What Walmart can learn from AMUL November 15, 2009
Posted by Ramnath Rangaswamy in Business, Emerging Markets, India, Indian Economy, Logistics, Retailing, Supply Chain.1 comment so far
I was reading an article about the visit of
CEO of Walmart and his meeting with Dr Manmohan Singh. He told the Prime Minister that Walmart’s entry would benefit the farmers and change the agrarian supply chain.
About 2 years back there were numerous articles on how Reliance Fresh was about to revolutionize and streamline the farm to fork supply chain agrarian supply chain by removing all the inefficiencies and middlemen.
So this talk of the Walmart CEO seemed like déjà vu!
I want this to happen and would love to see the vegetable and fruit supply chain streamlined.
But Walmart should look at a different role model and emulate a model which suits the Indian conditions and has already proven to be immensely successful.
In my humble opinion, the most successful agrarian supply chain is the AMUL model which drove the white revolution. A supply chain which handles a highly perishable commodity like milk in huge quantities and over a vast area requires a thousand bows!!
In rural India to be successful you have to go the grassroots and develop models with the involvement of the people and specially tailored and customized to their needs. The Panchayati Raj is just such a model – governance at the grassroots. It is a simple but very effective model.
In rural India, banking did not do well, but micro-finance is catching up. Big packs don’t do well but sachets do well. The list of innovations, specially tailored to the Indian Rural Market and which are successful, could go on.
Conversly, ideas and products plonked from urban markets without tweaking it to suit the rural markets have been failures.
One big failure in the Indian governance system are the schemes to benefit the rural poor. They are not conceived taking the grassroots into confidence or consideration. They are developed in Delhi and other State Capitals with nil or minimal grassroot involvement. The results are plain for all to see.
Amul is a cooperative. The milk suppliers are the shareholders. The owners decide what they should pay themselves for the raw material they supply. A unique situation where the owners of the company are also it’s largest vendors!
In the Amul system milk is collected at the collection centres. These collection centres are in the village, where the milk quantity is measured, the quality is checked and payment is made.
The milk is then transported by vans doing a “milk run” (literally and figuratively) and gets the milk to a chilling centre within 2 hours. At the chilling centre the milk is pasteurzied and then packed. Some surplus milk is sent to a factory to be converted to other milk products. A simple hub and spoke system.
The marvel is that all this was done 40 years back, when road and infrastructure was primitive.
AMUL has successfully used this model for vegetable oil – DHARA.
For the fruit and vegetable supply chain to be successful, the farmers need to organize themselves into cooperatives. That way they will have the bargaining power with the buyers and transporters. Instead of a multitudes of cooperatives, there should 1 per district or state
Next the cooperatives would have to invest in Cold -Storages.The number and location of the cold storages could be decided keeping in view the shelf life, the transportation costs and the investment in cold storages. A good Operations Research problem.
The collection of fruits and vegetables has to be organized. For this the truck routing has to be decided. The Milk Run concept can be applied here. The capacity of the collection vans, the length of the route, the amount of vegetables and fruits to be collected are the variables that need to be taken into consideration to draw out the routes.
The onward distribution of the fruits and vegetables to cities, retail stores can then be organized by trucks or railway parcel vans.
So Mr Walton, if you are really serious and want to revolutionize the Indian “farm to fork” supply chain it would be worth your time and effort to meet Dr Verghese Kurien - the father of white revolution in India and the brain behind AMUL- and learn or lesson or two from him.
Just calling on the Prime Minister and promising things without understanding India seems very hollow and could be painful.
PE (Private Equity Fund) and Logistics Companies October 18, 2009
Posted by Ramnath Rangaswamy in Emerging Markets, India, Indian Economy, Logistics, Supply Chain.add a comment
The Indian logistics industry is projected to grow at fast clip given the growth in the economy. With GDP slated to grow between 6% and 9% depending on who gave the numbers and when!
Given this growth in the logistics industry, many PE companies want to invest in this space and in logistics service companies.
How does a PE (Private Equity) Investor pick out the companies that will come out winners and will deliver money on the table.
I read this book by Malcolm Gladwell called BLINK. There Malcolm Gladwell discusses a concept called Thin Slicing – predicting something based on just 2-3 criteria or data (literally, in the blink of your eye).
In this writeup, I write of what I think would be the predictors of success, (thin-slicing), in this logistics space.
Infrastructure:
The logistics service provider must own the required infrastructure – trucks, rakes, vessels, warehouses. The logistics service provider cannot depend on the market for trucks or hire rakes from container rake operators. Yes, for some short-term needs or to cater to a sudden peak, the logistics service provider can hire from the market. But hiring cannot be the primary strategy.
The reason, a logistics service provider should own their own infrastructure, is so that the logistics service provider can provide superior service to the customers. By depending on others, the reliability reduces and in turn the logistics service provider’s service level drops.
And to be a winner in this space reliability and service is extremely important.
In my view one of the issues with Reliance Logistics was that they did not invest in infrastructure. Their business model was to depend on the market for trucks. They were not able to provide reliable service and the results are there for all to see.
On the other hand DHL owns it’s aircrafts, trucks, ships and is able to provide reliable service. Blue Dart in India owns aircrafts. Safexpress owns their trucks and warehouses. India Post has now taken aircrafts on lease. India Post already owned trucks and rail cars. By owning, I also include leasing. It is as good as having your own asset.
Many container rake operators have invested in CFS (Container Freight Stations) to have full control of their operations.
End-to-end solution:
The logistics service provider should provide a complete and holistic solution. Companies do not want a warehouse or a truck. Companies want seamless and hassle-free movement of their products and raw materials.
The logistics service provider should be able to load all the raw material or project cargo in China or Europe, bring it on a vessel to India, discharge the vessel, clear all custom formalities and deliver it at the customer’s doorstep.
Or it should be able to take finished product from the assembly line, transport it to a port, clear customs, export it and deliver the bill of lading to the customer.
Or the logistics service provider should bring together different parts from across the globe, assemble the product, customize the product as per the local requirement i.e., put in leaflets and accessories as per the local requirement and then distribute the product in the local markets.
A company will be able to provide this end-to-end service only if it owns the complete supply-chain.
Or if it has strategic tie-ups with freight forwarders, CFS owners, vessel charterers, rake-operators not only in India but across the globe.
Or it should have the wherewithal to form consortiums and offer a single-window solution to customers.
Many logistics service providers bought firms specializing in one part of the supply-chain. This enabled logistics service providers to provide customers across the supply-chain.
Customized solutions:
No two supply-chains are similar. No two customer needs and requirements are the same.
The logistics service provider must be able to provide bespoke solutions to meet the needs of the unique customer needs. One size fits all does not work here.
Examples of such solutions abound; Indian Railways has developed special parcel vans to carry Maruti cars. Adani transports Maruti cars to the south by shipping them in vessels from Mundra. Adani Agri logistics has developed special purpose wagons to carry foodgrains. Adani is planning to import special purpose wagons to carry cars.
The level of customized solutions that the company can provide, separates the men from the boys. It requires a certain confidence, conviction and courage to invest money in infrastructure for customized solutions and then to implement the customized solutions.
Niche:
Some logistics service providers operate in a niche and cater to only certain supply chains.
G4S or CISCO service the cash supply-chain for banks. They replenish the ATMs with cash and transfer cash from and to banks. PN Writer only deals with documents and household goods. Some companies specialize in healthcare and pharma supply chains. Some companies do only reverse logistics. Some companies specialize in spare parts supply chains.
As mentioned earlier , no 2 supply chains are similar. By operating in a niche, the logistics service provider are able to provide superior services to their customers.
Of course, it goes without saying that these strategies should be supported by able, experienced, intelligent and smart people who have the capability to understand the customer’s supply-chain needs, develop a solution to meet the customer needs and then run the supply-chain.
IT solutions and support – RFID, GPS, ERP- would be a key support required to deliver the supply-chain and logistics solutions.
I hope this helps you “thin slice” the logistics service providers and PE you invest your money in the ones that will succeed.
As the theory of thin slice quotes, “ a little knowledge goes a long way”!
Adani and Reliance – Ant and the Grasshopper story! September 6, 2009
Posted by Ramnath Rangaswamy in Emerging Markets, India, Indian Economy, Logistics, Railways, Supply Chain.2 comments
In the week of India’s independence day there was a lot of news about agricultural supply-chains in India. The fare was mixed- some good some bad!
The bad news first; there was the news of Reliance abandoning it’s project of setting up agricultural rural mandis in Punjab.
The good news was that
Adani had set up a complete end-to-end agricultural supply chain and LN Jain Group planned to setup an agricultural supply-chain.
Good news – Adani Agri Logistics
The Adani end-to end supply-chain is a wow as far as supply-chains go! It is as close to an ideal supply-chain as is practically possible. Adani has taken care of the complete supply-chain from grain storage to transportation to the last mile connectivity.
Adani has built grain silos where grains will be stored depending on the grade. Here different grades of grains can be stored. It reduces loss due to rodents and insects. The silos have rapid loading facilities to load wagons rapidly.
Adani got custom made wagons, BCBFG, to carry grains. These wagons are like covered BOBRN wagons. They are covered on top and they have bottom opening doors for rapid discharge into a hopper.
They have built smaller silos in the cities where the grain has to be distributed. These are akin to depots or RDCs.
Bad news – Reliance Retail
Reliance announced with a lot of fanfare and bluster on how they will setup mandis across the country and change the face of rural India. The called it the farm to fork project.
But they did not think about how they will store the foodstuff, how they will efficiently transport it and how they will distribute it. In short Reliance did not invest anything in setting up the supply-chain and logistics.
The difference
Adani did exactly what Reliance never did. Adani understood the importance of the supply-chain and ensured it built the supply-chain backbone. Reliance ignored the supply-chain and the results are there for all to see.
Most industries and companies in India ignore the logistics and supply-chain element while setting up factories. Plants are setup without any planning on how raw material will come in, how finished goods will be taken out.
Innovations in supply-chain (like the Adani example) are very few and far between.
The best thing is that Adani just reapplied ideas from other supply-chains. Coal is loaded by rapid loading systems into specialized wagons (BOBRN), transported by rail and unloaded into specialized hoppers that take the coal by conveyor belts to the power plant. Petroleum products already follow this model.
Adani’s model can be replicated for other products. Other liquids, like acids, edible oils can use this model. Tanks could be setup in Ports, specialized railway wagons can transport the material from source to destination i.e port to plant or customer. Similar supply-chains can be setup for other raw material in liquid or powdered form – silo storage, specialized railway wagons and distribution systems.
So this was a repeat of the classic ant and the grasshopper story.
May we see more innovations in India’s supply-chain, like Adani Agri’s!
HUL’s rejigged rural distribution network March 15, 2009
Posted by Ramnath Rangaswamy in Business, Consumer Goods, Emerging Markets, India, Indian Economy, Logistics, Supply Chain.9 comments
There was a news item, sometime in January 2009 about HUL (Hindustan Unilever) rejigging it’s rural distribution network.
Distribution networks are modified and tweaked to be in line with the market reality and company goals. When growth in urban areas was tapering, FMCG companies started concentrating on rural markets. In line with this, FMCG companies modified their distribution structure to be in line with this strategy and increase rural distribution.
Similarly, when Modern Retail chains were setting up shop in India companies modified their distribution strategy to serve them.
Companies will modify their distribution channels when VAT is implemented and CST% goes below 2%. When CST is reduced the necessity of maintaining a depot in each state vanishes. Companies will then rejig their distribution networks.
This latest change by HUL, in my view is to make the distribution channel more efficient and reduce costs.
HUL has removed one layer called the Star Stores.
HUL has also reduced the margins of the Rural Distributors by 2% from 6.76% to 4.76%.
What is the change in the distribution network.
Before the change the distribution network might have worked like this.
The RDs would have placed orders on depots and would have been delivered stocks from the depots. The RDs would have then supplied the Star Sellers based on a fixed route schedule. The Star Sellers in turn would have serviced the retail outlets in each village.
What will now happen is that the RDs will have to service the retail outlets previously serviced by the Star sellers.
How will the RDs cope the situation?
Here is how the RDs will cope with the situation.
- RDs will start milk runs: What this means is that the RDs vans will start from a base town (the town in which the RD is located) loaded with stock. It will travel on a particular route selling to retail outlets on that route (these retails outlets would earlier have been serviced by the Star Sellers). The route will typically end at the base town itself.
- For village clusters that are faraway from the base town, the RD may retain the Star Seller, replenishing the Star Seller’s stocks on a regular basis (once a week or once a fortnight). The Star Seller would continue to service the retailers as before.
- Wholesellers might be appointed. Instead of Star Sellers, the RD may sell to wholesellers in that area. The retail outlets would come to the wholeseller to buy their stocks/supplies.
- The RD may have his seller who takes visits retail outlets for 3-4 days and takes orders. These orders are conveyed to the RD who despatches to the seller, the stocks. The seller then spends the balance of the week 2-3 days supplying the stocks and collecting the cash.
- Some retail outlets will be dropped from coverage. The dropped outlet will have to depend on the wholeseller and buy from him.
Where and how is the value being unlocked in this whole rejig of HUL’s rural distribution network?
How will the RDs manage with lower margins?
- It can be reasonable assumed that the RDs will give a better quality of coverage to the rural outlets. This is because they would be covering the outlets directly. The calls on the retail outlets will be more reliable (i.e. same day every week), credit would be given to the retail outlets, quality of execution of promotions will improve and visibility and stock weights will improve. With better coverage, business will increase. This will help the RD get more margin money (on an absolute sense) and reduce the fixed costs per call.
- Also, RDs will have a larger area and hence the fixed cost of distribution will be distributed over a larger number of stores. This would reduce the cost of coverage per store.
One thing you can be sure of.. this is not the last distribution rejig you have seen!
