantity of Tomatoes Received, 2007

Tomato Received (tones/day) No. of days

Up to 100 3
100 – 200 2
200 – 300 3
300 – 400 5
400 – 500 11
500 – 600 9
600 – 700 4
700 – 800 4
More than 800 8
Total 49

Procurement Pattern:

A total of 336 farmers entered into contact with the company. The day wise
schedule of quantity of tomato received during 2007 has been given in Table 1.1.
The farmer wise schedule of tomato supplied during 2007 has been given in
Table 1.2 and 1.3.

Table 1.2: Number of Farmers Supplied Tomato in 2007 Season

Supply No. Of Average Average

farmers quantity quantity
supplied Expected
1. Less than quota 142 74.3 87.9
2. More than quota 194 74.3 63.1
3. Non-contract 29 15.7
farmers
Total 365 69.6

4
 Table 1.3: Pattern of Deviation from Quota (No. of farmers)

Deviation from quota Supply more than Supply less than

(tones) quota quota
Up to 5 62 36
5 to 10 47 35
10 to 20 52 38
20 to 30 23 11
More than 30 10 22
Total 194 142

Experience of the field supervisors revealed that generally large farmers defaulted
more in their commitment. It was noticed that the new farmers supplied more
than their quota. There were several farmers who could not fulfill their
commitment because the quality of their product was not suitable for processing
(damaged by pests and diseases).

PFPCL divided area of tomato procurement into nine regions. The farthest area
was about 200 kms.. The contract growers were spread over 155 villages in five
districts (Table 1.4). For each region the company had appointed field staff for
proving extension services and monitoring harvesting. The dates of harvest,
quality, weight, etc were monitored by crop dispatch slip at harvest point to
laboratory at the factory site.

Table 1.4: Grouping of Farmers on the Basis of Tomatoes Supplied

(No. of farmers)

Quantity 1 2 3 4 5 6 7 8 9 Other Total villages

in farmers
tonnes
Up to 11 2 4 2 5 3 5 4 4 0 1 30 12
11-20 3 4 3 5 3 6 2 2 0 0 28 19
21-30 2 3 4 5 3 9 6 7 3 0 42 13
31-40 3 5 1 7 3 11 13 5 2 0 50 23
41-50 1 3 1 0 2 1 8 0 2 0 18 8
51-60 0 3 2 3 0 1 10 2 8 0 29 13
61-70 0 1 0 0 0 3 5 1 7 1 18 10
71 –85 2 0 0 0 0 0 14 1 6 1 24 7
86-100 0 0 0 1 0 0 10 2 7 2 22 7
101-150 0 0 1 0 1 0 4 0 13 2 21 13
151-200 0 0 0 0 1 1 1 0 14 1 18 10
201-300 0 0 0 0 0 0 1 0 9 1 11 5
Over 0 0 0 0 0 0 0 0 7 1 8 15
5
300
Total 13 23 14 26 16 37 78 24 78 10 319
farmers
Total 10 20 8 18 11 23 27 9 19 10 155
villages

APPENDIX A

I(Grower)…………S/O…………………village………………….P.O………Dist………hereby
offer to grow and deliver tomatoes during the season 2007 to the PFPCL grown
by me on …………………acre of lands as per terms and conditions mentioned
below:

1) That the PFPCL will supply seedlings to me at the rate of Rs.10 per
thousand seedlings at the time of growing crop. The total cost of
seedling to be supplied to me comes to Rs…………………..
2) The PFPCL will adjust the cost of seed against proceeds from the
tomatoes supplied. In case of non supplies of tomatoes by me (grower)
for whatever reasons I will make the payment in cash to PFPCL by
June 30, 2008 at the rate of 25 paise per kg. Or else PFPCL can forfeit
my deposit of Rs.1000 and may de-register me from the list of contract
farmers.
3) That PFPCL reserves the right to watch the progress of the crop by
advising about watering, weeding, use of pesticides, harvesting of
tomatoes etc., and I agree to cultivate tomato as per directions issued
by PFPCL from time to time.
4) That the PFPCL will arrange the transportation of tomatoes from
villages to the factory at Kapura at my cost. The octroi and loading of
tomatoes in the field etc. has to be arranged by me. PFPCL will make
payment @ of Rs.1 per Kg. within 3 days of receipt of tomato at the
plant site.
5) The PFPCL will accept tomatoes free from insects and damage and
payment will be worked to as per quantity recorded in the factory
weigh bridge at the time of receipt of tomatoes (damaged or pest
infested or green tomatoes would be deducted from the total weight).
6) In case of closer of factory on account of unforeseen
circumstances/force PFPCL reserves the right to refuse tomato brought
by me and in that case I agree to shell the crop in the market.
7) In case of any disputer arising out of terms and conditions mentioned
above, the case shall be referred to the arbitrator appointed by PFCL
and the Haryana Agro Industries Corporation and whose decision shall
be finally and binding on both the parties.

Signature: Sign of the authorized officer

PFPCL
6