Thursday, 6 May 2010

Connecting Small Producers to Global Supply Chains: Importance of Local level Logistics - ITC eChoupal Case

A summary of the presentation made at World Bank, Washington DC on 6 May 2010

Customers served by the global supply chains look for consistent quality products that are cost competitive and delivered on time.

To meet these expectations while connecting small producers to global supply chains, four components of the local level logistics need to be managed. I will use agriculture to illustrate my arguments, but the same logic applies to several other non-farm outputs of small producers e.g. handicrafts.

The Local Components of Global Supply Chains:

Two of these are targeted at improving efficiency

  1. Logistics Costs
  2. Farm Productivity

And, the other two enhance effectiveness

  1. Produce quality aligned to market demand
  2. Safety in production and supply chain

Default characteristics of each of these components, in the emerging economies, constrain the small producers from achieving the desired objectives:

  1. When farmers sell their output to agribusinesses, avoidable additional logistics costs are incurred because the price is discovered only after quality check is done at produce consolidation points i.e. mandis (auction centers) that are some 25 km away from the farm gate. From mandis, the produce then moves to the warehouses of the processing units. This system is in vogue for nearly half a century, as there was no other go when the farmers are small, they live in widely dispersed villages and each one’s quality is different given the heterogeneity of farming conditions.
  2. For the same reasons of fragmentation, dispersion and heterogeneity, the delivery of agri extension (crop management knowledge) and other farm inputs viz. information, credit, seed, nutrients, crop protection chemicals, insurance etc., are uncoordinated. And, typically, this delivery is seen as a “last mile challenge”; hence there is no focus on building solutions for individual farmers keeping their unique contexts in mind. As a result, farm productivity tends to be much lower than the potential.
  3. On the quality front, these supply chains are great illustrations of “lemons problem”, where the real quality of the produce is not objectively factored into pricing at the mandi, eventually driving out the quality consciousness among the producers. The intermediaries, who make up for the missing infrastructure, act as Principals to transactions further aggravate the problem by blocking market signals & information flow along the chain.
  4. The product loses identity along the chain, due to indiscrete aggregation of the produce (of multiple producers) done by the intermediaries to maximize value for themselves. Varieties and grades get mixed up, giving no opportunity for the processors to determine blending ratios based on consumer preferences.

ITC eChoupal factors all these challenges and connects small producers to global supply chains efficiently and effectively:

  1. Quality factored price discovery in the village itself, by leveraging the power of Information & Communication Technologies and by co-opting a local farmer as Choupal Sanchalak to facilitate quality assessment.
  2. Bypasses the traditional intermediaries in the flow of information and market signals, yet leverages their physical handling capability in a weak infrastructure context, to manage the flow of goods & cash more efficiently, by co-opting them as Samyojaks.
  3. Using the same ICT platform to gather the crop management problems of individual farmers, builds “first mile solutions” in collaboration with experts at the back end
  4. Preserves product identity through the supply chain by defining the stack specifications, having already eliminated the vested interest of the intermediate principals by converting them into service providers.

Impact of ITC eChoupal on the four components of local logistics:

  1. Since the price is discovered within the village, the produce is now moving directly to ITC’s warehouses bypassing mandis, thereby eliminating non-value-adding handling expenses.
  2. With the context specific farming solutions offered, together with farm inputs, best practice adoption increased, thereby raising farm productivity and / or reducing the costs of farming.
  3. Since the quality is objectively factored into pricing, farmers are incentivised for improving quality. Free-flow of market signals on ICT infrastructure, is enabling production system to respond to consumer demand in terms of variety and quality.
  4. Since the sourcing is now directly from farmers, product identity is preserved along the chain with complete visibility provided to customers to determine their blends based on final consumer demand.

The result is a more efficient & effective connection of small farmers to the global supply chains, increasing their incomes and improving their ability to respond to markets.

9 comments:

  1. Excellent solutions for current scenerio of agriculture sir,
    By reading this blog Govt. can implment or remake certain policies and work culture in indian agriculture.
    Pvt. Corporate Agri players only can uplift of the falling agriculture.

    Welcome more blogs.
    vijaykumar.

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  2. Very nice and true analysis of the small farmers problems. I visited ITC chowpal in Maharshtra, and found that the prices offered by the mandi and e-chowpal are almost same, the farmers saves only on the brokerage/ loading unloading expenses in mandi. Whereas ITC saves noney by not paying any cess to APMC and get good quality produce at mandi price.

    Pl explain the scnario how ITC will help the small farmers get better deserved price for their produce.

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  3. Thanks Nitin :) Quality based pricing is one way ITC eChoupal gets the deserved prices to farmers. More importantly, by discovering prices in the village and additional choice of buyers now available, farmers are empowered to decide when and where to sell. Productivity improvement through extension work and quality inputs is the other income raising effort by ITC.

    Btw, ITC does pay the full APMC cess even if the produce is bought at eChoupals...

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  4. Thanks sir..for the clarification. I would like to know how there will be win-win situation for both private sector (like ITC) and the small farmers producer groups...Presently I am consulting to a alliance of NGOs, who are planning interventions to increase the income level of small and marginal farmers in Vidarbha, Maharashtra.

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  5. Nitin: The four points mentioned in the last para of this article are the typical win-win solution themes. I am happy to respond, if you would like to bounce any of your specific action plans off me (shiv.hyd@gmail.com)

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  6. Thanks Sir for a very positive response. I have feeling that government can only promise, but peoples and private sector of this country are going to deliver this time, as you explained in one of your writings. With the responsibility, in depth understanding of the issues and positive approach both will benefit mutually.

    Its my pleasure to share the action plans with you. I will be mailing you the concept shortly.

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  7. Great way of summarizing the e-Choupal initiative! Truly, this model is a win-win, in terms of high productivity and incomes for the farmers and quality product for the organization.

    I am sure, you would have faced several challenges (eg: infrastructural) in terms of providing real-time information in rural areas. Could you throw light on this?

    Once again, Kudos for conceptualizing and implementing this model.

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  8. Thanks Chandra :) Lack of infrastructure, of course, was a challenge; but that could be overcome with investments. That, in turn, required more innovative business models to recover those investments...

    Real challenges were in (1) dealing with the resistance from the traditional middlemen who didn't like improvement in farmers' bargaining power through access to information, and (2) convincing Government to reform agri sector, esp. APMC Act, Essential Commodities Act and Derivatives Trading...

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