Strategic buying at National Foods, Pakistan a recipe for success

Mohammad Kamran Mumtaz and Shahid Raza Mir

Mohammad Kamran Mumtaz and Shahid Raza Mir are Assistant Professors at the Institute of Business Administration, Karachi, Pakistan.

t was July 2007. Muhammad Iqbal, Head of Supply Chain Management at National Foods, Karachi reviewed his companys budget for scal year 2007-2008 that had recently been announced. The budget signalled start of planning for the next year. Iqbal was worried. The task of planning for purchase of tomato paste, a key ingredient in many products at National Foods, looked daunting. National Foods bought the paste from China and it had not been easy to decide the exact quantity to buy.

Supply Chain Head at National Foods

Iqbal had MBA in Supply Chain Management and brought with him 24 years of experience. Out of 17 years that he has been with National Foods, he spent ten years in sales and marketing department before joining the newly formed Supply Chain Department in 2005. In 2006, he got promoted to Head of Supply Chain and this brought with it extended responsibility for Iqbal. He had previously been sitting in meetings where issues concerning the buying of tomato paste were discussed. Now that he was the Head of Supply Chain he had to head such meetings himself and take a nal decision.

National Foods and National Ketchup

National Foods was founded in 1970 and started out as a Spice company (National Foods, 2008). About three decades later it had diversied into a versatile food company with over 250 different products in 12 categories and over 100 different products for the international markets. It was one of the local food companies in Pakistan that had both ISO 9001 and ISO 22000 certications. National Foods developed innovative food products based on convenience and fast preparation in line with existing modern lifestyles but also retained traditional values through its collection of food products. Ketchup target market The food trend in Pakistan was changing and city dwellers were getting more inclined towards ready made and fast foods. The changing tastes, traditions and patterns of food consumption created a scenario where traditional home made sauce and chutney were being replaced by ketchups of various types. Although ketchups found more appeal for younger generation they were equally liked by adults. There was growing market for ketchups and this left immense opportunity for food manufacturing companies to grab market share. Competitive positioning National Foods ketchup faced severe competition from primarily Mitchells, Youngs, Shangrila and Ahmed Foods ketchups. The market was cluttered with different varieties of

Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision making. The author/s may have disguised names; nancial and other recognizable information to protect condentiality.

DOI 10.1108/20450621111122174

VOL. 1 NO. 1 2011, pp. 1-7, Q Emerald Group Publishing Limited, ISSN 2045-0621

EMERALD EMERGING MARKETS CASE STUDIES

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ketchup from these companies which made it difcult for the consumer to distinguish products of one company from another. In the face of this erce competition, it was very hard for ketchup producing companies to stand out in the crowd. Therefore, it was critical to come up with new products and stay ahead of the competition. National Foods practiced aggressive marketing strategies to combat the competition. Special emphasis was placed on the distribution channel for ketchup. The company had also been placing great importance on quality. According to Mohammad Iqbal:
We want to give our customers the best quality and for that consumers are willing to pay more for our products than those of our competitors.

Ketchup manufacturing at National Foods The company launched its ketchup division in 1997. Ketchup was being produced on KOSME plant (which had been imported from Italy) at the National Foods factory in Sind Industrial and Trading Estate (SITE), Karachi. The Ketchup product category at National Foods included Tomato Ketchup which constituted 75 per cent of total sales in this category. Chilli Garlic Sauce constituted 10 per cent, Hot & Spicy 10 per cent and Imli Chutney 5 per cent. These contributed nearly 15 per cent to the gross sales of National Foods and had an average annual growth of 10-15 per cent. Anyhow, this growth in demand was volatile because of competition in the market and low barriers to entry.

Purchase of tomato paste at National Foods

History of buying tomato paste National Foods started buying tomato paste from Turkey in 1997 when its requirement was 200 metric tons per year. As the requirements increased with the growth of ketchup sales the company realized that it is more protable to buy from China. Although Pakistan was an option as suppliers for paste were available there but the brix value (brix value determined the percentage of total solids in the paste and hence its quality, the higher the value the better the quality) of the paste available in Pakistan ranged between 12 and 24 whereas National Foods required 36 brix tomato paste for its ketchup. The price difference as compared to China was not signicant either. China offered comparatively better prices for the desired quality of paste and a shorter lead time of one month when compared with Turkey. Thereby the company made its rst fresh agreement with Uranqi, Xiangian China in 2003. Landed cost of buying from China had shown an approximate average 10 per cent increase from the previous years. Anyhow it was hard to predict the exact pattern of prices for the next year. The buying process The yearly budget got announced in May to June. So requirements planning for tomato paste started in July. Then in August the company got samples of tomato paste and quotations from its qualied suppliers. Based on the quality of the sample and the quotation it then negotiated price with the suppliers that met the minimum threshold of quality. Order was then placed following the regulations for import. The paste was imported in 20 feet containers via sea. Shipment started arriving in early November but could get as late as last week of November depending on the timing of tomato harvest. The harvesting season for tomatoes started in August and continued till January in some years. This translated into getting nal deliveries, for the order placed in August, as late as January. The suppliers of tomato paste had to buy the tomatoes for production during the harvest season. They would charge an additional amount for holding the tomato paste after

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production if these are not shipped immediately. The holding cost in China was 10 per cent more as compared to that in Pakistan. Usual practice had been to book the paste during the harvesting season and any buying after that resulted in additional cost. Supplies for manufacturing of ketchup Ketchups were being made from 10 to 15 items. One of the key ingredients in the manufacturing of ketchups was tomato paste. It was available in tin cans for consumer market as well as wooden bins and steel drums with aseptic packing for the industrial market. Wooden drums could hold 1.3 MT while steel drums carried 240 kg approximately. These supplies had a shelf life of 18 months. Other ingredients of ketchup were tomato paste, sweeteners, vinegar, salt, spices, avorings, onion and/or garlic. The types of sweetener used were usually granulated cane sugar or beet sugar. Other sweeteners included dextrose or liquid sugar in the form of corn or glucose syrup. Tomato paste, sugar and preservatives were imported. The company imported paste in steel drums of 240 kg. Other raw materials were purchased locally from suppliers in Lahore and Karachi. Flexible packaging materials were supplied by Packages Limited while glass bottles by Ghani Glass and twist caps by Hills side. Master cartons came from suppliers 20-25 km from National Foods factory in Karachi.

Year 2007
Political conditions in Pakistan There had been a rise in antigovernment terrorist activities and general hatred against Pervez Musharraf Government for his pro-US stance (Hill & Associates, 2007). Several lethal suicide attacks in the stance of a few months, mostly targeting law enforcement ofcials, indicated extreme designs of the terrorists. The resolve to succeed at both ends was very strong, which clearly spelled out that the security situation would continue to be extremely volatile. Musharraf was under pressure from all the political parties to hold the elections on time as promised and to relinquish his post of Chief of Pakistans Armed Forces. If the election schedule announced by Parliamentary Affairs Minister Sher Afghan Niazi was followed, presidential elections would be held in the Autumn of 2007 and the general and provincial elections would be held on January 30, 2008. Uncertainty over the course of these elections, if they happened at all, was one of the most signicant risks facing the country. Islamic extremist groups, the mainstream political/Islamic parties and exiled national leaders were more interested in a showdown with General Musharraf to curtail his powers or to remove him from ofce, than they were in an election. Anyhow, the rupee had not shown much downslide and was trading at Rs. 60 for US$1. Buying scenario Prices for paste had risen but China claimed that crops next year would be good and prices would reduce. Calculations based on budget and demand forecast (considering 10 per cent annual growth) showed a requirement of 650 tons for the following year. Iqbal had got quotations for the required quantity with given specications from National Foods qualied suppliers. Table I shows the minimum buying criteria. The existing consumption rate showed that 150 tons of tomato paste would be available in inventory at the time the order is placed.

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Table I Tomato paste quality standard

Brix % Brix % average must not be less than Brix % no individual test value may be less than Lycopene mg/100 g Mold count Microbe Chromatism 12.5% a/b Mucosity cm/30(12.5%) PH Lead(Pb) mg/kg Tin(Sn) mg/kg Total acidity 36-38 36 34 e55 Not in excess of 50 per cent positive elds In accord with commercial asepsis demand e2.1 712 3.9-4.5 d0.5 d200 d3

Keywords: Purchase management, Tomato paste, Planning, Inventory, Perishable products

Iqbal had called quotation based on his approximate calculations for the quantity of tomato paste. The quotations were now available and Iqbal had to negotiate a nal price with the suppliers. Iqbal was able to make a deal for US$960/ton C&F Karachi Port in 2006 bringing the suppliers down from US$1,000/ton. There was an additional 25 per cent duty and 5 per cent custom and clearance cost. Holding costs for one ton of paste for one year in Pakistan could be approximated to Rs. 15,000.

References
Hill & Associates (2007), Security Assessment Pakistan 2007. National Foods (2008), Annual Report, National Foods, Melbourne.

Exhibits

Exhibit 1 National Foods ketchups (Note: Different packaging and sizes)

Note: Different packaging and sizes

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Exhibit 2
Chinas tomato paste export prices soaring up
Tuesday, March 06, 2007 Posted: 08:10 BJT(0010 GMT) MOFCOM A global shortage in tomato paste resulted in soaring export prices of Chinas related products, which brought more opportunities to its red industry, but at the same time, it also raised accusations from overseas tomato paste industry saying that Chinas tomato paste enterprises were cornering the market, which was justiably denied by Chinas tomato paste industry. Presently in Northern Italy, tomato paste price soared up to 700 euro/ton while in Spain, the price reached 680 euro/ton, and in the meantime, tomato paste was sold out in both Europe and U.S. The global shortage in tomato paste spurred Chinas exports signicantly. According to the statistics released by China Chamber of Commerce for I/E of Foodstuffs, Native Produce and Animal By-Products (CCCFNA), in 2006, Chinas tomato paste export volume reached 630 million kilograms, a 4.71% increase over the previous year, which totaled $360 million, up by 18.8% year on year while the unit price attained $566/ton, and realized a 13.46% growth. Witnessing Chinas tremendous success and increase in tomato paste exports, some people from overseas tomato paste industry assumed that China was taking advantage of the global shortage in tomato paste and cornering the market. These accusations were strongly opposed by ofcials representing the CCCFNA, who indicated that Chinas tomato paste producers used to sign an annual sales contract with overseas importers in early August each year; although price uctuation may still happen, the risk is shared by both exporter and importer. In 2006, due to bad weather in Greece, its tomato output was only 710,000 tons, less than the 1 million tons expected, and at the same time, the U.S. also faced a decline in tomato output, which totaled 10.10 million tons, a 13% decrease than reckoned. Meanwhile China maintained its normal yearly output. The statistics indicated that in 2006, Chinas tomato paste export volume to the U.S. reached 9.44 million kilograms, a 735.3% increase over the previous year, which realized $5.01 million of prot and went up by 933.2%. Source: Chinese Ministry of Commerce

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Exhibit 3 Weighted average lending and deposit rates

Gross disbursements Per cent per annum Outstanding loans Fresh deposits Outstanding deposits

Items July 2007 Public Private Foreign Specialised All banks June 2007 Public Private Foreign Specialised All banks May 2007 Public Private Foreign Specialised All banks April 2007 Public Private Foreign Specialised All banks March 2007 Public Private Foreign Specialised All banks February 2007 Public Private Foreign Specialised All banks January 2007 Public Private Foreign Specialised All banks

10.88 10.35 10.56 10.19 10.42 10.22 10.74 8.85 9.71 10.32 11.16 10.81 9.53 9.31 10.56 11.13 10.94 9.15 9.24 10.60 11.21 10.85 9.04 9.52 10.55 10.47 11.01 8.65 9.69 10.52 11.79 11.00 8.67 9.82 10.65

10.90 10.37 10.58 10.19 10.44 10.26 10.88 8.92 9.71 10.43 11.17 10.92 9.63 9.31 10.66 11.15 10.99 9.24 9.25 10.66 11.34 10.90 9.42 9.53 10.67 10.61 11.05 8.95 9.70 10.62 11.87 11.03 9.00 9.82 10.74

10.97 11.24 13.99 8.98 11.26 10.95 11.36 13.83 8.97 11.33 10.96 11.33 13.80 8.99 11.32 10.98 11.29 13.86 8.97 11.30 11.06 11.28 13.84 8.93 11.29 10.96 11.29 13.76 8.95 11.29 10.98 11.14 13.88 8.94 11.18

11.50 11.69 14.17 9.57 11.72 11.61 11.78 14.04 9.58 11.80 11.52 11.75 14.01 9.57 11.76 11.70 11.74 14.10 9.60 11.79 11.74 11.72 14.05 9.56 11.78 11.56 11.73 13.94 9.59 11.75 11.57 11.59 14.15 9.60 11.66

4.23 5.63 5.08 7.27 5.47 4.39 5.46 5.09 8.52 5.33 5.40 5.40 5.22 7.07 5.38 5.13 4.89 5.41 5.33 4.99 5.14 4.98 5.64 6.98 5.08 5.27 4.94 5.42 3.21 5.03 7.28 4.99 4.71 3.57 5.05

5.09 7.06 6.28 8.32 6.83 7.60 7.01 6.47 9.68 6.98 8.12 6.91 6.67 9.12 6.93 7.31 6.45 6.78 6.49 6.54 6.53 6.70 7.01 8.95 6.74 6.87 6.73 6.03 4.34 6.59 9.05 6.50 5.56 5.17 6.48

3.54 4.06 5.05 5.79 4.03 3.55 3.98 5.42 5.32 3.98 3.97 3.92 5.45 5.68 4.02 3.75 3.83 5.44 5.63 3.92 3.65 3.86 5.42 4.91 3.92 3.50 3.78 5.26 5.34 3.82 3.44 3.68 5.07 5.32 3.72

4.63 5.40 6.26 7.40 5.32 4.75 5.32 6.56 7.30 5.30 5.12 5.23 6.61 7.16 5.30 4.87 5.14 6.58 7.11 5.19 4.76 5.19 6.58 7.02 5.21 4.57 5.10 6.34 6.91 5.09 4.53 4.96 6.33 7.42 4.97

Source: www.sbp.org.pk/ecodata/Lendingdepositrates.pdf

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Exhibit 4 Key nancial ratios

2003 Performance measures Efciency ratio, operating leverage (%) Return on assets (%) Return on net assets (%) Return on capital employed (%) Return on equity (%) Protability measures Gross margin percentage Net margin (%) Operating margin (%) Earnings per sham Investment utilization Collection period (period average) Creditors payment days Inventory turnover days Inventory turnover ratio Asset turnover (times) Financial condition Current ratio Quick ratio Debt to equity ratio (%) Interest coverage ratio Booh value per share Source: National Foods Annual Report 2004 2005 2006 2007 2008

97.32 10.25 10.50 25.64 15.25 27.31 1.76 4.30 4.71 14.81 13.53 81.29 4.49 2.69 1.00 0.17 40.26 2.59 31.97

94.59 14.16 22.81 39.42 30.32 27.79 3.64 6.28 10.89 14.49 16.79 95.53 3.82 2.44 1.05 0.16 19.77 6.87 39.87

97.22 8.22 11.22 21.33 17.39 25.89 2.00 3.80 7.21 15.47 19.85 101.24 3.61 2.41 1.09 0.19 49.23 3.64 43.08

94.18 13.57 15.52 28.97 32.71 30.92 3.81 7.11 16.55 17.56 25.64 103.50 3.53 2.20 1.16 0.43 83.44 5.28 58.13

92.91 16.85 23.02 35.66 42.05 34.23 5.41 8.38 23.40 16.37 31.18 97.98 3.73 2.22 1.10 0.33 52.67 6.13 86.55

92.27 16.61 21.96 40.70 35.43 32.20 5.11 9.48 28.33 22.15 30.80 108.33 3.37 2.09 1.07 0.33 38.19 5.16 93.37

Exhibit 5
Year 1999 2000 2001 2002 2003 2004 2005 2006 Forecast 200 220 250 290 340 350 370 400 Demand 190 220 260 300 330 360 400 450 Error 10 0 210 210 10 210 230 250 Growth %

15.79 18.18 15.38 10.00 9.09 11.11 12.50

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