Modernizing the Rural Supply Chain: Feeding those who feed us

This article was published in AXIS 2020, the annual operations magazine published by the Association at XLRI for Industrial and Operations Management (AXIOM) at XLRI Xavier School of Management, Jamshedpur.

Introduction

In the year 1943, the east Indian province of Bengal in the then British colony of India went through one of the worst famines in the history of the subcontinent. An estimated 2 to 3 million people were reported dead as a direct consequence of the famine within the province of Bengal itself, while a far greater number of people – the poorest of the poor – were affected in the longer term. India is generally considered a geography gifted with agricultural fortunes, and even among the different provinces Bengal has had the reputation of being among the most fertile ones; this therefore begs the question that why a state known for feeding the entire country failed to feed its own. Subsequent research into the incident has come up with multiple theories all of which converge upon one common underlying theme – the famine of 1943 was not a natural disaster but a man-made one. Socioeconomic and political factors from across a broad spectrum have been identified by noted researchers working in economics and social sciences. In an independent India well into the 21st century, conditions have improved; administration, governance and human knowledge have come together to ensure that there is no rerun of a man-made famine of the scale of the 1940s. But a closer look into the issues affecting the Indian agricultural sector even today would disclose a picture not very different in principle from the situation pre-independence. The inability to feed one’s population is less of an accident of nature and more of an incident of mankind.

Data Speaks

From a purely statistical perspective, India is largely an agriculture driven economy. In a developed and simultaneously agriculturally vibrant economy like Australia, 2.5% of the population involved in farming can produce 93% of their domestic consumption. In the United States, the farming population decreased from 50% in mid-19th century to less than 2% in the 21st century. This trend reflects in the contribution of agriculture to the GDPs of these countries – 3% for Australia and 5.4% for the United States. A brief about the developing nature of the Indian economy is illustrated through a comparison – 70% of the total population, who are still directly dependent on agriculture, contribute only around 15% of the nation’s GVA. It is clear that the yield and productivity of Indian crops is abysmally low when compared against the developed nations. This position, to be honest, is not surprising to most since it only reflects the inequity in the distribution of Indian wealth (globally ranked 122nd on per capita GDP based on PPP) and generations of poverty among the rural farming households, all of which lead to poor structural efficiency of the entire agricultural landscape. The pertinent question here is, even with our inherent limitations are we making the best use of whatever we have?

To rectify and course-correct the structural flaws in the society is a long-term task. More often it requires administrative and policy-based decision making, which realistically goes beyond the scope and purview of a corporate institution. In clearer terms, corporations must create the best value it can out of the constraints we are living with. The rural Indian economy has largely been ignored by the private sector, which has led to over-dependence on government action. Considering these factors in conjunction, the need of the hour is a business model which would be financially sound enough to attract private investment, and simultaneously develop and work around the existing structural constraints the country deals with. Even without intervening into the national agriculture policy (an issue of much political debate and friction) and trying directly to enhance the agricultural output, a simpler and effective way of creating greater value is to put in place a robust and efficient distribution system, which would ensure that even when constrained by the quantity of our agricultural produce, we are putting whatever we have to the best use.

In a report by the United Nations’ Food and Agriculture Organization (FAO), 40% of India’s annual fresh farm produce is wasted. This amounts to $8.3 billion in a year; to put it into perspective that is thrice the total GDP of our neighbour Bhutan and about equal to the profit General Motors makes every year. It is true that wastage of agricultural produce is not uncommon (particularly in the Asia Pacific region), but the scale it reaches in India and the glaring inequity in the country in distribution of wealth makes it cause for botheration. Not only is the farming sector unable to produce sufficiently, but the country’s distribution systems are not even able to ensure utilization of whatever it produces – this lays the foundation for a classic corporate supply chain problem.

The Missing Link

The incessant and unabated rise of FMCG organizations in India shows that there is nothing inherently out of place in the country’s DNA which makes efficient distribution infeasible. But the weakness in this comparison is twofold: firstly, the nature of goods being dealt with are vastly different in terms of shelf life for FMCGs and agricultural products, and secondly the structure of the networks used in FMCGs and agri-based products are different. The centralized hub-and-spoke model is a preferred mode of distribution for FMCGs while distributed and localized peer-to-peer networks are more effective for perishable farm produce.

But in spite of the differences in distribution models, the way forward in tackling the issue of rural supply chains has to be an assimilation of methodologies and techniques from different industries involved in distribution practices. In this article, the problem is examined at three levels in increasing order of complexity. Up front, the immediate panacea for the rural supply chain would involve development of logistics and basic infrastructure – it answers the question of how to deliver. Once the logistics are in place, the second level of development would inquire into forecasting and planning – looking into the question how much to deliver. Finally, the third stage of value creation would examine long-term investment decisions and policy-based interventions – addressing the question of who will deliver.

Level I: Logistics and Infrastructure

While India required 93 million MTs of wheat for human consumption in 2018-19, the wheat it wastes annually is just below 25% of that number at 21 million MT tons – more than Australia’s total annual production. The national production (even at our low yield rates) is sufficient to feed the country’s demand but wastage is forcing us to import from abroad. This problem is not limited to wheat; as onion prices hit Rs 100/Kg at Mumbai in December 2019, exactly a year back in December 2018 onion farmers in Maharashtra had been forced to dump their produce after being offered abysmal rates of Rs 1.5/Kg at wholesale markets. When it comes to preserving perishable items, cold storages are the only economically feasible method of implementation. Currently only 10% of Indian perishable farm produce gets access to cold storages, and according to a study by researchers at IIM Calcutta, most of it goes into storing potatoes which have a sustained and profitable demand from multinational FMCGs producing fried potato chips. Most of the essential but low-margin products including wheat and tomato go without enough storage facilities.

There is a need to expand and simultaneously decentralize the cold storage systems in India, which has to be accompanied by a superior network of cold chain transportation. The first stage capital investment in setting up cold storages at block or divisional levels requires government action, and there is the option of sourcing the monthly operating costs from the rural households following the SHG model of microfinancing. The cold chain network requires corporate investment; the possibility of subsidising investment on refrigerated vehicles for agricultural transport can be considered. Apart from solving the obvious problem of ensuring longevity of crops, making cold storages accessible to common farmers also helps them get better prices. During times of recession, instead of selling their produce at cheap rates to middlemen and brokers in order to recover whatever money they could from the crops, availability of storage facilities would enable a farmer to hold and sell the produce when there is sufficient demand and healthy price.

Level II: Forecasting and Planning

Once a system for distribution is in place, the next step is to create an information dissemination platform which would allow the farmers to plan their produce in advance. The information arbitrage available to certain middlemen and brokers creates a massive disadvantage for the farmers, which can be solved through creating transparent and easily accessible databases for all stakeholders. The role of technology here is not very straightforward. On one hand there is the need for technical expertise that can handle historical and real-time data to ensure that the cultivation process and the supply chain network in conjunction create maximum value. On the other hand, there is the requirement of translating the benefits of technology into implementable, actionable solutions at the grassroots level for an average farmer, distributor or retailer.

The uniqueness and the challenge both lie in the complexity and entanglement of the supply chain. The spread of a supply chain may be limited within a block or district (in case of commodity items like common fruits and vegetables with easy availability) or may also reach foreign countries (in case of export-quality premium products). Japan, for instance, is a major procurer of first flush Darjeeling tea from the hills of north Bengal, in an instance highlighting the vast spread of a supply chain. Data transparency and reducing information asymmetry is the first step to cracking the code. On a broader level this would require application of high-end technology like blockchain and information systems engineering. On a grassroots level, the technology must be supplemented with making the stakeholders aware of these motivations and having them participate actively to reduce food waste, predict and implement market trends, and make full utilization of natural resources.

Level III: Policy Intervention and Investments

For successful implementation of these ideas, it is critical to identify the stakeholders in the process. Modernizing a supply chain requires both financial investment and technical expertise. Obtaining the correct balance between these two considerations forms the third and final step in supply chain modernization. The role of the government in providing investment impetus along the way is undeniable, but over-reliance on public machinery is to be avoided. Aspects of bureaucratic red-tape and governmental inertia are solved by attracting private investment, but without compromising on the priority that is to be placed upon the farmers. With the emergence of modern distribution channels there has been a spurt in privately owned mega organizations which specialise in distribution; these organizations would be placed well to invest and develop in rural supply chains but it might create a power imbalance tilted in favour of the powerful conglomerates which would possibly jeopardise the interests of the cultivators. More than one retail and distribution giant has faced allegations of exploiting suppliers, and since there is tremendous first-mover’s advantage in this business it creates the prospect of having virtual monopolies in certain geographic regions. Further complicating matters is the dilemma over allowing foreign direct investment in retail channels. Powerhouses in retailing and supply chain operating across multiple continents have the potential to monopolize a bulk of India’s retail space if allowed barrier-less entry; that would create high efficiency originating from expertise, but also have a lot of cash and control moving outside the country. The solution therefore is not a straightforward one.

There exists, however, little doubt that the rural supply chain is in dire need of modernization. By simply utilizing our agricultural production more effectively, the country would be able to feed more families, reduce poverty levels, achieve more equitable distribution of wealth, tackle solid waste management issues, cut down trade deficits by bringing down import dependence, capture consumer surplus – to name a few. It would enhance the efficiency of the entire economy which is deeply interlinked with the rural sector. But most of all it would provide those who feed us with the wherewithal for living a better life.

Conclusion

In his globally acclaimed epic “City of Joy”, renowned French author Dominique Lapierre narrates a story of an impoverished Indian family who migrate from their ancestral residence in rural India to a teeming and crowded city in the east in search of livelihood, and what follows is a story of dreams, aspirations, injustice and sacrifice in a big city dealing with an explosion in migrant population. As many a reader has questioned upon reading the novel – "Why do they even come and live in the city anyway when they can easily farm in the countryside?" It is evident that there is no single answer to this question, but maybe the solution to all of them lies in creating an efficient supply chain.

Cover Photo Credits: @yordphotos

References

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