Innovations In Fresh Vegetable Supply Chain4 An2

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Innovations In Fresh Vegetable Supply Chain4 An2

  1. 1. Innovations in Fresh Vegetable Supply Chains : Risk Reduction as Driver of Innovations M.G Subramanian, D.N.Suresh, Janat Shah, Uma Kausik Supply Chain Management Centre IIM Bangalore
  2. 2. Disclaimers <ul><li>No new data is being presented </li></ul><ul><li>The attempt is </li></ul><ul><ul><li>to conceptualise fresh vegetables supply chains as evolving channels of connection between customer and supplier </li></ul></ul><ul><ul><li>to seek critiques, ideas </li></ul></ul><ul><ul><li>to identify areas most conducive to contribution from IIMB Supply Chain Management Centre </li></ul></ul><ul><ul><li>to invite partnerships for our future work </li></ul></ul>
  3. 3. Our Approach 1: Blend micro and macro views <ul><li>Macro and microviews need to be balanced </li></ul><ul><ul><li>common problems (e.g) infrastructure quality, credit availability, </li></ul></ul><ul><ul><li>critical differences driven by </li></ul></ul><ul><ul><ul><li>producing / consuming areas: geographic distribution and diversity </li></ul></ul></ul><ul><ul><ul><li>state of practice + infrastructure > Land, labour, capital productivities </li></ul></ul></ul><ul><ul><ul><li>production mix </li></ul></ul></ul><ul><ul><ul><li>distance to markets </li></ul></ul></ul>There isn’t ONE Vegetable Supply Chain ; There are 100s needing reengg !
  4. 4. Producer Commission Agent Primary wholesale trader Retailer Local consumer Itinerant traders Shipper Secondary wholesale trader Outside consumer Cooperative/ Regulated Market I I II III IV V VI VII Fig. Market channels for vegetables in India Source: AVRDC (Sermadevi R. Subramanian, Sivam Varadarajan, and Muthiah Asokan)
  5. 5. Our Approach-2: Multiflow Channels are Useful Models <ul><li>Marketing Channels are a useful model/ metaphor for fresh vegetable supply chains too </li></ul><ul><li>Channels have participants facilitating flows from producer to consumer and vice versa </li></ul><ul><li>Multiple channels and channel functions will coexist in competition till a few deliver superior value to one or both – the consumer and the producer </li></ul><ul><li>The discovery of “ the few best” is an evolutionary process assisted by interventions </li></ul>
  6. 6. Producers Physical Possession Ownership Promotion Wholesalers Retailers Consumers Industrial and Household Physical Physical Possession Ownership Possession Ownership Promotion Promotion Financing Risking Ordering Payment Financing Financing Risking Risking Ordering Ordering Payment Payment The arrows above show flows of activity in the channel (e.g: physical possession flows from producers to wholesalers to retailers to consumers). Each flow carries a cost. Some examples of costs of various flows are given below: Marketing Flow Cost Represented Physical Possession Storage and Delivery Cost Ownership Inventory Carrying Cost Promotion Personal selling, advertising ,sales promotion, publicity, public relations costs Negotiation Time and legal costs Financing Credit terms , terms and conditions of sale Risking Price guarantee, warranties, insurance, repair, and after sales service costs Ordering Order- Processing costs Payment Collections, bad debts cost Negotiation Negotiation Negotiation Marketing Channels, Anne Coughlan et al
  7. 7. Case Study:Bangalore <ul><li>Channel players don multiple hats: </li></ul><ul><ul><li>fluidity in channel roles: </li></ul></ul><ul><ul><li>“ all commission agents are not equal” </li></ul></ul><ul><ul><li>financier agents seem quite prevalent </li></ul></ul><ul><li>Contracting even from organised retail is informal based on trust </li></ul><ul><li>Unmanaged Perishability - > </li></ul><ul><ul><li>No buffers for smoothening flows </li></ul></ul><ul><ul><li>Price, the only lever to equilibrate short term supply and demand at every hand-off point in the channel </li></ul></ul><ul><ul><li>Uncontrolled wastages </li></ul></ul><ul><li>Markups: Higher closer to customer ? </li></ul><ul><li>A ‘noisy’ channel that at best communicates price and quantity ‘signals’: </li></ul>
  8. 8. Our Approach-3 Risk is a critical factor for characterisation <ul><li>Supply Chains: A set of related flows </li></ul><ul><ul><li>Physical </li></ul></ul><ul><ul><li>Informational </li></ul></ul><ul><ul><li>Financial </li></ul></ul><ul><li>Risk/Uncertainty impacts all flow classes </li></ul><ul><li>Learning from Industrial Supply Chains : </li></ul><ul><li>“ Chains work efficiently when uncertainties are minimised ” </li></ul><ul><li>New configurations of flows may involve both specialisations and integrations of the critical flows </li></ul>
  9. 9. * Information was obtained through personal discussions with scientists of IARI, New Delhi. Source: Vegetable Demand and Production in India: Long-term Perspective Praduman Kumar, Pramod Kumar and Surabhi Mittal, Indian Agricultural Research Institute, New Delhi.
  10. 10. Source: “Vegetable Demand and Production in India: Long-term Perspective” from Praduman kumar, Pramod Kumar and Surabhi Mittal, Indian Agricultural Research Institute, New Delhi.
  11. 11. Price & Wastage Flow Source :(5) From competition at home to competing abroad :World Bank H: Markups increase with risk assumed by the channel player ? Q: Is this risk/reward structure “desirable”? Perishability Source: S. Raghunath and D. Ashok; June 2004 (IIM- Bangalore) Producer / Farmer: Price Rs. 2.00; Wastage: 20% Consolidator: Price: Rs.2.20; Wastage: 8% Market Wholesaler: Price Rs. 2.50; Wastage: 5% Semi-Wholesaler: Price Rs. 3.33; Wastage: 5% Retailers: Price Rs. 8.20; Wastage: 10% Commodity- Tomato; State - Karnataka
  12. 12. Uncertainties compound! Physical Risks Financial risks Information risks Deming: Reducing variability is key to process control !
  13. 13. Some Traditional Practices in Risk Management <ul><li>Shandis are held on fixed days of the weeks per location </li></ul><ul><ul><li>> reduce timing risk in demand, aggregate </li></ul></ul><ul><ul><li>> allow predictable deployment of farmer’ resources </li></ul></ul><ul><li>Specific festivals/weekdays/lunar phase emphasize specific consumption (e.g ) ‘no meat days’ </li></ul><ul><li>> narrow demand uncertainty </li></ul><ul><li>Outlets cluster </li></ul><ul><ul><li>> easier price discovery and convergence </li></ul></ul><ul><ul><li>> specialised services (e.g) waste disposal, ’seconds’ at modest aggregation of scale </li></ul></ul>
  14. 14. Modern Retail Formats :Practices embedding Risk Management <ul><li>Operational </li></ul><ul><li>Take advantage of time-of-day, day-of-week patterns to minimise labour, stocking optimise route planning & deliveries </li></ul><ul><li>Understand neighbourhood customer segments </li></ul><ul><li>Loyalty programmes and data mining to optimise assortment, stocking </li></ul><ul><li>Strategic </li></ul><ul><li>Contract farming </li></ul><ul><li>Cold storage and cold transportation </li></ul>
  15. 15. Optimal Risk Mitigation Total Expected Cost Investment in Mitigation (Physical, Informational,Financial) Expected opportunity loss because of residual risk Optimal investment level on risk mitigation Cost
  16. 16. Why is that view justified? Returns to other inputs Returns to risk reduction An example is the ratio of incremental return to incremental cost spent in cropcare - ICRIER study * (cauliflowers) Mitigation costs Reduced Risks * Impact of organised retail on the unorganised Sector: Mathew Joseph et al
  17. 17. Optimal Risk Mitigation: Impact of improvement in investment cost drivers Total Expected Cost Investment in Mitigation (Physical, Informational, Financial) Expected opportunity loss because of residual risk Optimal investment level on risk mitigation Cost
  18. 18. Customer Price, Risk Reduction and Farmer’s Share- Giving it to the farmer Farmer’s share Supply Chain Costs Ph. Fi. In
  19. 19. Customer Price, Risk Reduction and Farmer’s Share- Giving it to the farmer Farmer’s share <ul><li>Returns of social investments- </li></ul><ul><li>Pass it to farmers </li></ul><ul><li>Enablers to improve bargaining power </li></ul><ul><li>Reinvest in favour of sector </li></ul>Ph. Fi. In Ph. Fi. In
  20. 20. Customer Price, Risk Reduction and Farmer’s Share- Giving it to the customer Ph. Fi. In Farmer’s share Ph. Fi. In
  21. 21. Reducing Risks <ul><li>Can target either outcome </li></ul><ul><ul><li>A) Keep customer price same, give greater share to farmer </li></ul></ul><ul><ul><li>B) Keep farmer’s earning same, pass the gains to customer </li></ul></ul><ul><ul><li>C) Mix </li></ul></ul><ul><li>Emerging organised retail will </li></ul><ul><ul><li>use B to draw customers, use financial and informational strategies in risk reduction. </li></ul></ul><ul><ul><ul><li>Bulking to reduce forecasting risk, informal bulk buying; in-store cold storage, pull-based replenishment </li></ul></ul></ul><ul><ul><li>use scale to get to C (compete with supply assurance and quality) </li></ul></ul><ul><ul><ul><li>Deep disintermediation, Contract farming; distribution centres with cold storage </li></ul></ul></ul><ul><li>Infrastructural and informational risk reduction can level the playing field for small farmers and traditional retailers </li></ul><ul><ul><li>Co-operatives to focus on risk reductions </li></ul></ul><ul><ul><li>Terminal markets </li></ul></ul><ul><ul><li>Informal risk pooling </li></ul></ul><ul><ul><li>Microfinancing thru self-help groups </li></ul></ul><ul><ul><li>Upgrading of traditional wholesale markets and outlets </li></ul></ul>
  22. 22. Future work directions for IIMB <ul><li>Study for a few specific vegetable supply chains on a regional basis </li></ul><ul><ul><li>Physical, Financial,informational </li></ul></ul><ul><li>Study optimal architecture for cold storage </li></ul><ul><ul><li>Characterise influence of perishability on short/long supply chain </li></ul></ul><ul><li>Model effects of improving infrastructure on risks and costs </li></ul><ul><ul><li>Transpotation, preservation </li></ul></ul><ul><li>Characterise scale effects of outlets, potential of risk pooling </li></ul><ul><li>Fair contracting models </li></ul>
  23. 23. Thank You Questions?

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