Fixing the Agricultural Supply Chain from the Top and Bottom

20th Feb 2012
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In a land where roughly 70% of the population resides in rural areas and half of the nation’s population farms for a living, the importance of India’s agricultural sector cannot be overstated. Despite these massive numbers, the country’s agricultural output has been unable to keep pace with growing demands and global competition. According to the World Bank, “India’s rice yields are one-third of China’s and about half of those in Vietnam and Indonesia. With the exception of sugarcane, potato and tea, the same is true for most other agricultural commodities.”There are multiple reasons for this productivity gap, but one significant one is glaring inefficiencies in India’s agricultural supply chains. Logistics play a critical role in any economic sector, but when goods are perishable the supply chain becomes that much more important.

Much of the blame for these inefficiencies has been placed on the government. The NY Times reports that critics accuse policymakers of focusing on “more glamorous, urban industries like information technology, financial services and construction” [emphasis added] at the expense of the rural economy. Another factor is the overal lack of consolidation that has occurred in the agricultural sector, with the majority of production still operating at the single farmer level.

Understanding India’s Agricultural Supply Chain

First, the current structure of the supply chain allows for too many middleman who distort prices, exploit farmers and

prevent produce and other goods from reaching places where demand exists (click on the image to see a larger version). An Indian School of Business working paper states:In India, the infrastructure connecting these partners is very weak. Each stakeholder: farmers, wholesalers, food manufacturers, retailers all work in silos. Also, demand forecasting is totally absent and the farmers try to push what they produce in to the market. Data integration, financial flow management, supply-demand matching, collaborative forecasting, information sharing, goods movement synchronization through efficient transport scheduling, are very well practiced in high technology industries with immense benefits.

Each industry within the agricultural sector, e.g. vegetables, fisheries, poultry, etc., will have unique structures. However, the underlying causes for the inefficiencies are likely to be shared across all of them.

Second, there has been insufficient investment in necessary technologies that would extend the shelf life of these perishable goods. Produce spoils rapidly and requires special cold storage to increase chance it may be sold before spoilage. More than 30 percent of fruit and vegetables rot before being sold today. ISB identifies the following, collectively called cold storage, as vital to a successful supply chain:

  • Pre-cooling facilities
  • Cold Storages
  • Refrigerated Carriers • Packaging
  • Warehouse and Information Management systems
  • Traceability
  • Financial and Insurance Institutions

The report also connects the existence of such facilities and support mechanisms to the evolution of the prepared foods industries, like frozen foods.

Attempting to Fix the Supply Chain

One major challenge to fixing the supply chain is to do so in a way that does not disrupt and/or destroy the livelihoods of individual farmers. The farmer’s plight has taken center stage in an ongoing discourse over the best way to address these problems. Right now the Indian government is considering liberalizing the country’s $400 billion retail market. A large portion of this market stems from agriculture. The liberalization would pave the way for multinational corporations like Wal-Mart to own up to “51 percent of a multi-brand retailer if they invested at least $100 mn, with half spent on infrastructure development in India.” Here infrastructure development would include supply chain investments as Walmart would want to be able to transport its perishable goods throughout the country. Rural farmers and small business owners have become understandable concerned with regard to how a major retailer could displace jobs and exert unfair buying pressures on single farmers and storeowners.

On the other end of the spectrum, social entreprises like Jagriti Agro Tech work with farmers directly to consolidate “best practices developed by grassroots organizations and organic farming experts, along with IT tools to make farm monitoring, production and supply chain management efficient.” In doing so, the organization has enabled its farmers to enjoy a 25% increase in prices.

These anecdotes suggest that both approaches may be needed to fully address the scope and scale of India’s supply chain issues. While working with farmers directly provides them with the tools and information available to receive better prices and avoid exploitative middlemen, it is unclear that without multinational help and expertise the supply chains can nationalize and supply and demand of perishable goods could rationalize. It is hard to imagine smaller organizations like Jagriti investing the necessary resources to develop a well-functioning cold storage supply chain that could operate at the scale India demands.

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