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Milk collection and dairy farming in India

8/01/2017

India is probably one of the few, if not the only, country which has the tradition of collecting milk from a large number of small dairy farmers from rural parts. The collected milk from various collection points or centers is transported in tankers to the centralized processing centers for converting to various products such as toned, double toned, full cream etc. milk.

So, what is wrong with this picture? The proponents may ask. Their arguments are typically based on rural employment, scalability and cost efficiency. This in many instances are a valid argument. However, a deeper dive into this industry brings another often hidden facet.

Issues to ponder over:

  • Payouts to rural small scale (2-3 cows or buffaloes) dairy farmers are typically Rs. 21 to 24 per lit. This is around 35-45% of the retail price of approximately Rs. 50 to 52 per lit. The low payouts to the dairy farmers does not leave any profit margin for them to provide better feed or medical services or improve cattle breed. It remains just a side income for majority of the farmers.
  • India has a huge milk quality challenge. A large fraction of nation’s milk supply is contaminated or below standard. This is a recurring theme year over year. People in the heat of the moment tend to blame just about anyone and everyone across the whole value chain. Mistakes of the few gets amplified to all.

I tend to believe that real culprit may be the structure of the dairy industry in India. Millions of producers with thousand of collection centers increases the potential touch point for contamination. Even a small inadvertent mistake is amplified given the nature of the product. Couple that with the non-refrigerated milk transportation and the problem further magnifies.

  • Industry practice of focusing on fat percentage is too narrow a bench mark of quality. Many of the other important metric such as somatic cell count is not even a consideration. Mixing of milk from various animals such as cows and buffaloes is not even considered an issue. Given that milk is a primary source of nutrition (especially protein) for many children, the narrow focus on fat percentage does not help.

Present structure of dairy industry in India was created by the visionary Sardar Patel over 100 years ago. We needed to produce milk for the masses. It was the need of the moment. India, today, stands at a very different spot on economics, demographics and social spectrum. The time has come to take a deeper look into the structure of this important industry.

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Magic of yoga and cow’s milk

23/11/2016

Since the age of Veda’s there has always been a magical connection between Yoga and Cow’s milk. Laveda milk takes you back in time.

Laveda cow milk noida Delhi Gurgaon Yoga

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Five Policy Proposals for Reviving US Manufacturing Base

12/11/2011

During the last few weeks I have been writing about the manufacturing in USA (or America as I have often referred to in my writing).  I hinted at various policy initiatives that could breath life into our declining manufacturing base. In this article (and the few following it) I would like bring them all together and go into a bit more detail of some of these initiatives.

I believe that these five policies could be the foundational building block of our manufacturing base:

  1. Elevate Made in America Brand
  2. Manufacturing specific incentives
  3. Investment in Research and Developments
  4. Right size the regulations
  5. Level the global playing field

Each one of these policy initiatives should be helpful but when taken together they could have an impact far greater than individual initiatives. Sort of whole is more than the sum of the parts belief.

These are just my thoughts and merely a starting point for the discussion. I would love to hear from you!

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Impact on Supply Chain Flows in Moving Manufacturing Outside America for Domestic Demand

5/11/2011

In one of my earlier post I discussed the impact on inventories when a manufacturer chooses to locate the plant outside of USA for meeting domestic demand. Inventories, however, present a small part of the overall supply chain impact which includes issues such as logistics cost, labor wages, plant infrastructure and so on.

supply-chain-flow

The first step in understanding the impact on over all supply chain is to better grasp the impact on various flows like material, information and financial. The diagram above shows a simple model of various flows in supply chain and forms the basis of our discussion below.

Information flows

Information flow refers to the movement of electrons (or paper) from customers to the manufacturer to the supplier and back. I am assuming that one has moved beyond the age of moving papers (as in fax or mail) to electronic communication. If not, then may be that is something you should look at first. In the internet based communication age the flow of information is not hampered by the physical geographical limitations as it was in the age of paper based information movement. Irrespective of where the plant is located a manufacturer can know in real time what the stock situation is or if the plant is idle or if the raw material is not delivered on time or in full (OTIF).

One does not need expensive supply chain or ERP systems to make this information flow seamless. I have seen quite a few companies effectively use spreadsheets and emails to overcome any lack of systems. One can do even better by putting a simple web based portal with simple work flow management as an interim solution before spending millions on an ERP system. I was involved in designing such a solution for a building material products company with operations in over 50+ countries. A system like this can be rolled out over few months and at a fraction of the cost.

If a company has not achieved a frictionless flow of information between various entities then this probably should be a high priority item. It can be achieved rather easily in a relatively short time. In the past where I have seen poor flow of information in a supply chain. It often had little to do with where the plant is located but more to do with outdated supply chain practices like lack of consistent naming scheme for various products. In one instance a company had 26 product codes for strawberries.  Do you really need that!

Material flows

Material flows are almost always affected by the plant location outside of America to meet the domestic demand. The supply chain invariably lengthens with higher lead times, as a minimum, for outbound flow of materials. The second most observed phenomena is lumping of the material flow – a large batch moving at infrequent intervals. Think of buying coffee for your office and compare buying it every day vs once a week. You buy a bigger batch and need more storage space in later case. Similarly, the inventory levels go up for the finished goods in this scenario.

The value density (think of bulky items that cost less vs small items that cost more) of a product has a significant impact on the material flow, inventory levels and often on level of service offered to customers. The lower the value density the higher the impacts. In one of the situation, for an industrial product manufacturer, it had 9 months of finished goods inventory on hand. Less than 2 inventory turns! Needless to say that the company faced a high inventory obsolescence risk along with carrying cost. For high value density products such as chips, smart phones, or medicines the impact on material flow could be minimized significantly by using higher cost but faster transportation systems like air.

In general, in most circumstances the inventory levels should go up, lead time to customers should be higher, obsolescence risk greater and customer service levels (OTIF) lower with locating the plant outside of America to meet the demand at home. A manufacturer essentially needs a much more efficient supply chain to counter these negatives.

Financial flows

Probably one of the biggest change in financial flows on a supply chain in this scenario is the currency risk that a company faces. The revenue from the sales is in US dollars while a significant amount of expense is in a different currency due to plant being physically in a different country. Moreover, the complexity of financial flows increases as the touch points go up. Now you have different accounting systems, cash management policies, more ways to disburse money and higher need for financial controls.

Essentially, the lengthening of supply chain increases the cash-to-cash cycle in many instances. The velocity of cash flow slows down. On positive side, one may see a reduction in working capital requirement if the supply chain cost savings are significant enough.

In conclusion…

The scenario where a plant is located outside of US with sole purpose of supplying the product to US market is rather simple. I wanted to present this simple case to keep the discussion some what contained. One can easily expand it to include multiple markets and multiple plants supporting them. The information goes from simple bi-directional linear flow model, as discussed here, to a multi-directional flow with all its associated complexity.

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Export or Shift Manufacturing? Impact on Inventories to Meet External Demand

1/11/2011

In the last article I discussed about the impact on inventory levels if a manufacturer was to move the plant outside of USA to meet the domestic demand. In the last few decades this has been one of the most common pattern. The total supply chain costs attempted to find the low water mark. Initially it was the low wages that offered the benefits of shifting the plant outside. In recent past it is the presence of the manufacturing eco-system in countries like China. In last few years the search for low wages and other costs such as land is taking manufacturers to previously ignored geographies like Vietnam.

There is, however, another shift that is affecting the location of plants. It is the shift in global demand patterns. Asia-Pacific region is expected to present the lion’s share of demand in coming decades. Many of the manufacturers are bracing for such a shift in demand pattern and struggling with the question of how best to meet it. They can locate the plant in US and export or locate the plants closer to the demand centers itself. It’s a hard question and the discussion obviously goes well beyond just inventory levels. However, inventories are just as good a place to initiate the discussion as any.

Manufacture in US and Export

This is probably the most obvious choice for many of the manufacturers. They can explore the shifting waves of demand while not spreading their operational base too thin. Further more, if they can leverage some of the naturally occurring advantages of manufacturing in US the added cost is minimal when compared to shifting the manufacturing base itself.

The only added inventory for selling in a new geographies while manufacturing here would be finished goods. The outbound portion of supply chain from plant to customer site would see a rise in inventory levels. The greater transit times and larger batch sizes would require a substantial increase in inventory levels across the outbound chain if we were to maintain good service levels.

For highly complex and technologically sophisticated products, where we have a competitive edge in manufacturing in US, the increase in finished goods inventory may not be sufficient to warrant moving the manufacturing closer to the demand points. You can easily pack thousands of smart phones in a small enough package to air ship it anywhere in the world at a short notice.

In this scenario manufacturers can easily leverage our competitive advantages like “made in USA” brand that could be easily diluted by shifting the manufacturing outside. Similar arguments can be made for the new products. Perhaps this is why manufacturing innovation is so important for our economy.

Manufacture close to demand

The shifting global demand pattern and availability of low wage workers is a strong incentive to locate the manufacturing base close to the demand points. Imagine a scenario where a US company locates a plant in China, sources the raw material locally, manufactures and sells in local market. A small team of US managers with capital to invest and know how to make it happen is a scenario is too good to pass up. If you think this scenario is far fetched, think again. This is happening all around the globe and may be the seed for the emergence of US manufacturing base.

Once a company has established the demand, the inventory risks in this scenario are minimal. In fact, it makes sense to locate the plant close to demand centers if the capital and the managerial capability allows it. Risks that needs to be managed are the potential negative impact on brand image and loss of intellectual capital. The inventory levels should in fact go down in this scenario.

In conclusion…

The global demand pattern is shifting. For us to compete effectively across the world in many situations it makes sense to leverage the local raw material and talent pool by locating the manufacturing plants close to demand points. The inventory effects in most cases should be favorable except when the skills or raw materials or technology etc give a natural advantages to locating the plant in US.

This topic of export vs make closer to demand points is a fascinating one. The discussion naturally goes well beyond the inventories. In fact, it is a minor consideration in bigger supply chain context. I look forward to discussing this more in coming days as I believe that the global shift in demand is one of the catalyst in reviving the US manufacturing base.

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Impact on Inventories by Moving Manufacturing Outside America for Domestic Demand

27/10/2011

Moving the manufacturing plant (operations) to outside of our boarders to meet domestic demand has a significant impact on various supply chain flows. The general belief is that inventory levels across the whole supply chain will rise for most of the products in this situation. In this article let’s explore this belief further for one of the most common situation – manufacturing plant is outside of America and it caters to domestic (USA) demand.

Why do we care about inventory levels?

Too many reasons! It is probably one of the most costly item when you consider it in all its forms: Raw material (and components), work-in-process, finished goods at the factory and warehouses, in-transit and finally on the shelf at retailers or other downstream customer warehouses/plants. Inventory is everywhere in the supply chain.

Inventory is not free. You may argue that with long account payable terms to suppliers it does not really cost that much money. At least for raw material inventory. But remember you still have to store it, manage it and it can go obsolete or may have limited shelf life. Even in the case of iron bars if you leave them to nature they would get rusted. If you are processing milk you have just so much time before it goes bad. or imagine that a manufacturer is left with a lot of computers with 6 month old design. The value is probably cut in half.

It is hard to give estimates of the inventory costs for different type of manufacturing. But it suffices to say that this cost is high. Not something a company can take lightly.

High inventory operation also increases the capital requirements of a company. It not only has a direct impact on the bottom line but slows down the growth potential. Think of dancing with a heavy backpack on. Not fun!

Impact on various types of inventories

For this discussion let’s look at the impact on inventory levels across the supply chain — from sourcing of raw material to the finished goods at your customers shop or plant. Contrary to popular believes these inventory levels may not always go up.

Raw material or components inventory

There are rare cases when a company chooses not to be close to the sources of raw materials, or components, when locating the plant outside of America. These can be the situations where there are multiple important raw materials and not all of them available in same geography for example. Also assuming that a company did not make the obvious mistake of locating the plant away from raw material sources for no other compelling reasons. The raw material/component inventories would most probably not go up. In fact, in many situations they may go down as the inbound transportation time decreases. Thus resulting in lower in-transit inventories for raw materials.

We will look at the case of locating a plant in a new geography to meet the local demand (not the US market) there in another article.

Results: Inventory levels – neutral to down

Work-in-progress inventory

If a company can run the plant at the same level of efficiency as at home then there should not be any reason for work-in-progress inventory levels to go up. There are, however, many situations where a company chooses for a lower level of plant automation to reduce the upfront investment and leverage the cheap wages. In this case the inventory levels would generally go up.

Results: Inventory levels – neutral to up slightly

Finished goods inventory at the plant

One of the downside of locating the plant outside of America is the distance a product has to travel before it is ready for selling to final consumers. In most case, a company has to ship an economic order quantity that may be larger than if the plant was located in US. Now with plant outside they may have to ship a container or more at a time for most of the products. The staging and packing operations required at the plant for large and often less frequent shipments requires that a plant hold a larger inventories in its shipping facilities.

There are cases where the product shipped is of high value with low volume like swiss watches or computer chips. The inventory level required at the plant will be hardly larger than normal.

Results: Inventory levels – up

Finished goods inventory in-transit

Except in few rare cases, where companies can ship via air a small quantity, the inventory levels should go up significantly. Imagine a container shipping from China and spending days (if not weeks) at the sea. A manufacturer has to ship a large quantity at a time and that has to spend a lot of time in transit resulting in large in-transit inventory levels.

In cases, where the plant is located in nearby countries like Mexico, the shipping time should still be larger than moving a product across state lines by a truck or rail. Think of custom paper-work, inspections and driving on roads which may not be as good as here at home.

Results: Inventory levels – up a lot

Finished goods inventory in outbound channels

With outbound channels, I refer to the finished goods (ready to sell) inventory which is in warehouses, in-transit to customers and at customers premises like stores. You may be thinking, why count the inventory at the customers locations? Well, it is the inventory in the supply chain irrespective of who owns it. The total supply chain cost goes up and the manufacturer would have to bear a share of this cost.

This inventory level goes up significantly for couple of key reasons. The reduced frequency of replenishing the inventory in the sales channel would require a larger inventory levels than usual. Also, with plant being located far away the ability to meet the volatile demand goes down thus requiring a larger inventory levels to meet the customer service levels. These two issues are somewhat related and easy to calculate once you know the demand volatility, frequency of inbound and outbound shipments etc.

Results: Inventory levels – up a lot

In conclusion…

Locating a plant outside of America to meet the domestic (USA) demand should, in most cases, result in larger inventory of finished goods. The inventory of raw-materials and work-in-progress may, however, not be impacted significantly.

I will leave you with few thoughts to ponder…finished goods inventory is more expensive than anything building up to it and the risk of products going obsolete whether it is due to limited shelf life or with changing nature of demand as in consumer products.

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