Supply development and sourcing practices in agro retail chains

Abstract

India has a burgeoning population to feed but its farmers are plagued by a host of problems ranging from extreme fragmentation, marginal land holdings, monsoon dependence, and heterogeneity to skewed social, physical and institutional infrastructure. Further the wastage in the agro supply chain of fruits and vegetables (F and V) is phenomenal being equal to the annual consumption of F and V by UK. Agro-Retail chains in India have sought to put the supply chain in place while providing fair value to the farmer and in the process eliminating intermediaries who aren t adding any value to the supply chain. However, agro retail chains in India are constrained by the prevailing FDI norms government regulations. The agricultural supply chain presents some unique problems that are not present in other supply chains. These are Supply chain and logistics, Perishability and seasonality, Procurement, Forecasting and Standardization and Quality issues. The poor logistics infrastructure coupled with perishability and seasonality posses a major challenge for efficient agri retail supply chain in India. The various regulations like APMA (1972), Essential Commodities Act (1955) etc have prevented the formation of an efficient food supply chain in India so far. However the govt. is making changes in those acts to make food supply chain and procurement more competitive. For procurement purposes, various models can be used by a retailer such as Buy from the wholesale or mandi market, Corporate farming, Contract farming, Buy from farmers without contract, Buy from an agent/ distributor other than wholesale market. Every approach has its positive and negative aspects. However long term contract and collaboration across the supply chain have been proved beneficial in organized retail in various parts of the world. In India also, as the retail sector matures, we may see a similar trend. It has been observed that collaboration helps in forecasting and standardization as well. A practice followed by some retail players in India is successive markdown of food products in order to sell the items within a stipulated period. An analytical treatment of this model done within the scope of this study using Monte Carlo simulation shows that the initial stock, the time of start of discount have significant effect on the profit of the retailer. The position of India in terms of development of organized retail now is similar to the situation of some other countries few decades back. Although India has many fundamental differences in terms of size, diversity, regulatory issues etc. still the way agri retail chain was transformed in those countries offer valuable lessons for India. The examples of Latin America, US and East Asian countries show that the successful retailer have created long term partnership across the value chain resulting in significant enhancement of quality and reduction of cost. It has been observed world-wide that the growth of organized retail has transformed the agricultural supply chain. In India the organized retail is a relatively new phenomenon. As the organized retail sector matures, we may see several symbiotic relationships to emerge such as long term contract in the supply chain and procurement, information sharing and effective backward linkages, more focus on quality and adoption of food safety norms. The Government can facilitate the process by modernizing regulation and effective enforcement of the regulation. It would be worthwhile to explore the suggestions put forward by the World Bank removal of all storage, marketing, credit restrictions on all commodities except emergencies, removal all reservations of agro-industrial activities for SSI, amendment of APMA and other restrictive regulations to allow farmers to market their produce wholesale outside the state regulated market, development of contractual arrangements in agriculture by facilitating creation of producer organizations, legislating appropriate contract law and enforcing it effectively. As the competitive scenario becomes more intense, much more rigorous addressing of the above mentioned issues and efficiencies in the supply chain backbone will be required.