18-04-2013, 03:16 PM
Business Strategies for Managing Complex Supply Chains in Large Emerging Economies: The Story of AMUL
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Abstract
In this paper we describe a case study of a dairy cooperative, AMUL, in western India that has developed a successful model for doing business in large emerging economy. It has been primarily responsible, through its innovative practices, for India to become world’s largest producer of milk. This paper draws various lessons from the experiences of AMUL that would be useful to cooperatives globally as well as firms that are interested in doing business in large emerging markets like India and China.
Many of these economies have underdeveloped markets and fragmented supply bases. Market failures for many of these small producers are high. On the other hand, the size of both, markets and the suppliers is large. As a result, firms that identify appropriate business strategies that take into account these characteristics are more likely to succeed in these markets. The following are some key message from AMUL’s success: firms in these environments need to simultaneously develop markets and suppliers to synchronize demand and supply planning, develop or become a part of network of producers (i.e., cooperatives in this case) to obtain scale economies, focus on operational effectiveness to achieve cost leadership to enable low price strategy. In addition, a central focus to bring the diverse element together and a long-term approach are required.
Introduction
Since the turn of 19th century, Cooperatives have existed as dominant forms of organization in the dairy industry around the world. Sometimes they have played the role of developing infant industry while at other times they have been used to strengthen weak production bases in an environment where market failures tend to be higher for marginal producers. In some other cases, a network of small producers have organized themselves to better market their products. Management of these cooperatives have also led to some interesting managerial insights for managers in emerging as well as developed economies.
Large emerging economies, e.g., India and China, have complexities that range from development of markets (where the largest segment of population is the one which has low purchasing power) to integration of low cost suppliers who are predominantly very small. For firms that aspire to conduct substantial business in such markets, such complexities have to be recognized and then overcome. The challenge is to understand the linkages between markets and the society. This would also require development of a new business model that helps a firm grow in such environments. This paper is about one such successful model. The Kaira District Milk Cooperative Union or AMUL in India is an example of how to develop a network of firms in order to overcome the complexities of a large yet fragmented market like those in emerging economies by creating value for suppliers as well as the customers. AMUL has led the milk dairy revolution in India that has now emerged as one of the largest milk producers in the world.
The AMUL Story
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 milk 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 kilometers away). India ranked nowhere amongst milk producing countries in the world in 1946.
Cooperatives and the Global Dairy Industry
Three broad questions have intrigued researchers and practitioners on cooperatives3: what are the objectives of cooperatives, what determines the success and failure of cooperatives and how do cooperatives act as organizations of social and economic change. While most of the observations are based on normative judgments of what the cooperatives are supposed to do, some studies reflect the true behavior of agents within a cooperative framework thereby making the debate on cooperatives more complex but also interesting. To these themes we add another question that reflects in some ways our own enquiry through this paper: are mechanisms of cooperation that cooperatives employ any different from those used by other industrial organizations?
Traditionally, cooperatives have been established to serve the needs of its members in order to maximize their returns. Governments have usually seen these organizations as effective mechanisms for delivering their own programmes (e.g., sector development or poverty reduction, etc.). Researchers have looked at cooperatives as channels for re-distributing wealth, improving the opportunities for the weaker sections of the society, alternative institutions for property ownership, efforts in democratic and participative governance of organizations4 etc. (this discussion draws from Shah, 1995). In that, the cooperatives have often sought protection of sorts from uncertainties in the market place. Globally, modern day cooperatives are agglomeration of many such small groupings that serve some of the above objectives but have now moved from being protected entities to becoming market driven. This makes such cooperatives an interesting organizational alternative to traditional business enterprises (i.e., investor owned firms) in terms of concern for shareholders, distributional effectiveness and ability to provide product/service variety5.
AMUL’s Journey towards Excellence
AMUL’s journey towards excellence is marked by some critical understanding of the business environment in large emerging economies like India where markets have to be developed by combining efficiency related initiatives with increasing the base of marginal suppliers and consumers. The essence of AMUL’s efforts were as follows:
• It combined market and social development in an emerging economy. It recognized the inter-linkages between various environments that governed the lives of marginal milk farmers and the unmet needs of consumers. It also changed the supply chain paradigm in order to reduce the cost to the consumer while increasing the return to the supplier.
• It realized that in order to achieve their objectives, it had to benefit a large number of people – both suppliers and consumers. While large scale had the danger of failure due to poor control and required more resources, it also had the advantage of creating a momentum that would be necessary to bring more people into the fold and thereby help more suppliers and consumers.
• It also realized that its goal could only be achieved in the long run and this required developing values in people and processes that were robust, replicable and transparent.
• It also realized that the cooperative would not be independent and viable in the face of competition if it were not financially sound. This implied that AMUL had to develop distinct capabilities that would deliver competitive advantage to its operations.
Leadership
While Kaira Union (or AMUL) had the support of national leaders who were at the forefront of the Indian independence movement, its local leaders were trained in Gandhian simplicity17 and had their feet rooted firmly amongst people whom they had mobilized – the poor farmers of Anand. The foremost amongst them was Tribhuvandas Patel18 who had led the movement for the formation of cooperatives of small and marginal farmers in order to compete against investor owned enterprises on one hand, and keep bureaucracy away on the other hand. Tribhuvandas was the first Chairman of the cooperative. His skills lay in organizing the village producers, in making them believe in the power of cooperation and their rights towards improvement of human condition. He is remembered as fair and honest person whose highest sense of accountability to the members of the union laid the foundation of trust between network members19. Another important aspect of his remarkable management style was his gentleness and ability to repose trust in people – he gave complete autonomy to managers of the union and earned complete commitment from them20. Verghese Kurien21 was one such manager who would, first, shape the destiny of the Union and then the milk movement throughout the country.
Strategy
AMUL’s business strategy is driven by its twin objectives of (i) long-term, sustainable growth to its member farmers, and (ii) value proposition to a large customer base by providing milk and other dairy products a low price. Its strategy, which evolved over time, comprises of elements described below.
Simultaneous Development of Suppliers and Customers: From the very early stages of the formation of AMUL, the cooperative realized that sustained growth for the long-term was contingent on matching supply and demand. Further, given the primitive state of the market and the suppliers of milk, their development in a synchronous manner was critical for the continued growth of the industry. The organization also recognized that in view of the poor infrastructure in India, such development could not be left to market forces and proactive interventions were required. Accordingly, AMUL and GCMMF adopted a number of strategies to assure such growth. For example, at the time AMUL was formed, the vast majority of consumers had limited purchasing power and was value conscious with very low levels of consumption of milk and other dairy products. Thus, AMUL adopted a low price strategy to make their products affordable and guarantee value to the consumer. The success of this strategy is well recognized and remains the main plank of AMUL's strategy even today. The choice of product mix and the sequence in which AMUL introduced its products is consistent with this philosophy.
Organization
AMUL is organized as a cooperative of cooperatives (i.e., each village society, a cooperative in itself, is a member of the AMUL cooperative) thereby deriving the advantage of scale and uniformity in decision making. The founders of Kaira Union realized that to fulfill their objectives, a large number of marginal farmers had to benefit from the cooperative – a network of stakeholders had to be built. And once built, it had to grow so as to draw more rural poor to undertake dairy farming as a means of livelihood. The network had to have several layers – the organizational network where the voice of the owners governed all decisions, a physical network of support services and product delivery process and a network of small farmers that could deliver the benefit of a large corporation in the market place. More importantly, a process had to be put in place to build these networks.
Marketing
GCMMF is the marketing arm of the network and manages the physical delivery and distribution of milk and dairy products from all the Unions to customers. GCMMF is also responsible for all decisions related to market development and customer management. These activities, which range from long-term planning to medium-term and short-term operational decisions are described below.
As mentioned earlier, introduction of new products and choice of product mix and markets should be consistent with the growth strategy, and synchronous with growth in milk supply. GCMMF’s demand growth strategy may be characterized by two key elements: (i) developing markets for its high value products by graduating customer segments from low value products, and (ii) maintaining a healthy level of customer base for its base products (low value segment). This strategy often requires GCMMF to allocate sufficient quantity of milk supply to low value products, thereby sacrificing additional profits that could be generated by converting the same to high value products.
Operations & Supply Chain Management
As mentioned earlier, the strategy, design and practices in AMUL’s network are strongly driven by the objective of establishing and operating an efficient supply chain from milk production and procurement to product delivery to customers. Management of this network is built around two key elements – (a) coordination of the diverse elements of the network and (b) use of appropriate technology that includes product, process and information technology and managerial practices and systems. In what follows, we describe various features of these elements that have contributed to the evolution of an efficient supply chain.