A reflective approach to materials management ice cream industry


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A Reflection on the best practices of Materials Management in relation to Ice Cream Industry

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A reflective approach to materials management ice cream industry

  3. 3. INDUSTRY BACKGROUNDThe Ice Cream Industry in India is, admittedly, not as huge as theManufacturing or Automotive Industry, though it is growing quite rapidly. Thisis understandable, given that ice cream is a seasonal product. Even so, ananalysis of this industry has brought forth the underlying complexities ofsupply chains, flow of materials, and so on. Although most analyses havebeen on the Marketing, Sales & Distribution paths, I chose to look at it fromthe view point of Materials Management. I have tried to relate most MMconcepts to this industry.Some key points about this industry are as follows:a. Valued at INR 4,300 croreb. Has the Amul brand as the major market player (38% share)c. Each brand has a different supply chain form associated with it.My focus is on the ice cream brand Amul, owned, produced & marketed bythe Gujarat Milk Marketing Federation (GCMMF). It is a somewhat uniqueorganization because it is essentially a combination of various dairycooperatives. Another surprising fact is that most of these cooperatives arerun by farmers, the main suppliers of raw material (milk).I chose the ice cream industry because of the following reasons:a. It provides key insights into Procurement, Production & Supply Chain Management.b. I wanted to do something different than my peers.c. The industry has been explored from the Marketing, Finance & Sales angles. Not much emphasis has gone into the Materials Management / Supply Chain aspect. Below is the market structure of the Indian Ice Cream industry:
  4. 4. BEST PRACTICES IN MATERIALS MANAGEMENT:In this section, I will try to reflect on the best practices used by Amul inrelation to Materials Management.I have often come across the term “Best Practices” in many books & evenduring my tenure as an IT professional, but never fully understood it until Istarted researching for this assignment. From Wikipedia, I got the followingdefinition:Best practices are generally-accepted, informally-standardized techniques, methods orprocesses that have proven themselves over time to accomplish given tasks.From what I have learned & experienced, I believe Best Practices are tools &techniques used by organizations to achieve specific objectives over givenperiods of time. You define a process, set the necessary guidelines & policies,provide the framework, complete each task in the process and measure theoutput, compare the methods used with past approaches & set them asbenchmarks against which all future tasks are measured. Best Practices wouldalso involve the appropriate strategies used to complete tasks in the leastpossible time.So what are Amul’s best practices when it comes to Materials Management?Let’s list them down one by one:1. An efficient cold chain network. Amul has the largest cold chain network (over 18000 refrigeration units) in India. There are temperature data loggers & RFID tags in place, used to monitor the temperature history of the truck, warehouse etc. Additionally, there are Chilling Units in place inside the Dairy Co-ops as well as in the trucks carrying the milk.2. An efficient procurement mechanism – bringing the suppliers & consumers closer. Suppliers do the procurement via Dairy Co-ops, who in turn send the raw material to various dry & cold warehouses, and ultimately it ends up as a packaged product sold to the consumer. This is not followed by other ice cream manufacturers such as Vadilal, Havmor, Mother Dairy, etc.3. A precise Supply Chain – This is lacking in most ice cream manufacturing units. Because milk is directly sourced from the farmers, it is cheaper to procure. Most market players outsource this part to dairy
  5. 5. farms. Also the distribution channel is not as effective as that of Amul. Plus, with their unique “Umbrella Brand” strategy, the Supply Chain becomes even more effective because the amount of milk sourced would be enough not just for making ice creams, but other products as well.4. Effective Use of Information Technology & Automation – The presence of EIAS, GIS and DISK makes Amul a formidable presence in the entire ice cream industry. The integration of ERP with the military- precision Supply Chain provides scope for effective forecasting, enhanced milk production capabilities, and inventory tracking & management.In further sections, I shall cover 2 main areas of MaterialsManagement that are vital to this organization’s success.
  6. 6. SOURCING & ITIn this section, we take a look at two key areas where Amul utilises keyconcepts of both materials management as well as supply chain management.Before going on to describe these, here is the Supply Chain of the GujaratMilk Marketing Federation (GCMMF), which makes the brand “Amul” and itsrange of dairy products:
  7. 7. The figure above is a simple form of GCMMF’s Supply Chain. However, it isnot all that simple – in fact, this Supply Chain is one of the most complicatedones in the world. What intrigued me most about this network was theimpeccable efficiency & immense precision with which GCMMF has managedall these years. The core aspects that make this network “tick” are:a. Sourcingb. IT (a relatively new addition to this set up).SOURCING:At first glance, it is easy enough to understand that any firm involved in thedairy business uses milk as raw material. An image of cows being milkedimmediately springs to mind. However, the farmers who collect the milk forthe various co-operative societies & unions (that make up the GCMMF) usebuffalo milk as the chief source of raw material for making ice cream. Anotherfact that interested me was how the sourcing was done. Farmers take themilk they have collected in cans (taking care to see that it doesn’t get spoilt)to the nearest Milk Collection Centre. In the figure above, this CollectionCentre is also called the Village Dairy Co-op. There are many such units allover the state of Gujarat. The farmers line up at the Centre, “deposit” themilk, get paid for the amount they have brought, and leave.Each Collection Centre has a daily target, something like 10 litres of milk areto be collected (for example). Such targets are called Milk Quotas. Once theQuota for the day is fulfilled, the collected milk is placed in Chilling Units toensure that it is fresh and ready for processing. If the designated CollectionCentre is not equipped with a Chilling Unit, it immediately sends the gatheredraw material to the nearest Co-op that has one. The advantage here is – allsuch Collection Centres are very close to each other, so the milk has very littlechance of getting spoiled.In summary – milk produced directly from cattle is sold by farmers to variousDairy Co-operatives that form the GCMMF. Such Co-ops store this milk in theirChilling Units, or send it across to other Co-ops that have such units. With thiskind of strategy, the federation’s daily milk procurement is a staggering 12million litres per day. Also, the logistics & distribution of milk to customersis handled by third parties while the federation focuses on core dairyactivities. Such activities include:
  8. 8. a. Preparing production plans at different Unions so that each gets a fair return on its capacity & market requirement matches the different strengths of each Union.b. Maximizing the network surplus – excess milk generated.c. Ensuring that all Unions have equity on realizing the surplus – this means that if there is surplus milk generated, it is sent to those Unions who are falling short of their Daily Milk Quota.Why does this form of sourcing make it a best practice?This is a tricky question to answer. I think that the sourcing used by Amul iseven more innovative than that of its competitors. The reasons are:1. The “middleman” concept is eliminated here. Amul takes its milk directly from the farmers. This is quite unlike the practices used by other ice cream manufacturers.2. There is a direct link between the producer & the consumer. By using this strategy, Amul is able to maintain a healthy business relationship & stay ahead of its competitors3. It becomes a best practice in terms of the overall profits generated. Amul’s sourcing is one of the key factors that helped it grab the largest market share in the ice cream sector.
  9. 9. IT IN MATERIALS MANAGEMENT:With such a large & efficient supply chain, GCMMF would be expected to rollin profit. However, the following problems were encountered, whichnecessitated the use of Information Technology & Automation:1. There was an indirect connection between Producers (farmers) and the Consumers (general public).2. Producers were unable to forecast productivity accurately and in time.Then came the solution – Information Technology. Within a short span oftime, IT enabled the Supply Chain to be carried out with even more military-like precision. Following are some of the features that were implemented:a. Installation of Automated Milk Collection System Units (AMCUS).b. Implementation of Enterprise wide Integrated Application System (EIAS). This covers a wide array of operations such as market planning, inventory control, quality control management, etc.c. Another brilliant initiative – establishing a Dairy Information System Kiosk (DISK) – was undertaken by IIM Ahmedabad. Its purpose was to ensure that the automated collection of milk would be supplemented by comprehensive data analysis & choosing the best decision to help in improving the collection process. More data means faster decision making, faster decision making leads to better forecasting, better forecasting enables creating precise MPS & Production Plans, which in turn facilitate better Capacity Requirement Planning.How does all this tie up with the Supply Chain? The answer is simple. Ateach phase of the Supply Chain, EIAS can be plugged in. Thisparticular software is platform-independent (it can be used in anysystem) and also facilitates quick decision making. I say this becauseit is easier to get a consolidated report, at each stage of the entire supplyprocess, so that GCMMF can track the status every step of the way. In a way,it incorporates the Monitoring & Control aspect of Project Management.
  10. 10. One final feather in GCMMF’s cap is the use of the Geographic Information System (GIS). It is very similar to the Global Positioning System (GPS). Using the map of India with the GIS, the federation plots the zone/depot (milk depot) boundary, along with pointers for zone, depot & distributor locations. The fun continues when, along with the various locations, supporting sales data (for each product) also pops up. This provides the following advantages: 1. GIS is used by Amul to plan business activity at the sourcing / collection level. 2. Enables the company to forecast milk production according to each region, & suggest corrective measures (if any). The Master Production Schedules (MPS) & Production Plans can then be formulated accordingly. Below is the Information Structure used by Amul:Why is IT considered as a best practice in the industry? All major players in this industry have now realized the importance ofInformation Technology – more specifically, gathering, storing & delivering data in astructured, presentable format. Some, like Kwality Walls (marketed by HUL), havestarted implementing SAP by partnering with various service providers (such as TataConsultancy Services, Deloitte, etc.). Though these initiatives are quite recent, theyare well on their way to become Best Practices (per the definition given in the
  11. 11. previous section). I do not know for certain whether these will be replaced by betteralternatives, but ERP & IT are here to stay. If that is what it takes to generateprofits in the long run, then so be it – this is the motto followed by most icecream companies now. With the formation of the Indian Ice Cream Manufacturers’Association, it is widely expected that IT will, in a short duration, establish itself as akey component of this industry.
  12. 12. INDUSTRY TERMINOLOGIES & LEARNINGS FROM THISASSIGNMENT:Frankly speaking, I’ve never had an assignment that required me to go intothe nitty-gritties of one of the biggest industries ever. What this has done is-it has made me stop, pause, think & review whatever I’ve learned so far.Being a former IT professional, I didn’t think I could cope with the conceptsof Materials Management, Supply Chain, etc. So far, it has been the bestassignment ever given to us. The reasons are:1. It forced me to think long & hard2. It has generated curiosity in me to better understand the ice cream manufacturing process & figure out ways to improve on the IT as well as Sourcing portions of this Supply Chain3. It has opened up a few interesting career choices. I came across various industry terminologies while working on this assignment. Some of them are: Cold Chain Warehousing Inventory Procurement Sourcing Supply & Distribution Logistics In conclusion – I hope to have benefitted from this assignment as it has given me a clearer picture of the Industry. We could use some more assignments on such lines to broaden our understanding of basic industry concepts. And like I mentioned earlier, such an endeavour does open up a few alternative career choices.BIBLIOGRAPHY:
  13. 13. www.amul.com (for the Supply Chain diagram)http://en.wikipedia.org/Cold_Chain (for definition of the term)www.rediff.com/business/the-extraordinary-story-of-Amul.html (for statistics)www.dare.co.in (for the Market Structure)One on one interaction with Mr Vipin Sharma (PRN # 96), who has worked inthe Projects section of GCMMF- for the Supply Chain & Material Flow