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

Disclaimers

• No new data is being presented• The attempt is

– to conceptualise fresh vegetables supply chains as evolving channels of connection between customer and supplier

– to seek critiques, ideas – to identify areas most conducive to contribution from

IIMB Supply Chain Management Centre– to invite partnerships for our future work

Our Approach 1: Blend micro and macro views

• Macro and microviews need to be balanced– common problems (e.g) infrastructure quality, credit

availability,– critical differences driven by

• producing / consuming areas: geographic distribution and diversity

• state of practice + infrastructure > Land, labour, capital productivities

• production mix • distance to markets

There isn’t ONE Vegetable Supply Chain ; There are 100s needing reengg !

Producer

Commission Agent

Primary wholesaletrader

Retailer

Localconsumer

Itineranttraders

Shipper

Secondary wholesale

trader

Outsideconsumer

Cooperative/ Regulated Market

I

I

II

III

IVV

VIVII

Fig. Market channels for vegetables in India

Source: AVRDC (Sermadevi R. Subramanian, Sivam Varadarajan, and Muthiah Asokan)

Our Approach-2:

Multiflow Channels are Useful Models

• Marketing Channels are a useful model/ metaphor for fresh vegetable supply chains too

• Channels have participants facilitating flows from producer to consumer and vice versa

• Multiple channels and channel functions will coexist in competition till a few deliver superior value to one or both – the consumer and the producer

• The discovery of “ the few best” is an evolutionary process assisted by interventions

Producers

Physical

PossessionOwnership

Promotion

Wholesalers RetailersConsumers

Industrial andHousehold

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

Case Study:Bangalore

• Channel players don multiple hats: – fluidity in channel roles: – “all commission agents are not equal”– financier agents seem quite prevalent

• Contracting even from organised retail is informal based on trust

• Unmanaged Perishability - > – No buffers for smoothening flows– Price, the only lever to equilibrate short term supply and demand

at every hand-off point in the channel– Uncontrolled wastages

• Markups: Higher closer to customer ?• A ‘noisy’ channel that at best communicates price and

quantity ‘signals’:

Our Approach-3Risk is a critical factor for characterisation

• Supply Chains: A set of related flows– Physical– Informational– Financial

• Risk/Uncertainty impacts all flow classes• Learning from Industrial Supply Chains : “Chains work efficiently when uncertainties are

minimised ”• New configurations of flows may involve both

specialisations and integrations of the critical flows

Estimated post-harvest losses of vegetables in India

23.5

41.9 39.546.3

100

26.2 31.8

6 6.812.4 11.820.0* 19.521.720.0*16.913.8 9.8*

0

20

40

60

80

100

120Per cent share in total vegetable consumption

Post-harvest losses (per cent of production)

* 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.

Post-harvest losses of major vegetables in India

39

4

4.23

9.37.7

5.7

5.35.7

13.8 1.8

05

101520253035

Tomato Onion PotatoPe

rce

nta

ge

of

pro

du

cti

on

Farm Level

Wholesale Storage

Retail Stage

Storage

Source: “Vegetable Demand and Production in India: Long-term Perspective”from Praduman kumar, Pramod Kumar and Surabhi Mittal, Indian Agricultural Research Institute, New Delhi.

Price & Wastage Flow

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

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”?

Pe

rishab

ility

Uncertainties compound!Physical Risks

Financial risks Information risks

Deming: Reducing variability is key to process control !

Some Traditional Practices in Risk Management

• Shandis are held on fixed days of the weeks per location> reduce timing risk in demand, aggregate

> allow predictable deployment of farmer’ resources

• Specific festivals/weekdays/lunar phase emphasize specific consumption (e.g ) ‘no meat days’

> narrow demand uncertainty

• Outlets cluster> easier price discovery and convergence

> specialised services (e.g) waste disposal, ’seconds’ at modest aggregation of scale

Modern Retail Formats :Practices embedding Risk Management

Operational • Take advantage of time-of-day, day-of-week patterns to

minimise labour, stocking optimise route planning & deliveries

• Understand neighbourhood customer segments• Loyalty programmes and data mining to optimise

assortment, stocking

Strategic• Contract farming• Cold storage and cold transportation

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

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)

Mitig

atio

n co

sts

Reduced Risks

* Impact of organised retail on the unorganised

Sector: Mathew Joseph et al

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

Customer Price, Risk Reduction and Farmer’s Share- Giving it to the farmer

Farmer’s share

Ph.Fi.

In

Supply Chain Costs

Customer Price, Risk Reduction and Farmer’s Share- Giving it to the farmer

Farmer’s share

Returns of social investments-- Pass it to farmers

- Enablers to improve bargaining power

– Reinvest in favour of sector

Ph.Fi.

In

Ph.Fi.

In

Customer Price, Risk Reduction and Farmer’s Share- Giving it to the customer

Ph.Fi.

In

Ph.Fi.

In

Farmer’s share

Reducing Risks• Can target either outcome

– A) Keep customer price same, give greater share to farmer– B) Keep farmer’s earning same, pass the gains to customer– C) Mix

• Emerging organised retail will – use B to draw customers, use financial and informational strategies in risk

reduction.• Bulking to reduce forecasting risk, informal bulk buying; in-store cold storage,

pull-based replenishment– use scale to get to C (compete with supply assurance and quality)

• Deep disintermediation, Contract farming; distribution centres with cold storage

• Infrastructural and informational risk reduction can level the playing field for small farmers and traditional retailers

– Co-operatives to focus on risk reductions– Terminal markets– Informal risk pooling– Microfinancing thru self-help groups– Upgrading of traditional wholesale markets and outlets

Future work directions for IIMB

• Study for a few specific vegetable supply chains on a regional basis– Physical, Financial,informational

• Study optimal architecture for cold storage– Characterise influence of perishability on short/long supply chain

• Model effects of improving infrastructure on risks and costs– Transpotation, preservation

• Characterise scale effects of outlets, potential of risk pooling• Fair contracting models

Thank You

Questions?