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26 Nov

Getting to the source of things

Do you sometimes marvel at the convenience of your daily life?

Everything is at your fingertips. You see something you wish to have — food, drink, clothes, accessories, technology —and it magically appears at your doorstep.

You could practically live off a bed, and a phone, if you really had to.

But all this convenience has abstracted away the boring and challenging on-ground aspects of business that make this magic happen, much to our own detriment.

Most of our discussions around businesses are superficial and devoid of any real-world detail.

To be blunt, most of it is vague and rubbish MBA-speak. And most online discussions around businesses are often lacking when it comes to understanding where the actual value is being created in the entire value chain.

But to get good at business and have a real hold over its principles, we need to unbox this black box and actually get into the nitty-gritty of all the unglamorous background work that needs to happen for the final performance to feel like magic to the end consumer.

So, for a change today, let's talk about a not so glamourized aspect of a business — the supply chain, and specifically, the sourcing stage. The textbook definition for sourcing:

"Sourcing is an upstream part of the supply chain: It’s the process of strategically choosing the right services and goods that a company needs to run their business. Sourcing is also the act of buying goods, including seller selection, contract negotiation and measuring the long-term performance of your suppliers."

Bleh! Boring. I think an example is needed to put this jargon-filled definition into context.

Consider something as ubiquitous as milk.

How does it reach you daily, at the same time, and with the form factor you’ve requested it in?

It is almost magical how smooth this process is. And you might underestimate how smooth this process really needs to be in order for thousands of litres of milk to not go to waste every single day.

In India, we arrived at this smooth process of milk distribution because of “Operation Flood” and the success of the cooperative model of milk collection.

You see, milk is a perishable commodity. Farmers producing milk from their cattle used to face the same issues as they did with vegetables or fruits. They couldn’t command a price for the product. Often, they would be forced to sell it at a much lower rate to not waste the produce.

The price was anyway determined by the middlemen, and contractors who took the produce to a market. Additionally, there was seasonality. The quantity of milk produced by a cow in summer and winter differ leading to problems of surplus and shortage, leading to this huge seasonal variability in the supply chain.

So, in 1945, the Government of Bombay started the Bombay Milk Scheme, which meant milk had to be transported 427 kilometres from Anand (Gujarat) to Maharashtra. The transportation of milk was only possible if it was pasteurised at the site of collection.

To further the initiative, the Government of Bombay entered into a contract with Polson's Limited, which represented the contractors. While the contract ensured regular buyers for the milk produced, the original supplier still didn’t get a justified share in the transaction.

Hence, in order to fight back, the milk farmers organised themselves into a collective unit and went on a milk strike. Their demand was that milk is pasteurised in a collectively owned milk processing facility, and that the government, and not the contractors, be the buyers. The strike collapsed the entire supply chain and no milk was transported for 15 days.

The strike eventually led to the approval of the union’s demand, and a subsequent rise in the cooperative ownership of milk processing facilities in the Kaira district.

By June 1948, the Kaira Union went on from producing about 250 litres of milk a day to 5000 litres a day. This was possible because the suppliers could wield control over the produce.

In the present day, dairy farmers can send milk twice a day to the collection centres in the village before it is transported for further processing.

The small union had successfully arrived at a minimum viable sourcing process for milk.

Later, the union focussed on solving the issue of surplus milk by learning to process it into milk powder, and other by-products like butter, which would make milk production all the more efficient. It was considered a breakthrough back in the day because the products were made by processing buffalo milk for the first time in the world.

Because of the union, the milk supply chain solved a few of the major challenges related to:

  • the durability of raw material
  • the management of surplus produce
  • supply finding a sustained demand

Kaira Union soon introduced the brand Amul to market the product range. But until this point, the process was only standardised in a limited geography.

Operation Flood gave it the much-needed impetus and revolutionised the milk supply in India.

It helped create a national milk grid linking producers throughout India to consumers in over 700 towns and cities and reducing seasonal and regional price variations while ensuring that producers get a major share of the profit by eliminating the middlemen. At its bedrock stood the village milk producers' co-operatives, which procure milk and provide inputs and services, making modern management and technology available to all the members.

Operation Flood not only augmented milk production, it successfully created a steady supply chain that farming families that could earn revenue for decades to come.

The process of sourcing milk, and delivering it to your local milk retail shop was perfected to such an extent that you probably didn’t even realise it wasn’t affected even during the COVID lockdowns.

To ensure there was no disruption in the supply chain of milk during the entire duration of the lockdown, here’s what Amul did:

  • Amul announced cash incentives for dairy plant workers, drivers, sales executives, distributors and retailers.
  • To ensure an uninterrupted supply of packaging materials, it engaged with district collectors where packaging factories were located. Amul even arranged for cattle feed to be transported from states like Punjab and Haryana for its farmers in Gujarat.
  • It ensured that not a single case of infection was reported among plant workers. And not a single litre of milk was wasted. The plant could seamlessly handle over 500,000 litres of milk it received daily.
  • Farmer members of the dairy cooperatives were also largely protected — unlike vegetable growers, they did not have to dump their produce and received a fair price. For every rupee that Amul makes, it pays 80 paise back to its farmers.

Talk about aligning incentives and keeping your primary stakeholder and manufacturer happy.

Amul making it seem like they had anticipated the lockdown — ready to shift operations to suit the needs of the time — just reflects how neatly established their supply chain processes and its relationships are.

From its early days as a small union to the current scale at which Amul operates, they focused on a few basic details that are crucial to a supply chain, and specifically to the process of sourcing:

Preserving the supplier's interest, aiding the supplier with relevant technology and support, fixing issues before applying a process on a wider scale, and not constantly tinkering with a smooth operation all contribute to the quality of the process.

Additionally, the sourcing of milk, processing it on the spot, and converting excess into other useful byproducts are all the processes which take place before the milk gets delivered to you at your doorstep.

The discussion on Amul helps underline the importance of perfecting sourcing as a process in a complex supply chain of a perishable product like milk. And it shows us how inherently complex supply chains are, even when you consider a simple example like milk.

But that’s not all.

When I initially complained that we are too enamoured by the glamorous aspects of business, I also wanted to leave you with something that could pique your curiosity about how supply chains are set in motion.

It is the questions you ask around the sourcing process that determine your response.

  • Are suppliers disorganised but belong to the same region? e.g., Alphonso mangoes
  • Are suppliers already in contact and communicating over geographies? e.g., Diamonds
  • Is there price consolidation amongst the suppliers or do they practise price discrimination? e.g., Oil
  • Is the raw material rare? e.g., Lithium
  • Do the suppliers want to standardise the production of the raw material? Do they already have a process? Do you have something better to offer?
  • Do the suppliers have a union or do they operate independently? e.g., Rickshaw/Taxi unions
  • What kind of government permissions are required? Who is in charge of giving these permissions? What are their incentives?  
  • What are the possible conflicts of interest with every stakeholder? How do you manage them?
  • Will your business create sustained demand for them to engage in any contract with you?
  • How will you preserve their interests over the long term?

Answer these questions to get at a lot of the real-world nuances that can make or break a supply chain.

If you get down to the main source and work upward, you can find answers to a lot of your questions around what makes products cheap or expensive.

But for that, you will have to take off the rose-tinted glasses of a lay consumer who is spoiled by all this convenience and dive deep into the messy processes that sustain any business.

Over the next few days, weeks, and months, I will take you through all the technical details and first principles that rule supply chains and manufacturing processes. Let's get to the source of things.

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