Food. supply chain. improving india s

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1 improving india s Food supply chain To become a global leader in food supply, India needs to replace its fragmented and wasteful produce-supply chain with a modern and efficient one. A supportive food processing industry will also help improve the farm-to-plate supply chain, writes professor N. Viswanadham 28 september 2008 supply chain management & logistics 2.0

2 When it comes to food production, India can claim an impressive collection of rankings. It is the second largest producer of fruits and vegetables, second highest producer of milk, fifth largest producer of eggs and sixth in fish. Given this record, it becomes a little difficult to explain why it does not have a place in the top-ten list of food exporting countries. It is here that the real revolution starts, because India has one of the most fragmented produce-supply chains in the world. Lack of adequate cold chain infrastructure and a supportive food processing industry leads to wastage of about 20 per cent of all foods produced. Conservative estimates put processing levels in the fruit and vegetable sector at 2 per cent, meat and poultry at 2 per cent, milk at 14 per cent, fish at 4 per cent, bulk meat de-boning is to the tune of 21 per cent. As of now, the food processing sector, constitutes only 14 per cent of the manufacturing GDP, which amounts to a product value of Rs 2,80,000 crores. So is it possible to transform this archaic food system, which is so deeply entrenched and wasteful, into a modern efficient one that makes India the food basket of the world? To answer this we need to understand the country s food supply chain. The Indian Food Processing Industry India with its billion-plus population provides a large and growing market for food products. Food products are the single largest component of private consumption expenditure, accounting for as much as 49 per cent of the total spending. Furthermore, the upward mobility of income classes and increasing need for convenience and hygiene is driving demand for perishables, non-food staples and processed foods. Though companies like HLL, ITC, MTR have introduced some innovative heatand-eat dishes with reasonably good packaging, hygiene and quality issues remain since there is a fair amount of manual handling. While domestic companies like Dabur, MTR, ITC, Godrej and Amul are aggressively entering the food chain, multinationals are also gradually making their presence felt Cargill and Conagra in agri-inputs, Tropicana in food processing and Metro in wholesaling. However, the pace is slow in the food sector when compared to IT and pharma. India is still to get its share of billion-dollar players in the food industry like China and Philippines where the companies are achieving sales exceeding US $ 1 billion. How can India become a leader? If India has to become a leading global food supplier, it needs to put in place an agile, adaptive and efficient supply chain. While the country has a distinct advantage in terms of diversity in population with several religious groups and different food habits, the food supply chain is complex, with perishable goods and numerous small stake holders. In India, the infrastructure connecting these partners is weak. Each stake holder, be it the farmer, the wholesaler, the food manufacturers, the retailer, all work in silos. There is complete absence of demand forecasting, with farmers trying to push into the market whatever they produce. What needs to be introduced in the food supply chain are best practices like data integration, financial flow management, supply-demand matching, collaborative forecasting, information sharing and goods movement synchronization through efficient transport scheduling. Cold chain-intensive supply chains should take advantage of technology improvements in data capturing and processing, product tracking and tracing, synchronized freight transport transit times for time compression along the supply chain and supply-demand matching. The supply chain needs to be designed and built in an integrated THE ideal supply chain The food supply chain can be subdivided into a number of sectors. While agriculture, horticulture, fisheries and aquaculture come in the primary-producers category, the manufacturers, who process the food for ready-to- cook or eat format, along with the packaging companies come in the intermediate stage. The retailers, wholesalers and caterers comprise the last part of supply chain. At each stage, value is added by the new ownership such as processors, distributors, packers, etc., and the cost and profits are part of the business. The food items can go to the final consumer from any of the three stages from farmers in the form of fresh produce, to the caterers directly from the manufacturer, and finally from the retailer to the consumer. The movement of goods from one stake holder to another is facilitated by the in-house or 3PL service provider. Information management is done by all stake holders and their information systems are all interconnected seamlessly. This is the food chain system followed in advanced countries. In India and other developing countries, the state of the food chain is more fragmented and primitive. supply chain management & logistics 2.0 september

3 manner, alongwith the processes of new product development, procurement and order-to-delivery processes, well-designed and well supported by software. There are several regulatory changes that need to be made all along the supply chain so that they are consistent and mutually reinforcing. Introduce supply chain expertise There is need to embrace the Efficient Consumer Response (ECR) concept, which was introduced in the US in the nineties and is now followed worldwide in grocery supply chains. ECR refers to a set of strategies that aim to get companies across a supply chain to work closely to serve their customers better and at a lower cost. Consumers benefit from improved product availability and choice, while distributors and suppliers derive better efficiency and cost savings. Also collaborative planning, forecasting and replenishment have yielded substantial savings The FOOD SUPPLY CHAIN ECOSYSTEM The Food chain ecosystem is formed through the participation of all stake holders, including farmers, seed growers, merchants, transporters, wholesalers, retailers, financial institutions and insurance companies. Information sharing is essential for generating efficiencies. In advanced countries, retailers like Walmart, Tesco, etc. have become the channel masters of food supply chain taking over from the food manufacturers. In India, there is no real channel master managing the supply-demand situation and coordinating the supply chain and managing the logistical activities. This provides a tremendous opportunity for smart players to enter the growing market retailing. The only thing to keep in mind is that infrastructure capital outlays are high and returns are long term. There are also various risks associated with owning a cold chain. Some of these include country risks, monsoon risks, crop or raw material supply failures due to pests, diseases and partner risks. Then there are sticky points like high taxes on processed food, high import duties and nascent contract farming which make profitability look like a big issue in India. 30 september 2008 supply chain management & logistics 2.0

4 for retailers. Relationship between the stake holders in a supply chain is of paramount importance for ECR, CPFR and other relationship paradigms to work. Lower Food Packaging Costs Packaging is one area that has assumed critical importance as shelf-life becomes limited and hordes of products compete to attract the consumer. Realising the growth opportunities linked to it, companies from different sectors have jumped in to the packaging bandwagon. This has opened the sector for introduction of modern technology and also the entry of foreign players. Given that the cost of packaging ranges anywhere from 10 to 64 per cent of the total production costs, efforts should be made to cut costs through use of manufacturing automation and economies of scale. Need for Standards Standardization is a powerful tool for improving supply chain efficiency. There are two kinds of standards in the food supply chain. The first one is the food standard, which is related to the content, the manufacturing process and the packaging, etc. There are several such standards for dairy, poultry, etc. The second standard is about the logistics and IT systems, like standardization of cartons, pallets and IT software so that seamless transfer of goods and information is possible. Standards enable partners across the supply chain to enjoy increased productivity and economies of scale due to better compatibility and interoperability of their systems and processes. Compliance with Food Safety and Hygiene Standards With food safety assuming growing importance in world markets, much of India s success in doing business will depend on its ability to meet the increasingly stringent food safety standards imposed in developed countries. The increase in world food trade and the advent of the Sanitary and Phytosanitary (SPS) Agreement under the WTO have lead to increasing recognition and adoption of food safety measures. Compliance with international food standards is a prerequisite to gaining a higher chunk of world food trade pie. Training The food supply chain is going through a metamorphosis, which means the system has to be supported through new organizational forms manned by specialists. Training, coaching, counseling and mentoring have to be extended to all parties in the supply chain. For example, training sessions should be provided on important logistics systems like cold chain management to raise the knowledge level and awareness on the importance of implementing the cold chain management. This will reduce breakdowns in maintaining the required temperature throughout the supply chain. The same applies to other areas in the food supply chain such as procurement, retailing, etc. Multiple Business Models The food processing industry supply chain starts at the farm and ends with the consumer. The local consumer could be served though home delivery or through a retailer or a neighborhood kirana store. An international consumer could be served through food malls. Thus products need to be manufactured for local use and export. In each case, it is important to forecast the demand for the channels and serve the customer within the expected lead time. The service levels and the pricing will determine whether the customer will return. Standardization is a powerful tool for improving supply chain efficiency. Streamline Processes In India, there are several regulatory measures handled by a multitude of departments divided between the state and central governments. While some of this is inevitable, streamlining the process would be extremely productive. Further, research should be initiated to develop indigenous packaging materials, machines and laboratories for developing new food products and more importantly protocols for storage and processing food raw materials. Improving the Food Supply Chain Cold chain infrastructure. That the finance minister has finally exempted certain categories of refrigeration equipment from taxes shows that the Indian government is trying hard to improve the country s cold chain infrastructure. The new legislation has created fresh opportunities for 3PL service providers primarily, especially foreign players. Though there is 100 per cent FDI allowed in this sector, investments in cold chain infrastructure are capital intensive and yield slow returns. There is, however, a need to study the potential risks and the ROI for this activity. Third Party Logistics: The food supply chain is temperature sensitive and manual handling reduces the product quality and life. Hence, entry of logistics providers with air-conditioned trucks, automatic handling equipment supply chain management & logistics 2.0 september

5 and trained manpower can improve the chain. The service providers can also adopt state-of-the-art techniques such as cross docking that will reduce transit times and cut down on inventory. Food processing industry: This is one sector where 100 per cent FDI is allowed. Incentives are also offered to those interested in setting up processing plants either in Agri-Export Zones or outside them. Given the diverse population and religions found in India, there is scope for creating zones meant for specific communities. Thus, a halal hub could export its products to South-East Asia and the Middle East. Likewise, a vegetarian hub could reach out to vegetarians in India and abroad. Same way, there could also be organic food zones and sea food hubs. Retail revolution: Retail, one of the largest sectors in the global economy, is going through a transition in India. While globally, more than 72 per cent of food is sold through supermarkets, Indian consumers buy most of their food products from the 12 million-plus outlets which include handcarts, wet markets and neighbourhood kirana stores. The kirana stores usually have small spaces, lack cold storage facilities and have restricted capital. The Indian retail sector is estimated to have a market size of over $180 billion; but the organized sector represents only 2 per cent of this market. A strong retail front-end can also provide the necessary fillip to agriculture, food processing and other industries. Though 100 per cent FDI is not allowed in this sector, India has a retail revolution knocking on its doors. Several regulations along the supply chain constrain its expansion and functioning as a seed-to-feed chain. been only partially successful. This is because there are several regulations along the supply chain that constrain its expansion and functioning as a demand driven supply chain or seed-to-feed chain. Abolishing controlled prices, eliminating taxes on inter-state movement of goods, allowing farmers to sell directly to organized retail and removing restrictions on land holdings (which are currently circumscribed by land ceiling acts) leading to fragmented land holdings, are some of the issues that need active consideration. The backward integration of organized retail into agriculture also holds the potential of economies of scale and helps remove the large inefficiencies in the supply chain. India has practically everything going for it. It has cultivable land, it has all the seasons needed for production of all varieties of fruits and vegetables and it has a well-developed agribusiness system that works in its own, though chaotic, way. The only problem with this system is that a huge gap exists between what is produced and what finally reaches the consumer. By the time, the surplus and fresh produce makes its way to the markets, they have gone through several middlemen, travelled several roads, worsened in quality, increased in price and got wasted. If India has to offer the world a rich and healthy food basket, it has to build proper cold chain infrastructure, invest in applied research in post harvest technologies, get food processing plants working in various sectors and develop its food retailing sector. Till then, the surplus food produced in India remains out of its food basket. The way ahead While several foreign organized retailers have vowed to improve the farm-to-plate supply chain, they have The writer is the executive director of GLAMS at Indian School of Business. You can reach him at n.viswanadham@gmail.com. 32 september 2008 supply chain management & logistics 2.0