Supply Chain Drivers For

Suraj Shanbhag

MS10A055

Supply Chain Drivers For Amul

Assignment 2 SCM

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

1

I. Introduction:

II. Drivers of the supply chain:

The major drivers of Supply chain performance consist of three logistical drivers & three cross-functional drivers. Logistical drivers:

Facilities

Inventory

Transportation Cross-functional drivers:

Information

Sourcing

Pricing Company’s supply chain can achieve the balance between responsiveness & efficiency that best meets the needs of the company competitive strategy.

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

2

I. FACILITY

Facility is the actual physical locations in the supply chain network where product are stored, assembled or fabricated. The two major types of facilities are:

• Production sites(factories)

• Storage sites(warehouses)

1) Factories can be built to accommodate one of two approaches to manufacturing:

a) Product Focus: A factory that takes a product focus performs the range of different operations required to make a given product line from fabrication of different product parts to assembly of these parts.

b) Functional focus: A functional focus approach concentrates on performing just a few operations such as only making a select group of parts or doing only assembly

2) Warehousing: There are three main approaches to use in warehousing:

a) Stock keeping unit (SKU) storage: In this approach all of a given type of product is stored together.

b) Job lot storage: In this approach all the different products related to the needs of a certain type of customer or related to the needs of a particular job are stored together.

c) Cross docking: In this approach, product is not actually warehoused in the facility; instead the facility is used to house a process where trucks from suppliers arrive and unload large quantities of different products. These large lots are then broken down into smaller lots. Smaller lots of different products are recombined according to the needs of the day and quickly loaded onto outbound trucks that deliver the product to their final destination.

For Amul:

The Gujarat Cooperative Milk Marketing Federation Ltd, Anand (GCMMF) is the largest food products marketing organisation of India. It is the apex organization of the Dairy Cooperatives of Gujarat. This State has been a pioneer in organizing dairy cooperatives and our success has not only been emulated in India but serves as a model for rest of the World. Over the last five and a half decades, Dairy Cooperatives in Gujarat have created an economic network that links more than 2.8 million village milk producers with millions of consumers in India and abroad through a cooperative system that includes 13,141 Village Dairy Cooperative Societies (VDCS) at the village level, affiliated to 13 District Cooperative Milk Producers’ Unions at the District level and GCMMF at the State level. These cooperatives collect on an average 7.5 million litres of milk per day from their producer members, more than 70% of whom are small, marginal farmers and landless labourers and include a sizeable population of tribal folk and people belonging to the scheduled castes.

The turnover of GCMMF (AMUL) during 2008-09 was Rs. 67.11 billion. It markets the products, produced by the district milk unions in 30 dairy plants, under the renowned AMUL brand name. The combined processing capacity of these plants is 11.6 million litres per day, with four dairy plants having processing capacity in excess of 1 million Litres per day. The farmers of Gujarat own the largest state of the art dairy plant in Asia – Mother Dairy, Gandhinagar, Gujarat – which can handle 2.5 million litres of milk per day and process 100 MTs of milk powder daily. During the last year, 3.1 billion litres of milk was collected by Member Unions of GCMMF. Huge capacities for milk drying, product manufacture and cattle feed manufacture have been installed. All its products are manufactured under the most hygienic conditions. All dairy plants of the unions are ISO 9001-2000, ISO 22000 and HACCP certified. GCMMF (AMUL)’s Total Quality Management ensures

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

3

the quality of products right from the starting point (milk producer) through the value chain until it reaches the consumer.

Some figures:

2.8 million milk producer member families • 13,759 village societies • 13 District Unions • 8.5 million liters of milk procured per day • Rs. 150 million disbursed in cash daily • GCMMF is the largest cooperative business with an annual turnover of Rs. 53 billion • Largest milk handling capacity in Asia • Largest Cold Chain Network • 48 Sales offices, 3000 Wholesale Distributors, 5 lakh retail outlets

II. INVENTORY

Inventory encompasses all the raw materials, work in process, and finished goods within a supply chain. Changing inventory policies can dramatically alter the supply chain’s efficiency & responsiveness. There are three basic decisions to make regarding the creation and holding of inventory:

• Cycle Inventory: This is the amount of inventory needed to satisfy demand for the product in the period between purchases of the product.

• Safety Inventory: inventory that is held as a buffer against uncertainty. If demand forecasting could be done with perfect accuracy, then the only inventory that would be needed would be cycle inventory.

• Seasonal Inventory: This is inventory that is built up in anticipation of predictable increases in demand that occur at certain times of the year.

For AMUL:

Every day Amul collects 447,000 liters of milk from 2.12 million farmers (many illiterate), converts the milk into branded, packaged products, and delivers goods worth Rs 6 crore (Rs 60 million) to over 500,000 retail outlets across India. The collected milk is stored in large silos and further processed. Since most of the products are highly perishable it is of utmost importance that the raw material inventory is maintained at a minimum. Thus by setting facilities close to the villages the raw material inventory in maintained at a minimum increasing the work in process inventory.

Also supply is always lesser than demand so seasonality and safety stock are not a consideration for the company.

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

4

III. TRANSPORTATION

Transportation entails moving inventory from point to point in the supply chain. Transportation can take the form of many combinations of modes & routes, each with its own performance characteristics.

For AMUL:

• Rails which is also very cost efficient but can be slow is used for products with large life spans. This mode is also restricted to use between locations that are served by rail lines.

• Trucks are a relatively quick & very flexible mode of transport. Trucks can go almost anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel fluctuates and the condition of road varies. Majority of the trucks are often capable of handling cold storage for transportation over long distances for perishable products.

IV. INFORMATION

Information serves as the connection between various stages of a supply chain, allowing them to coordinate & maximize total supply chain profitability. It is also crucial to the daily operations of each stage in a supply chain for e.g. a production scheduling system.

Information is used for the following purpose in a supply chain:

a) Coordinating daily activities related to the functioning of other supply chain drivers: facility, inventory & transportation.

b) Forecasting & planning to anticipate& meet future demands. Available information is used to make tactical forecasts to guide the setting of monthly & quarterly production schedules & time table

c) Enabling technologies: many technologies exist to share & analyze information in the supply chain. Managers must decide which technologies to use & how to integrate these technologies into their companies like internet, ERP, RFID.

For AMUL:

Amul and GCMMF acknowledged that development and growth could not be left to market forces and that proactive intervention was required. Two key requirements were identified. The first, that sustained growth for the long term would depend on matching supply and demand. It would need heavy investment in the simultaneous development of suppliers and consumers. Second, that effective management of the network and commercial viability would require professional managers and technocrats.

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

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To implement their vision while retaining their focus on farmers, a hierarchical network of cooperatives was developed, this today forms the robust supply chain behind GCMMF’s endeavors.

Introducing higher value products beginning with liquid milk, GCMMF enhanced the product mix through the progressive addition of higher value products while maintaining the desired growth in existing products. Despite competition in the high value dairy product segments from firms such as Hindustan Lever, Nestle and Britannia, GCMMF ensures that the product mix and the sequence in which Amul introduces its products is consistent with the core philosophy of providing milk at a basic, affordable price. Umbrella brand the network follows an umbrella branding strategy. By insisting on an umbrella brand, GCMMF not only skillfully avoided inter-union conflicts but also created an opportunity for the union members to cooperate in developing products. Managing the supply chain Even though the cooperative was formed to bring together farmers, it was recognized that professional managers and technocrats would be required to manage the network effectively and make it commercially viable.

Establishing best practices a key source of competitive advantage has been the enterprise's ability to continuously implement best practices across all elements of the network: the federation, the unions, the village societies and the distribution channel. In developing these practices, the federation and the unions have adapted successful models from around the world. It could be the implementation of small group activities or quality circles at the federation.

Village societies are encouraged through subsidies to install chilling units. Automation in processing and packaging areas is common, as is HACCP certification. Amul actively pursues developments in embryo transfer and cattle breeding in order to improve cattle quality and increases in milk yields. GCMMF were one of the first FMCG (fast-moving consumer goods) firms in India to employ Internet technologies to implement B2C commerce. Today customers can order a variety of products through the Internet and be assured of timely delivery with cash payment upon receipt. Another e-initiative underway is to provide farmers access to information relating to markets, technology and best practices in the dairy industry through net enabled kiosks in the villages. GCMMF has also implemented a Geographical Information System (GIS) at both ends of the supply chain, i.e. milk collection as well as the marketing process. Farmers now have better access to information on the output as well as support services while providing a better planning tool to marketing personnel.

V. SOURCING

Sourcing is the set of business processes required to purchase goods & services. Managers must first decide which tasks will be outsourced & those that will be performed within the firm.

Components of sourcing decisions

• In-House or outsource: The most significant sourcing decision for a firm is whether to perform a task in-house or outsource it to a third party. This decision should be driven in part by its impact on the total supply chain profitability.

• Supplier selection: It must be decided on the number of suppliers they will have for a particular activity. The must then identify the criteria along which suppliers will be evaluated & how they will be selected like through direct negotiations or resort to an auction.

For AMUL:

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

6

The Amul Model is a three-tier cooperative structure. This structure consists of a Dairy Cooperative Society at the village level affiliated to a Milk Union at the District level which in turn is further federated into a Milk Federation at the State level. The above three-tier structure was set-up in order to delegate the various functions, milk collection is done at the Village Dairy Society, Milk Procurement & Processing at the District Milk Union and Milk & Milk Products Marketing at the State Milk Federation. This helps in eliminating not only internal competition but also ensuring that economies of scale is achieved. As the above structure was first evolved at Amul in Gujarat and thereafter replicated all over the country under the Operation Flood Programme, it is known as the ‘Amul Model’ or ‘Anand Pattern’ of Dairy Cooperatives.

Responsible for Marketing of Milk & Milk Products Responsible for Procurement & Processing of Milk Responsible for Collection of Milk Responsible for Milk Production

Village Dairy Cooperative Society (VDCS)

The milk producers of a village, having surplus milk after own consumption, come together and form a Village Dairy Cooperative Society (VDCS). The Village Dairy Cooperative is the primary society under the three-tier structure. It has membership of milk producers of the village and is governed by an elected Management Committee consisting of 9 to 12 elected representatives of the milk producers based on the principle of one member, one vote. The village society further appoints a Secretary (a paid employee and member secretary of the Management Committee) for management of the day-to-day functions. It also employs various people for assisting the Secretary in accomplishing his / her daily duties. The main functions of the VDCS are as follows:

• Collection of surplus milk from the milk producers of the village & payment based on quality & quantity

• Providing support services to the members like Veterinary First Aid, Artificial Insemination services, cattle-feed sales, mineral mixture sales, fodder & fodder seed sales, conducting training on Animal Husbandry & Dairying, etc.

• Selling liquid milk for local consumers of the village • Supplying milk to the District Milk Union • Thus, the VDCS in an independent entity managed locally by the milk producers and assisted by the

District Milk Union.

District Cooperative Milk Producers’ Union (Milk Union)

The Village Societies of a District (ranging from 75 to 1653 per Milk Union in Gujarat) having surplus milk after local sales come together and form a District Milk Union. The Milk Union is the second tier under the three-tier structure. It has membership of Village Dairy Societies of the District and is governed by a Board of Directors consisting of 9 to 18 elected representatives of the Village Societies. The Milk Union further appoints a professional Managing Director (paid employee and member secretary of the Board) for management of the day-to-day functions. It also employs various people for assisting the Managing Director in accomplishing his / her daily duties. The main functions of the Milk Union are as follows:

• Procurement of milk from the Village Dairy Societies of the District • Arranging transportation of raw milk from the VDCS to the Milk Union. • Providing input services to the producers like Veterinary Care, Artificial Insemination services, cattle-

feed sales, mineral mixture sales, fodder & fodder seed sales, etc. • Conducting training on Cooperative Development, Animal Husbandry & Dairying for milk producers

and conducting specialised skill development & Leadership Development training for VDCS staff & Management Committee members.

• Providing management support to the VDCS along with regular supervision of its activities. • Establish Chilling Centres & Dairy Plants for processing the milk received from the villages.

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

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• Selling liquid milk & milk products within the District • Process milk into various milk & milk products as per the requirement of State Marketing Federation. • Decide on the prices of milk to be paid to milk producers as well on the prices of support services

provided to members.

State Cooperative Milk Federation (Federation)

The Milk Unions of a State are federated into a State Cooperative Milk Federation. The Federation is the apex tier under the three-tier structure. It has membership of all the cooperative Milk Unions of the State and is governed by a Board of Directors consisting of one elected representative of each Milk Union. The State Federation further appoints a Managing Director (paid employee and member secretary of the Board) for management of the day-to-day functions. It also employs various people for assisting the Managing Director in accomplishing his daily duties. The main functions of the Federation are as follows:

• Marketing of milk & milk products processed / manufactured by Milk Unions. • Establish distribution network for marketing of milk & milk products. • Arranging transportation of milk & milk products from the Milk Unions to the market. • Creating & maintaining a brand for marketing of milk & milk products (brand building). • Providing support services to the Milk Unions & members like Technical Inputs, management

support & advisory services. • Pooling surplus milk from the Milk Unions and supplying it to deficit Milk Unions. • Establish feeder-balancing Dairy Plants for processing the surplus milk of the Milk Unions. • Arranging for common purchase of raw materials used in manufacture / packaging of milk products. • Decide on the prices of milk & milk products to be paid to Milk Unions. • Decide on the products to be manufactured at various Milk Unions (product-mix) and capacity

required for the same. • Conduct long-term Milk Production, Procurement & Processing as well as Marketing Planning. • Arranging Finance for the Milk Unions and providing them technical know-how. • Designing & Providing training on Cooperative Development, Technical & Marketing functions. • Conflict Resolution & keeping the entire structure intact.

Assignment 2 SCM Supply Chain

Drivers For Amul

Suraj Shanbhag

8

VI. PRICING

Pricing determines how much a firm will charge for goods & services that it makes available in the supply chain. Pricing affects the behavior of the buyer of the good or services, thus affecting supply chain performance, for example, if a transportation company varies its charges based on the lead time provided by the customers, it’s very likely that customers who value efficiency will order early & customers who value responsiveness will be willing to wait & order just before they need a product transported. This directly affects the supply chain in terms of the level of responsiveness required as well as the demand profile that the supply chain attempts to serve. Pricing is also a lever that can be used to match supply & demand.

Components of Pricing Decisions:

• Fixed Price versus Menu pricing: A firm must decide whether it will charge a fixed price for its supply chain activities or have a menu with prices that vary with some other attribute, such as response time or location of delivery.

• Everyday low pricing versus High-Low pricing

For AMUL:

By managing to procure directly from the manufacturer and since the producers the processers and the final retailers are all stake-holders in the entity AMUL has managed to have a progressive cost advantage in their production and this is evident in the pricing strategy of AMUL as well. They price their products much lower than the established or other international players.