Indian Agricultural Produce Distribution System

Towards an Integrated Agri Produce Flow

Professors
S. Raghunath and D. Ashok
Research Scholars:
Puneet Prakash Mathur and Thomas Joseph
Indian Institute of Management, Bangalore
1 IIM Bangalore
 In the Indian Manufacturing Context

•It is customary to refer to various entities as supply chain players.

•Players are beginning to regard effective supply chain management

as a team activity.

•“It is the supply chains that compete, and not individual businesses”-
is an accepted axiom

What about the Agri Produce Supply Chain?

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The Indian Agricultural Setting

• Rural Population : 72%

• Depend directly or indirectly on agriculture : 72%

• Self-sufficient in food-grain production

• Share in India’s GDP is just : 25%

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The Context of Indian Fresh Fruit and Vegetables industry

• Second largest producer of vegetables in the world

– Second only to China
– accounts for about 15% of the world’s production of vegetables

• Largest producer of fruits in the world

– accounts for about 8% of the world’s production of fruits

• constitute around 10% of the total agricultural production of the

country (Approximate size Rs 25,000 crores)

• Expected size of food industry : Rs 500,000 crores

– Expected size by 2005
(FAIDA Revisited – Realising the potential, January, 2004 by McKinsey
& Company prepared for CII)

… F&V production in India is high, and opportunities in the field are large

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Yet… The Efficiency Of The Agri Produce Supply Chain Is Not
Even A Patch On The Indian Manufacturing Supply Chain

 Numerous intermediaries

 High Level of Wastages

 Lack of transparency – prices, availability, demand, customer

preferences

 Poor Infrastructure – Storage, Packaging, transportation / no cold chain

 Poor linkages in the marketing channel

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Our Field Study

Examined following areas

 Role of each intermediary in the traditional channel

 Quality, hygiene & shelf life of agriculture produce

 Wastages at various stages of distribution system

 Price received by farmer vis-à-vis end-consumer price

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Field Study : Scope

• Cultivation area covered

– Hosakote & Kolar taluks of Bangalore

• Wholesale markets covered

– New Kalisaipalyam Market,Bangalore – Vegetables
– Binipet market, Bangalore– exclusively for Banana
– Yeshwantpur APMC, Bangalore

• Vegetables and fruits selected for study

– Tomato, Potato, Cabbage, Cauliflower and Banana

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Numerous Intermediaries

Farmer

Consolidator

Wholesaler

Semi-wholesaler

Retailer

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High cumulative wastages across the supply chain varied from
24% (for potato) to 40% (for tomato)

Description Cumulative Wastage

Potato 24%

Cauliflower 24%

Banana 30%

Cabbage 36%

Tomato 40%

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Way Forward

Is the way forward then…..

• Strengthening value added-essential activities

• Total elimination of non value added activities

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Lack of Transparency-Unacceptable Inequity in Farmer’s Remuneration

Produce Farm gate Retail Price Retail to Farm

Price (Rs) (Rs) gate ratio
Tomato 2 8.2 4.1

Potato 6.6 12 1.8

Banana 5 9 1.8

Cabbage 5.5 9.5 1.7

Cauliflower 4 12 3.0

One of the highest in the world !

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Does The Supply Chain Promote Supply-Demand Transparency?

Agri produce moves downstream

Demand traditionally flows upstream link to link

Wholesaler Semi
Wholesaler
Consolidator Retailer
Demand
Farmer travels upstream
Customers

Agri Produce

moves
downstream
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 Field Study Findings : Price

•Price received by farmer varies from 24% to 58% of end consumer

price for different produces
Tomato Potato Cabbage Cauliflower Banana

Price paid by end 8.20 12.00 9.00 9.50 12.00

consumer (Rs. Per kg)

Price received by 2.00 6.60 5.00 5.50 4.00

farmer (Rs. Per kg)

Price realization by 24% 55% 56% 58% 33%

farmer as % of end
consumer price
Mark up (price paid by 310% 82% 80% 73% 200%
end consumer to the
price received by
farmer
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Each link within the supply chain embraces the following constituents

Perceived demand for produce

-purchase orders placed
-forecasts of what might happen

•At least one added value process

-which customer is prepared to pay for

•Information on current produce

-which may be ‘stale’ or alternatively ‘distorted’ or both

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Each link within the supply chain embraces the following constituents

• Disturbances affecting produce supply

-rainfall / water table / electricity / farm equipment / transport.

• Transmission lags or lead times

-which occur for both agri produce flow and information flow.

• Decision points
-where information on agri produce availability, purchase orders
and stock levels is brought together and acted upon.

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Potentially complex operation of supply chain is made worse

 This is because there is uncertainty associated with

• Perceived demand

• Quality of information

• Time associated with the many transmission lags

• both for agri produce flow and information flow

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Elemental Supply Chain Cycle time Best practice Achievable via
Process traditional target organized
operation Distribution format

1. Communication
Requirement from 1 Day 1 Hour 2 Hours
retailer to Consolidator
and farmer
2. Processing of Order-
from consolidator to 2 Days 1 Day 1.5 Days
farmer
3. Order Picking (Produce
picking) 1 Day 4 to 5 Hours 8-10 Hours
4. Transport of produce 8-10 Hours 2 Hours 4 Hours
5. Total order cycle time
(Placement 4 Days 2 Days 2½ Days
requirement on
farmer/Consolidator to
produce being
available)

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Are Customer Preferences Transparent To Supplier’s Suppliers?

Customer needs & expectations

Coordination Suppliers

Suppliers’ suppliers

Success is linked to the strengths of the weakest supply chain partner.

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Are Customer Preferences Transparent To Supplier’s Suppliers? …

• Hotels/Restaurants
• Catering joints
• Home kitchens
• Packaged food manufacturers
• Ministry of Defence!

Coordination
Suppliers

Suppliers’ suppliers

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Poor Handling & Infrastructure

• Poor and multiple handling

• Improper bagging without crating

• Lack of temperature controlled vehicles and storage facilities

• Poor roads, warehouses and market yards

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No Cold Chain

• Without post-harvest preservation , fruits and vegetables tend to ripen

or perish very quickly

• Cold chain helps preserve the fruits and vegetables for longer periods

• Removal of ‘field heat’ immediately after harvesting - within 2 hours

prevents ripening of fruits and vegetables

• It is estimated that post harvest losses in India are typically around 30%
- i.e. around Rs 30,000 Crores p.a!

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Poor Linkages in the Marketing Channel

Current Relationships Suggested Future Relationships

• Focus on produce sales transaction • Focus on retention of farmer as a
valued supplier
• Focus on produce as a commodity • Focus on produce differentiated
according to benefits

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Poor Linkages in the Marketing Channel

Current Relationships Suggested Future Relationships

• Short time scale • Long time scale
• Little emphasis on farmer • High commitment to farmer
information and advisory information and advisory service
service

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! Poor Linkages in the Marketing Channel

Current Relationships Suggested Future Relationships

• Moderate farmer contact • High farmer contact
• Quality is primarily the concern of • Quality is the concern of all
farmer

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So Why The Urgency ?

Agri Produce Perishability

Urgency

Search for efficiency

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Suggested Improvements : Dis-intermediation and participation of

organized players

Benefits to end consumers

Price (Rs per kg) paid by end consumer

Tomato Potato Cabbage Cauliflower Banana
Traditional distribution system 8.20 12.00 9.00 9.50 12.00
Modern distribution system 6.50 11.00 8.20 8.50 10.50
Improvement 21% 8% 9% 11% 13%

Benefits to farmers

Realization (in Rs) by farmer for 100 kg of produce

Tomato Potato Cabbage Cauliflower Banana
Traditional distribution system 79.15 561.60 426.00 390.00 342.00
Modern distribution system 98.76 583.44 430.13 474.36 353.40
Improvement in realization 25% 4% 1% 22% 3%

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A short video clip follows …

Thank You

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 Supply Chain
Issues In The
Distribution Of
Fruits & Vegetables

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 Orchard to Market Chain

5
4 6

3 7

8
2

1 9

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Some Observations On The Current Agri Supply Chain Scenario

• Primitive systems of cultivation

• Agriculture is disjointed as there is no linkage between production of

agricultural produce and its demand in the market

• Poor on-farm practices in harvest and post-harvest handling

• Poor infrastructure in terms of transportation, storage and market

• Difficulty in collection from numerous small farms

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Some Observations On The Current Agri Supply Chain Scenario …

• Negligent attitude towards post-harvest losses

• Lack of quality consciousness

• Absence of food processing units

• Faulty power supply

• Unavailability of modern cold storage

And yet, we are amongst the largest producer of

Fruits & Vegetables in the world !!

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Unshackling of the Supply Chain

• Efficiating of the supply chain can happen on many fronts:

• Physical

• Fiscal

• Process

• Technology

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Physical

• As the length of the chain gets reduced, each player has to do more
work

• The resultant crashing of the link(s) will enable economies of scale to

build up

• As competition hots up, size will matter and ‘mom-and-pop’ outfits will
need to consolidate to attain scale

• For this consolidated chain to be competitive, their procurement costs

must decrease

• Large players are most likely to be able to service this requirement

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Physical …

• The big players in the process, will bring in systematic ways of working
and better practices and improved infrastructure like cold chain

Ultimately Consumers are the winners

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Fiscal

• Acts of Law that do not offer a level playing field will need to be
re-looked at (e.g. The APMC Act)

• Introduction of uniform tax rates will encourage the disbanding of

‘artificial’ and fragmented links like C&F Agents in each state

• Impact of issues relating to subsidies will need to be studied for

relevance in current context

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Process

• The supply chain business processes will need to be revamped in line

with changing or improving practices

• Adversarial relationships (e.g. with the wholesalers) will need to be

converted into one of genuine ‘partnerships’

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Technology

• Farm production technologies will need to be modernised

• Usage of IT in agri-business will need to be enhanced

• Linkages between farmers and the other players in the chain will need
to be strengthened and IT offers this opportunity

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Grower

• Full risk borne at every stage

• Marginal land holding

2
• Disconnect with the market place

All pain – little gain !

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Harvesting

• Manual methods

• Poor storage conditions

• Timing harvesting with transport arrival

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Packaging

• No grading or sorting

• Poor packing

• Inadequate processing capability

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 • Poor storage conditions

• Manual material handling

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Improvements in the Distribution System

Can the Indian agri-produce distribution system be improved?

• Adopt the global best practices which are present in developed countries

• A model worked-out for the select produce (of the field study) based on
above showed better realization to farmers and lower prices for end
consumers

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Improvements in the Distribution System

Adopt the global best practices which are present in developed countries
• Storage
– Post harvest storage facilities
– Collection centers
– Cold chain
• Packaging
– Special purpose containers to prevent transportation damages
– Protection from contamination
– Not imparting any toxic substance
• Handling
– Specialty handling tools and equipments
• Transportation
– Freighters
– multi modal transport services
• Logistics service provider
– Storage, warehousing and material handling services
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Improvements in the Distribution System

Adopt the global best practices which are present in developed countries

• Value added services

– Grading, sorting and packaging facilities leading to standardization

– Ripening and primary processing facilities

… adoption of good post harvest practices can result in significant cost savings
due to wastage reduction and economies of scale

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Suggested Improvements : Dis-intermediation and participation of organized

players
• Illustrative example of tomato for establishing the benefits of organized
distribution formats.
Current System Modern System

Producer Processor Realisation

Price : Rs. 2.00 Up By 25 %
Wastage : 20% Due To Reduction
Producer
In Wastage
Price : Rs. 2.00
Wastage : 10%
Processor
Consolidator
Agriculture Market Yard
Commission : 10%
{Traders
Wastage : 8% / Commission Agent Consolidator
1 ~ 2 % Commission} Commission : 10%
Wastage : 2 %
Organised
Distribution Outlets
Market Wholesaler
Price : Rs. 2.50 Price : Rs. 3.33
Wastage : 5% Wastage : 5 %

Overall
`Price Price
mark-up mark up
Retailers
Semi–Wholesaler
310% 225% Price : Rs. 6.50
Price : Rs. 3.33
Wastage : 5% Wastage : 10%

Retailers Ultimate Consumers Ultimate Consumers

Price : Rs. 8.20 Price : Rs. 8.20 Price : 6.50
Wastage : 10%

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And The Winner Is ….. (Note :All figures in %)

(with
Modern (with same Modern
Traditional System ration
System prices System
alizati
Stakeholder at
on of
each
return
level)
s)

Gross Gross
Waste Gross Margin Waste Waste
Margin Margin

Farmer 20.0 10.0 10.0

Consolidator 8.0 10.0 2.0 10.0 2.0 10.0
Wholesaler 5.0 10.8 5.0 31.4 5.0 10.0
Semi-wholesaler 5.0 13.7 - - - -
Retailer 10.0 54.9 10.0 43.1 10.0 50.0
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Total
 Thank You

D Ashok
ashokd@iimb.ernet.in

49 IIM Bangalore