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2013

AMUL
A LOGISTICS SUCCESS STORY
SUBMITTED TO : Dr. Asit Bandyopadhayay

Raghav Chawla Piyush Shukla Divyansh Singh

AMUL: A LOGISTICS SUCCESS STORY


Gujarat Cooperative Milk Marketing Federation Ltd. (GCMMF), is India's largest food product marketing organisation with annual turnover (2012-13) US$ 2.54 billion. Its daily milk procurement is approx 13 million lit per day from 16914 village milk cooperative societies, 17 member unions covering 24 districts, and 3.18 million milk producer members. GCMMF is India's largest exporter of Dairy Products. It has been accorded a "Trading House" status. Many of THE products are available in USA, Gulf Countries, Singapore, The Philippines, Japan, China and Australia. GCMMF has received the APEDA Award from Government of India for Excellence in Dairy Product Exports for the last 13 years. For the year 2009-10, GCMMF has been awarded "Golden Trophy" for its outstanding export performance and contribution in dairy products sector by APEDA. 1. BACKGROUND The Kaira District Cooperative Milk Producers Union Limited was established on December 14, 1946 as a response to exploitation of marginal milk producers in the city of Anand (in Kaira district of the western state of Gujarat in India) by traders or agents of existing dairies. Producers had to travel long distances to deliver milk to the only dairy, the Polson Dairy in Anand often milk went sour, especially in the summer season, as producers had to physically carry in individual containers. These agents decided the prices and the off-take from the farmers by the season. Milk is a commodity that has to be collected twice a day from each cow/buffalo. In winter, the producer was either left with surplus unsold milk or had to sell it at very low prices. Moreover, the government at that time had given monopoly rights to Polson Dairy (around that time Polson was the most well-known butter brand in the country) to collect milk from Anand and supply to Bombay city in turn (about 400 kilometres away). India ranked nowhere amongst milk producing countries in the world in 1946. The producers of Kaira district took advice of the nationalist leaders, Sardar Vallabhbhai Patel (who later became the first Home Minister of free India) and Morarji Desai (who later become the Prime Minister of India). They advised the farmers to form a Cooperative and supply directly to the Bombay Milk Scheme instead of selling it to Polson (who did the same but gave low prices to the producers). Thus the Kaira District Cooperative was established to

collect and process milk in the district of Kaira. Milk collection was also decentralized as most producers were marginal farmers who would deliver 1-2 litres of milk per day. Village level cooperatives were established to organize the marginal milk producers in each of these villages. The first modern dairy of the Kaira Union was established at Anand (which popularly came to be known as AMUL dairy after its brand name). The new plant had the capacity to pasteurize 300,000 pounds of milk per day, manufacture 10,000 pounds of butter per day, 12,500 pounds of milk powder per day and 1,200 pounds of Casein per day. Indigenous R&D and technology development at the Cooperative had led to the successful production of skimmed milk powder from buffalo milk the first time on a commercial scale anywhere in the world. The foundations of a modern dairy industry in India had just been laid as India had one of the largest buffalo populations in the world. 2. PRESENT SCENARIO We move to year 2010. The dairy industry in India and particularly in the State of Gujarat looks very different. India for one has emerged as the largest milk producing country in the world (see Table 1). Gujarat emerges as the most successful State in terms of milk and milk product production through its cooperative dairy movement. The Kaira District Cooperative Milk Producers Union Limited, Anand becomes the focal point of dairy development in the entire region and AMUL emerges as one of the most recognized brands in India, ahead of many international brands.

TABLE 1: World milk production Source: nddb.org

The sales turnover of the GCMMF from 1994-2013 is been represented below in chart 1 which helps to get a clear view of the earnings of the company, GCMMF is today nation's largest food company with an annual turnover exceeding Rs. 13735 Crores

Turnover (Rs. million)


160000 140000 120000 100000 80000 60000 40000 20000 0

Chart 1: Annual Turnover of AMUL Source: AMUL.com

3. THE AMUL MODEL The AMUL Model of dairy development is a three-tiered structure with the dairy cooperative societies at the village level federated under a milk union at the district level and a federation of member unions at the state level. Starting with a single shared plant at Anand and two village cooperative societies for milk procurement, the dairy cooperative movement in State of Gujarat had evolved into a network of 3.18 million milk producers (called farmers) who are organized in 16,914 milk collection independent cooperatives (called Village Societies). These Village Societies (VS) supply milk to seventeen independent dairy cooperatives (called Unions). AMUL is one such Union. Milk and milk products from these Unions are marketed by a common marketing organization (called Federation). Figure 1 and 2 together show the structure and the range of activities in this extensive network.

Figure 1,2: Milk supply chain and benefits distribution (Source: AMUL.com)

The AMUL model has helped India to emerge as the largest milk producer in the world. More than 15 million milk producers pour their milk in 1, 44,246 dairy cooperative societies across the country. Their milk is processed in 177 District Co-operative Unions and marketed by 22 State Marketing Federations, ensuring a better life for millions. FUNCTIONS OF VARIOUS TIERS IN THE AMUL MODEL A. Village Dairy Cooperative Society (VDCS) a. Collection of surplus milk & payment based on quality & quantity. b. Providing support services to the members. c. Selling liquid milk for local consumers of the village. d. Supplying milk to the District Milk Union B. District Cooperative Milk Producers Union (Milk Union) a. Procurement of milk from the Village Dairy Societies of the District. b. Arranging transportation of raw milk from the VDCS to the Milk Union. c. Providing input services to the producers. d. Conducting training on Cooperative development e. Providing management support & regular supervision to the VDCS. f. Establish Chilling Centers & Dairy Plants for processing the milk. g. Selling liquid milk & milk products within the District. h. Process milk into various milk & milk products. i. Decide on the prices of milk to be paid to milk producers. C. State Cooperative Milk Federation (Federation) a. Marketing of milk & milk products b. Establish distribution network c. Arranging transportation from the Milk Unions to the market. d. Creating & maintaining a brand e. Providing Technical Inputs, management support & advisory services. f. Decide on the products to be manufactured at various Milk Unions (productmix) g. Conduct long-term Milk Production, Procurement, Processing & Marketing Planning h. Conflict Resolution & keeping the entire structure intact

4. AMUL DISTRIBUTION NETWORK Most producers work with marketing intermediaries to bring their products to market. The marketing intermediaries make up a marketing channel also called distribution channel. Distribution channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. The Head Office of GCMMF is located at Anand. The entire market is divided in 5 zones. The zonal offices are located at Ahmedabad, Mumbai, New Delhi, Kolkata and Chennai. Moreover there are 49 Depots located across the country and GCMMF caters to 13 Export markets. A zero level of channel also called a direct marketing channel consists of a manufacturer selling directly to the final customers. A one level channel; contains one selling intermediary such as retailer to the final customers. A two level channel two intermediaries are typically wholesaler and retailer. A three level channel are typically wholesaler, retailer and jobber in between. GCMMF has an excellent distribution. It is its distribution channel, which has made it so popular. GCMMFs products like milk and milk products are perishable. It becomes that much important for them to have a good distribution. DISTRIBUTION CHART

Products

Agents

Wholesaler

Retailer

Consumer

We can see from above figure that GCMMF distribution channel is simple and clear. The products change hands for three times before it reaches to the final consumer. First of all the products are stored at the Agents end who are mere facilitators in the network. Then the products are sold to wholesale dealers who then sell to retailers and then the product finally reaches the consumers. 5. AMUL SUPPLY CHAIN Sourcing and marketing perishable products such as milk, butter, cheese, ghee which has a very low shelf life becomes very difficult when being managed at international level. The supply chain of AMUL has with time, become increasingly efficient at the process of procuring milk and distributing the products. Figure 3 shows the supply chain of AMUL.

Figure 3: AMUL supply chain (source: Internet)

The supply chain of AMUL can be described in the following steps: Some 3.2 million farmers from 17 districts of Kaira (kheda), Sabar Kantha, Baroda, Panchmahal, Rajkot, Bharuch, Mehsana, Banas Kantha, Surat, Ahmedabad,

Surendranagar,Amerlim Bhavnagar, Kutch, Valsad and Gandhi nagar reach the milk collection centers every day in the morning and afternoon to sell the milk their buffaloes have given in the morning and in the noon. The total milk procurement in the last year 2012 was an average 12.7 million litres per day. All the milk procurement centres are equipped with computers and electronic milk testers (EMTs). EMTs ensure efficient testing and measurement of milk constituents. The computers run the automatic milk collection system, which ensures immediate preparation of milk payment bills, transparency of operations and greater efficiency of milk collection. The milk is then sent to chilling depots in each village of the member unions. There are 16914 villages under GCMMF and each one has a village Cooperative society. VDC also runs the automatic milk collection system. The milk is then sent to the 17 member unions. All of them run an ultra-modern dairy that processes this raw material, which has travelled from faraway villages to the district headquarters. The various products made under the flagship of AMUL such as butter, milk powder, cheese, dahi, readymade foods such as gulab jamun, pizza etc. Are manufactured at these various plants and distributed through the various distributors across the country and abroad through GCMMF. One reason that AMUL is the giant it is because its built on the back of a co-operative movement. It encourages women and farmers to collect milk from their cows and pass it on to them for a price. By managing milk supplies from the cattle farmer and sending it straight to the factory, its been able to eliminate the middleman. Complexity and dynamics of the supply chain make it very difficult to assess the interaction effects. Increased cooperation among network members has resulted in a number of changes at all levels -- operational, tactical and strategic, and has led to the emergence of practices and strategies for improving the chain's performance. Most prominent among these include the following:

(i) Information sharing, often dynamically, to improve planning and execution. Sharing of POS data is a classic example for minimizing the distortions due to bull-whip effect and reducing perceived variability of demand by the partners in the chain. Typically, information sharing extends to costs as well. (ii) Focus on core competence of each player in the chain. The objective is to ensure that each task is performed by the entity best suited for it. As a result, firms have become willing partners in ceding control to a network partner for improving performance. VMI in many industries is a direct result of such change in management thinking. Similarly, the role of third parties for providing specific expertise such as logistics has grown substantially with emphasis on supply chain. (iii) Capacity improvement: It helps network partners in improving their capability and making them competitive. Milk procurement Total milk procurement by our Member Unions during the year 2012-13 averaged 93.02 lakhs kilograms (9.30 million kgs) per day representing a growth of 6.68% over 87.19 lakhs kgs (8.7 million kgs) per day achieved during the year 2008-09. The highest procurement as usual was recorded during January, 2012 at 122.5 lakhs kgs per day Managing third party service providers Its core activity lay in milk processing and the production of dairy products and all other activities such as logistics of milk collection, distribution of dairy products, sale of products through dealers and retail stores, provision of animal feed, and veterinary services were entrusted to third parties. 6. AMUL LOGISTICS Logistics are an important part of any organisation, especially when it is perishable products like milk and milk products. The logistics of AMUL consists of a 3 step process I. Logistics in collection 12.7 million liters of milk per day From about 16914 separate village cooperative societies. Approximately 3.18 million milk producing member.

II.

Logistics in coordination of Storing the milk. Processing the milk. Distributing the milk.

III.

Supplier logistics Weighing the milk. Determining of fat content. Calculation of the purchase price.

There are 2 channels in the logistical processing of milk and milk products Procurement channel- upstream flow Distribution channel- downstream flow

I.

PROCUREMENT FUNCTIONS o Activities at the village level comprised developing and servicing the VCSs. o Increasing milk collection, procuring milk, and transporting it to the chilling and processing units twice a day. o The VCSs provided the farmers with good quality animal feed, fodder, and other services like veterinary first aid.

PROCUREMENT CHANNEL On an average around thousand farmers come to sell milk at their local co-operative milk collection center. Each farmer has been given a plastic card for identification. At the milk collection counter, the farmer drops the card into a box and the identification number is transmitted to a personal computer attached to the machine. The milk is then weighed and the fat content of the milk is measured by an electronic fat testing machine.

Both these details are recorded in the PC. The computer then calculates the amount due to farmer on the basis of the fat content. The value of the milk is then printed out on a slip and handed over to farmer who collects the payment at adjacent window.

Figure 4: Upstream procurement model

II.

COLD STORAGE NETWORK Chillers in proximity of villages Prompt transport to district facilities for further dispatch to consumers/ processing units. Chilled trucks to transport processed products Delivery to local chillers by insulated rail tankers and chilled trucks. Refrigerators and freezers with retailers and departmental stores to retain freshness.

III.

DISTRIBUTION NETWORK AMUL products are available in over 500,000 retail outlets across India through its network of over 3,500 distributors. There are 47 depots with dry and cold warehouses to buffer inventory of the entire range of products. GCMMF transacts on an advance demand draft basis from its wholesale dealers instead of the cheque system adopted by other major FMCG companies. This practice is consistent with GCMMF's philosophy of maintaining cash transactions throughout the supply chain and it also minimizes dumping.

GCMMF coordinated with various unions to get a regular supply of milk and dairy products. The processed milk and dairy products were procured from district dairy unions and distributed through third party distributors. To ensure quality and timely deliveries, GCMMF and the district unions had several mechanisms in place. The unions monitored the supplies of milk and the distribution of finished products.

DOWNSTREAM FLOW First leg o Manufacturing units to company depots using 9 and 18 MT trucks o Frozen food-below 18C o Dairy wet-0-4C Second leg o Depots to Warehousing Depots o Transport through insulated 3 and 5 MT TATA 407s Third leg o Warehousing Depots to retailers o Transport through rickshaws according to the beat plan

Figure 4: Distribution (upstream) flow

REVERSE LOGISTICS MILK CHURN from dairy to VCS POUCH MILK TRAY from retailer to dairy BOTTLE from retailer to dairy DAMAGED PRODUCTS from customer to retailer then to dairy

THIRD PARTY LOGISTICAL SERVICES In addition to the weaknesses in the basic infrastructure, logistics and transportation services are typically not professionally managed, with little regard for quality and service. Even from the cursory description of the environment provided above, it should be clear that the traditional management practices of the west are not sufficient for success in emerging markets. Many MNCs that ventured into India following the first phase of liberalization in 1990s found this at a great cost. The success of GCMMF and AMUL is in glaring contrast to the experience of these MNCs and thus provides an alternative business model that may be useful for others considering entry into emerging markets like India. Well before the ideas of core competence and the role of third parties in managing the supply chain were recognized and became fashionable, these concepts were practiced by GCMMF and AMUL. From the beginning, it was recognized that the core activity for the Unions lay in processing of milk and production of dairy products. Accordingly, the Unions focused efforts on these activities and related technology development. The

marketing efforts (including brand development) were assumed by GCMMF. All other activities were entrusted to third parties. These include logistics of milk collection, distribution of dairy products, sale of products through dealers and retail stores, some veterinary services etc. It is worth noting that a number of these third parties are not in the organized sector, and many are not professionally managed. Hence, while third parties perform the activities, the Unions and GCMMF have developed a number of mechanisms to retain control and assure quality and timely deliveries. This is particularly critical for a perishable product such as liquid milk. A schematic description of the business model showing the demand-supply linkages is presented in Figure 5. In addition to material flows, the figure shows major decisions, support services, and planning and coordination activities. For example, procurement prices set by Unions are a major determinant of milk supply. Similarly, GCMMFs pricing strategy for dairy products has a strong influence on consumer demand. As shown in the figure, the Unions and GCMMF share coordination activities. In

addition to outbound logistics, GCMMF takes responsibility for coordinating with the distributors to assure adequate and timely supply of products. It also works with the Unions in determining product mix, product allocations and in developing production plans. The Unions, on the other hand, coordinate collection logistics and support services

to the member-farmers. In what follows we elaborate on these aspects in more detail and provide a rationale for the model and strategies adopted by GCMMF.

Figure 5: Demand-supply linkages

On the supply side, as mentioned earlier, the member-suppliers were typically small and marginal farmers with severe liquidity problems, illiterate and untrained. AMUL and other cooperative Unions adopted a number of strategies to develop the supply of milk and assure steady growth. First, for the short term, the procurement prices were set so as to provide fair and reasonable return. Second, aware of the liquidity problems, cash payments for the milk supply was made with minimum of delay. This practice continues today with many village societies making payments upon the receipt of milk. For the long-term, the Unions followed a multi-pronged strategy of education and support. For example, only part of the surplus generated by the Unions is paid to the members in the form of dividends. A substantial part of this surplus is used for activities that promote growth of milk supply and improve yields. These include provision of veterinary

services, support for cold storage facilities at the village societies etc. In parallel, the Unions have put in place a number of initiatives to help educate the members.

7. PROBLEMS AND ISSUES WITH SUPPLY CHAIN Managing this supply chain efficiently is critical as GCMMF's competitive position is driven by low consumer prices supported by a low cost system. In the past years the concept of just-in-time was not introduced, all GCMMF branches were engaged in route scheduling and have dedicated vehicle operations. Even though the cooperative was formed to bring together farmers, professional managers and technocrats would be still required to manage the network effectively and make it commercially viable. It is worth noting that a number of third parties are not in the organized sector, and many are not professionally managed with little regard for quality and service. This is a particularly critical issue in the logistics and transport of a perishable commodity where there are already weaknesses in the basic infrastructure. Its network which consists of large number of members requires regular roll out improvement programs and high implementation rate of these programs. Having a strong supply chain is only the beginning, the remaining part includes making consumer products that sell well and that the same consumers are able to be impacted by marketing and advertising movements. The organization was also suffering from the high middleman cost which was tackled by managing milk supplies from the cattle farmer and sending it straight to the factory. Due to the perishable nature of the product, it has to invest in cold storage which is an extra burden in distribution and warehousing. At the time AMUL was formed; consumers had limited purchasing power, and modest consumption levels of milk and other dairy products. Thus AMUL adopted a low-cost price strategy to make its products affordable and attractive to consumers by guaranteeing them value for money. In addition to the weaknesses in the basic infrastructure, logistics and transportation services are typically not professionally managed, with little regard for quality and service. GCMMF was 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.

8. IT INTEGRATION IN AMUL Enterprise resource planning: the company at has implemented an ERP program as low as Rs. 3 crores in collaboration with TCS ltd. The company uses IT, the data right from the procurement from the farmers till the delivery of goods to the retailers is fed into the system. The software enabling the channel members to use for the synchronized working and best possible utilization of the available resources maintains details regarding the inventory management. The project was named as Enterprise wise integrated application system (EIAS) The evolution of IT in AMUL was took place in the guidance of DR.B.M Vyas. The milk collection center at village cooperative societies, were first automated. Application and utilization of GIS. Data analysis software utilization for milk production estimation and increasing productivity. VATS network between all the level of distribution network and GCMMF.

IMPLEMENTATION AMUL start implementation of ERP in phases. Automatic milk collection system units(AMCUS) at village society were installed in the first phase to automate milk production logistics. AMCUS facilities to capture member information, milk fat content, and volume collected, and amount payable to each member electronically. AMUL also connected its zonal offices, regional offices and members dairies through VSATs. The customized ERP- EIAS has been implemented across the organization integrating various operational departments.

AMUL is also using Geographic Information Systems (GIS) for business planning and optimization of collection processes. Indian Institute of Management Ahmedabad supplemented AMULs IT strategy by providing an application software Dairy Information System Kiosk (DISK) to facilitate data analysis and decision support in improving milk collection. The kiosk would also contain an extensive database on the history of cattle owned by the farmers, medical history of the cattle, reproductive cycle and history of diseases. Farmers can have access to information related to milk production, including best practices in breeding and rearing cattle. As a large amount of detailed history on milk production is available in the database, the system can be used to forecast milk collection and monitor the produce from individual sellers.

Figure 6 : Structure of Information System

THE BENEFITS OF THE AMCUS SYSTEM The rural people are getting many benefits from the IT initiatives, started by GCMMF. The benefits of the various projects such as DISK are yet to be realised. The following are the demonstrated benefits from the ICT platform. Time reduction Reduction of pilferage Reduced human errors On the spot payments for farmers Reduced waste Transparency of operation Operational integration

REAPING RETURNS Radical changes in business processes - eliminating middlemen. Improved delivery mechanisms and transparency of business operations. Due to this process, AMUL is able to collect six million liters of milk per day. Huge reduction in processing time for effecting payments to the farmers from a week to couple of minute. Processing of 10 Million payments daily, amounting to transactions worth USD 3.78 million in cash. Movement of 5000 trucks to 200 dairy processing plants twice a day in a most optimum manner. Practicing just in time supply chain management with six sigma accuracy. Online order placements of AMULs products on the web. Distributors can place their orders on the website. AMUL exports products worth around US$ 25 million to countries in West Asia, Africa and USA.

9. CONCLUSION Even though it faces some problems in its supply chain, AMUL has developed a truly wondrous model. Keeping costs to a minimum and procuring and processing milk from such a large area that too twice a day is awe-inspiring in itself. Being the leader in the Indian dairy industry for so long speaks volumes in itself. Anybody who truly wants to achieve perfection can follow the AMUL model.

BIBLIOGRAPHY
www.amul.com Heredia, R. ; The AMUL India Story, New Delhi, TMH, 1997 Kachru , U. ; Strategic Management: Concept and Cases Manikutty, S. ; Gujarat co-operative milk marketing federation ltd. , IIM Ahemdabad,2000 www.nddb.org