LOGISTICS AND SUPPLY CHAIN IN RURAL INDIA – THE

GOLDEN OPPORTUNITY.

Amita Marwha*

As the Indian retail, manufacturing and infrastructure sectors are poised for rapid growth; they are

faced with new challenges when it comes to logistics and supply chain issues — particularly in

the untapped rural areas for farm produce and delivery of goods and services.

With over 70 per cent of the economy centered around the rural parts of the country, logistics

players are now seeking ways to address this issue as about $100 billion worth potential is latent

in the rural parts of the country. India still prohibits foreign direct investment in multi-brand

retailing but continues to be pressured by multi-national giants since as Wal-Mart and Tesco,

from the UK. In response the Indian government has told these global retail chains that they

should invest in the back-end infrastructure before any consideration can be given to the opening

up of the Indian retail market.

The Indian logistics sector

The logistics sector in India has evolved over the past two decades from being a pure

transportation and warehousing function oriented service to provision of more value added

offerings like customs clearance, domestic / international freight forwarding, cross-docking,

reverse logistics, freight consolidation, warehousing of modern standards etc.

There has been a growing recognition of logistics in India as a strategic tool for enterprise cost

reduction and improvement of organizational efficiency; on the flip side, however, the logistics

sector is characterized by dominance of a disorganized market. Transporters with fleets smaller

than five trucks account for over two-thirds of the total trucks owned and operated in India and

make up 80 per cent of revenues. The freight forwarding segment is also represented by

thousands of small customs brokers and clearing & forwarding agents, who cater to local cargo

requirements.

The evolving business landscape and increasing competition across industries, is creating the

need for more efficient and reliable logistics services than what exists today. For example, rapid

growth of organized retail and the need to reach out to the large untapped rural markets in India

* Faculty Department of Economics Isabella Thoburn Collegee-mail-facultyeco.itcollege@gmail.com

are necessitating development of strong back end and front end supply networks. While the end

user industries like auto, consumer durables, organized retail, etc are direct triggers for the growth

of the logistics sector in India, some of the other drivers are mentioned in the adjacent diagram. .

India with a GDP of about Rs 31,297 billion is estimated to spend 13 per cent of its GDP on

logistics, creating an industry size of around Rs. 4,068 billion. The sector has been witnessing

double digit year-on-year growth rate since 2002 and is expected to be more than USD 120

billion (Rs. 5,400 billion approx.) by 2015.

The Indian Ministry of Commerce and Industry wants investment in basic supply chain functions,

especially in rural area which have seen little of India's economic boom. India experiences

problems with fresh products taking too long to get to the consumer, which has forced retailers to

look overseas to source fruit and vegetables. The government feels that foreign investment could

stop the flood of importation of fresh goods and create hundreds of thousands of jobs in rural

areas. India's ascending fortunes in the manufacturing sector over the last few years has opened

several windows of opportunities for the logistics market, and this trend is likely to gain pace as

the wave of global economic slowdown is gradually receding and India emerging as one of the

earliest major economies to recover from recession. This fast-paced growth of the industrial

sector, coupled with the more sturdy progress of the agricultural sector, has necessitated extensive

supply chains across the country to facilitate sourcing and distribution of production.

THE GOLDEN OPPORTUNITY

The Indian rural market with its vast size and demand base offers a huge opportunity that MNCs

cannot afford to ignore. With 128 million households, the rural population is nearly three times

the urban. As a result of the growing affluence, fuelled by good monsoons and the increase in

agricultural output to 200 million tonnes from 176 million tonnes in 1991, rural India has a large

consuming class with 41 per cent of India's middle-class and 58 per cent of the total disposable

income.The importance of the rural market for some FMCG and durable marketers is underlined

by the fact that the rural market accounts for close to 70 per cent of toilet-soap users and 38 per

cent of all two-wheeler purchased. The rural market accounts for half the total market for TV sets,

fans, pressure cookers, bicycles, washing soap, blades, tea, salt and toothpowder, What is more,

the rural market for FMCG products is growing much faster than the urban counterpart.

Strategic Analysis of Indian Logistics Market finds that the market earned revenues of $75.19

billion in 2009, representing about 6.2 percent of the country's GDP. The market is expected to

reach $120.42 billion in 2014, witnessing a CAGR of 9.9 percent between 2009 and 2014.

Transportation segment accounts for close to 62.0 percent of the total market reiterating the fact

that it is the most important logistics function for all industries. Further, agricultural sector

accounts for slightly over half of the total logistics market in India, owing to the extensive storage

and transportation activities associated with agro products within the country.

"Apart from the steady expansion of operations by large domestic industrial groups, an increasing

number of global majors in industries ranging from automotive and electronics to

pharmaceuticals and cement have been targeting a spot in the highly lucrative Indian market,".

"While foreign companies need to engage logistics service providers since they are not

conversant with the culture, government policies, or distribution landscape of the country,

domestic companies are outsourcing their logistic activities to organized third-party logistics

(3PLs) to focus on their core competencies."

Most manufacturing industries such as automotive, cement, minerals, oil & gas, pharma, food

processing, and fast moving consumer goods (FMCG) need multimodal transportation services as

they have a widespread consumer base but limited production bases. Industries such as FMCG,

pharma, and food processing apart from the agricultural sector also have considerable

requirements for integrated logistics parks owing to their higher need for warehousing activity.

These industries are the leading contributors in the 25.7 percent share accounted by warehousing

segment within the total Indian logistics market.

Multimodal transportation solutions are becoming possible with the development of inter-

connected transportation infrastructure facilities, especially dedicated freight corridors by the

railways and improvements in coastal shipping facilities. Similarly, the construction of massive

state-of-the-art logistics parks at key distribution hubs are helping to meet the specialized

warehousing needs of industries. These developments are encouraging companies to increasingly

outsource logistics functions.

LOGISTICS AND SUPPLY CHAIN –THE INDEGENIOUS SUCEESS STORY

The story of India’s perishable foods business has long been one of innovations. While Amul, via

the Gujarat Co-Operative Milk Marketing Federation, has already made a success out of its

supply chain, there are many others in the milk and milk-based products that are now trying out

various options.

Take the milk supply chain. Broadly, rural farmers / villagers bring their milk daily to the milk

collection centre, or agent, for sale. This milk is chilled at the nearest chilling centre before

onward transport for processing at the local/ regional dairy. Here the dairy pasteurizes it, converts

it into products. This is the supply side of the business, which has essentially not changed.

However, a look through the annual reports of 34 listed food products companies throws up some

interesting ideas, of leveraging the logistics of milk procurement for reverse logistics: using the

system to drive product penetration into rural markets. For example Heritage Foods (HFIL), with

sales of Rs 245 crore from its liquid milk business

This is how the company plans to configure its retail supply chain, using its milk procurement

chain, in the company’s own words, from its annual report 2005-06: “HFIL has an established

supply chain of their dairy business, which procures milk from farmers in Rural Areas (mainly in

AP and some parts of Karnataka and Tamil Nadu). The starting point will be to harness the

current infrastructure to penetrate into the rural market. e.g. instead of direct retail presence milk

collection agents will be mobilized for selling products, reverse logistics in the supply chain can

be used to transfer goods from the Urban markets to rural markets; thus able to dis-intermediate

the supply chain cost, provide benefits to the rural customer & improve better penetration on the

rural areas.

It will connect to consumers through Agents (predominantly current Milk Collection Agents of

HFIL) who will sell the goods (mainly FMCG) to the consumers. The value preposition for the

rural customer will be the availability of the quality/genuine FMCG products mostly branded

ones at a better price. This will also provide opportunity to HFIL to launch & strengthen their

private label in rural markets which is slightly easier turf for private label than the urban

markets.”

Another dairy firm, Umang Dairies, also outlines its plans in the annual report. It plans to

leverage its network of 18 depots, 6 consignment agents and 650 distributors and reaching 2.5

lakh outlets. On the procurement side, it collects milk from 2.5 lakh farmers in 800 villages.

Umang plans to put more products through its retail network on one side, and the procurement on

the other.

The reverse logistics option has been used in several companies already- like in durables-FMCG;

cars-durables combos. But the vast network of milk procurement can still be tapped: the milk

collection centers are plentiful, agents are much clued onto local needs and wants, and because of

the perish ability of the milk; transport systems are more reliable than otherwise. With the retail

boom now spreading into smaller cities of India, there are opportunities on both sides of the

chain: all it needs an entrepreneur’s touch. ITC’s Agri Business Division, one of India’s largest

exporters of agricultural commodities, has conceived e-Choupal as a more efficient supply chain

aimed at delivering value to its customers around the world on a sustainable basis.                        

The e-Choupal model has been specifically designed to tackle the challenges posed by the unique

features of Indian agriculture, characterized by fragmented farms, weak infrastructure and the

involvement of numerous intermediaries, among others. E-Choupal’ also unshackles the potential

of Indian farmer who has been trapped in a vicious cycle of low risk taking ability - low

investment - low productivity - weak market orientation - low value addition - low margin - low

risk taking ability. This made him and Indian agribusiness sector globally uncompetitive, despite

rich & abundant natural resources.                                              

                      Such a market-led business model can enhance the competitiveness of Indian

agriculture and trigger a virtuous cycle of higher productivity, higher incomes, and enlarged

capacity for farmer risk management, larger investments and higher quality and productivity.        

...As more and more businesses turn to on-line purchasing, their means of supplying the customer

with those goods has undergone a drastic change. No longer does the consumer have to drive to a

store in order to purchase a wanted item, all that is needed is a computer, in internet connection

and the url for the company. By logging onto a web site hosted by a company a consumer is able

to browse on-line catalogues of items offered, select which item or items appeal to them, place

the purchase request and pay for the purchase without having to leave the comfort of their home

or office.

In today's market we are seeing a much easier flow of upstream information, consumer to

producer and of downstream information, producer to consumer (IEEE, 2005). In order to

facilitate a downstream flow of information so consumers can make informed decisions there will

be a continued need for information aggregators. A single manufacturer won't be able to perform

all of the processing steps for a consumer but there will no longer be a need for a middle man to

basically repackage the order.

Packages are now able to go directly from the business to the consumer without the hassle (or

extra cost) of a warehouse, or retailer. Point-to-point shipping is available from web based

markets using such shipping services as Federal Express, United Parcel Service and the United

States mail. Since businesses doing a large amount of shipping are able to negotiate better

shipping costs than a consumer could often the shipping of a product is free or at least at a greatly

reduced rate. Free shipping is simply another bonus to the consumer along with the ease of on-

line purchasing.

The Indian rural market has a huge demand base and offers great opportunities to marketers.

Two-thirds of Indian consumers live in rural areas and almost half of the national income is

generated here. The reasons for heading into the rural areas are fairly clear. The urban consumer

durable market for products like colour TVs, washing machines, refrigerators and air conditioners

is growing annually at between 7 per cent and 10 per cent.

The rural market is zooming ahead at around 25 per cent annually. "The rural market is growing

faster than urban India now," says Venugopal Dhoot, chairman of the Rs 989 -crore (Rs billion)

Videocon Appliances. "The urban market is a replacement and up gradation market today," adds

Samsung's director, marketing, Ravinder Zutshi.

Reasons for improvement of business in rural area

  * Socio-economic changes (lifestyle, habits and tastes, economic status)

  * Literacy level (25% before independence – more than 65% in 2001)

  * Infrastructure facilities (roads, electricity, media)

  * Increase in income 

  * Increase in expectations

MART, the specialist rural marketing and rural development consultancy has found that 53 per

cent of FMCG sales lie in the rural areas, as do 59 per cent of consumer durable sales. Of two

million BSNL mobile connections, 50 per cent went to small towns and villages. TO expand the

market by tapping the countryside, more and more MNCs are foraying into India's rural markets.

Among those that have made some headway are Hindustan Lever, Coca-Cola, LG Electronics,

Britannia, Standard Life, Philips, Colgate Palmolive and the foreign-invested telecom companies.

THE HURDLES

The rural market may be alluring but it is not without its problems: Low per capita disposable

incomes that is half the urban disposable income; large number of daily wage earners, acute

dependence on the vagaries of the monsoon; seasonal consumption linked to harvests and

festivals and special occasions; poor roads; power problems; and inaccessibility to conventional

advertising media. However, the rural consumer is not unlike his urban counterpart in many

ways.

Both manufacturers and logistics companies are hampered by the problem of poor infrastructure

connectivity in rural areas. The hardest hit by the inadequate transport connectivity are likely to

be the FMCG, food processing, pharmaceuticals, and consumer durables industries, which have a

huge potential consumer base in these areas. The former two industries are also affected on the

sourcing side since they are highly dependent on the raw materials sourced from rural areas.

"While foreign companies need to engage logistics service providers since they are not

conversant with the culture, government policies, or distribution landscape of the country,

domestic companies are outsourcing their logistic activities to organized third-party logistics

(3PLs) to focus on their core competencies. Both manufacturers and logistics companies are

hampered by the problem of poor infrastructure connectivity in rural areas.

"Apart from the development of dedicated railway freight corridors, focused development of

inland waterways and the strengthening of road networks through the national highway

development program are expected to improve the market reach of most industries," he said.

"Owing to these efforts, professional logistics services can be extended up to rural areas, leading

to a higher scale of logistics activities outsourcing."

The more daring MNCs are meeting the consequent challenges of availability, affordability,

acceptability and awareness (the so-called 4 As)

Availability

The first challenge is to ensure availability of the product or service. India's 627,000 villages are

spread over 3.2 million sq km; 700 million Indians may live in rural areas, finding them is not

easy. However, given the poor state of roads, it is an even greater challenge to regularly reach

products to the far-flung villages. Any serious marketer must strive to reach at least 13,113

villages with a population of more than 5,000. Marketers must trade off the distribution cost with

incremental market penetration. Over the years, India's largest MNC, Hindustan Lever, a

subsidiary of Unilever, has built a strong distribution system which helps its brands reach the

interiors of the rural market. To service remote village, stockiest use auto rickshaws, bullock-

carts and even boats in the backwaters of Kerala. Coca-Cola, which considers rural India as a

future growth driver, has evolved a hub and spoke distribution model to reach the villages. To

ensure full loads, the company depot supplies, twice a week, large distributors which who act as

hubs. These distributors appoint and supply, once a week, smaller distributors in adjoining areas.

LG Electronics defines all cities and towns other than the seven metros cities as rural and semi-

urban market. To tap these unexplored country markets, LG has set up 45 area offices and 59

rural/remote area offices.

Affordability

The second challenge is to ensure affordability of the product or service. With low disposable

incomes, products need to be affordable to the rural consumer, most of whom are on daily wages.

Some companies have addressed the affordability problem by introducing small unit packs.

Godrej recently introduced three brands of Cinthol, Fair Glow and Godrej in 50-gm packs, priced

at Rs 4-5 meant specifically for Madhya Pradesh, Bihar and Uttar Pradesh — the so-called

`Bimaru' States.

Hindustan Lever, among the first MNCs to realize the potential of India's rural market, has

launched a variant of its largest selling soap brand, Lifebuoy at Rs 2 for 50 gm. The move is

mainly targeted at the rural market. Coca-Cola has addressed the affordability issue by

introducing the returnable 200-ml glass bottle priced at Rs 5. The initiative has paid off: Eighty

per cent of new drinkers now come from the rural markets. Coca-Cola has also introduced

Sunfill, a powdered soft-drink concentrate. The instant and ready-to-mix Sunfill is available in a

single-serve sachet of 25 gm priced at Rs 2 and mutiserve sachet of 200 gm priced at Rs 15.

Acceptability

The third challenge is to gain acceptability for the product or service. Therefore, there is a need to

offer products that suit the rural market. One company which has reaped rich dividends by doing

so is LG Electronics. In 1998, it developed a customized TV for the rural market and christened it

Sampoorna. It was a runway hit selling 100,000 sets in the very first year. Because of the lack of

electricity and refrigerators in the rural areas, Coca-Cola provides low-cost ice boxes — a tin box

for new outlets and thermocol box for seasonal outlets.

The insurance companies that have tailor-made products for the rural market have

performed well. HDFC Standard LIFE topped private insurers by selling policies worth Rs 3.5

crore in total premia. The company tied up with non-governmental organizations and offered

reasonably-priced policies in the nature of group insurance covers. With large parts of rural India

inaccessible to conventional advertising media — only 41 per cent rural households have access

to TV — building awareness is another challenge. Fortunately, however, the rural consumer has

the same likes as the urban consumer — movies and music — and for both the urban and rural

consumer, the family is the key unit of identity. However, the rural consumer expressions differ

from his urban counterpart. Outing for the former is confined to local fairs and festivals and TV

viewing is confined to the state-owned Doordarshan. Consumption of branded products is treated

as a special treat or indulgence.

Hindustan Lever relies heavily on its own company-organized media. These are promotional

events organized by stockiest. Godrej Consumer Products, which is trying to push its soap brands

into the interior areas, uses radio to reach the local people in their language.

Coca-Cola uses a combination of TV, cinema and radio to reach 53.6 per cent of rural

households. It doubled its spend on advertising on Doordarshan, which alone reached 41 per cent

of rural households. It has also used banners, posters and tapped all the local forms of

entertainment. Since price is a key issue in the rural areas, Coca-Cola advertising stressed its

`magical' price point of Rs 5 per bottle in all media.LG Electronics uses vans and road shows to

reach rural customers. The company uses local language advertising. Philips India uses wall

writing and radio advertising to drive its growth in rural areas.

The key dilemma for MNCs eager to tap the large and fast-growing rural market is whether they

can do so without hurting the company's profit margins. Mr Carlo Donati, Chairman and

Managing-Director, Nestle, while admitting that his company's product portfolio is essentially

designed for urban consumers, cautions companies from plunging headlong into the rural market

as capturing rural consumers can be expensive. "Any generalization" says Mr Donati, "about rural

India could be wrong and one should focus on high GDP growth areas, be it urban, semi-urban or

rural."

The Big Picture:

ITC's Agri Business Division, one of India's largest exporters of agricultural commodities, has

conceived e-Choupal as a more efficient supply chain aimed at delivering value to its customers

around the world on a sustainable basis.

The e-Choupal model has been specifically designed to tackle the challenges posed by the unique

features of Indian agriculture, characterised by fragmented farms, weak infrastructure and the

involvement of numerous intermediaries, among others.

'e-Choupal' also unshackles the potential of Indian farmer who has been trapped in a vicious cycle

of low risk taking ability > low investment > low productivity > weak market orientation > low

value addition > low margin > low risk taking ability. This made him and Indian agribusiness

sector globally uncompetitive, despite rich & abundant natural resources.

Such a market-led business model can enhance the competitiveness of Indian agriculture and

trigger a virtuous cycle of higher productivity, higher incomes, enlarged capacity for farmer risk

management, larger investments and higher quality and productivity.

Further, a growth in rural incomes will also unleash the latent demand for industrial goods so

necessary for the continued growth of the Indian economy. This will create another virtuous cycle

propelling the economy into a higher growth trajectory.

The Model in Action:

Appreciating the imperative of intermediaries in the Indian context, 'e-Choupal' leverages

Information Technology to virtually cluster all the value chain participants, delivering the same

benefits as vertical integration does in mature agricultural economies like the USA.

'e-Choupal' makes use of the physical transmission capabilities of current intermediaries -

aggregation, logistics, counter-party risk and bridge financing -while disintermediating them from

the chain of information flow and market signals.

With a judicious blend of click & mortar capabilities, village internet kiosks managed by farmers

- called sanchalaks - themselves, enable the agricultural community access ready information in

their local language on the weather & market prices, disseminate knowledge on scientific farm

practices & risk management, facilitate the sale of farm inputs (now with embedded knowledge)

and purchase farm produce from the farmers' doorsteps (decision making is now information-

based).

Real-time information and customised knowledge provided by 'e-Choupal' enhance the ability of

farmers to take decisions and align their farm output with market demand and secure quality &

productivity. The aggregation of the demand for farm inputs from individual farmers gives them

access to high quality inputs from established and reputed manufacturers at fair prices. As a direct

marketing channel, virtually linked to the 'mandi' system for price discovery, 'e-Choupal'

eliminates wasteful intermediation and multiple handling. Thereby it significantly reduces

transaction costs.

'e-Choupal' ensures world-class quality in delivering all these goods & services through several

product / service specific partnerships with the leaders in the respective fields, in addition to

ITC's own expertise.

While the farmers benefit through enhanced farm productivity and higher farm gate prices, ITC

benefits from the lower net cost of procurement (despite offering better prices to the farmer)

having eliminated costs in the supply chain that do not add value.

 The Status of Execution:

Launched in June 2000, 'e-Choupal', has already become the largest initiative among all Internet-

based interventions in rural India. 'e-Choupal' services today reach out to over 4 million farmers

growing a range of crops - soyabean, coffee, wheat, rice, pulses, shrimp - in over 40,000 villages

through 6500 kiosks across ten states (Madhya Pradesh, Haryana, Uttarakhand, Karnataka,

Andhra Pradesh, Uttar Pradesh, Rajasthan, Maharashtra, Kerela and Tamil Nadu).

The problems encountered while setting up and managing these 'e-Choupals' are primarily of

infrastructural inadequacies, including power supply, telecom connectivity and bandwidth, apart

from the challenge of imparting skills to the first time internet users in remote and inaccessible

areas of rural India.

Several alternative and innovative solutions - some of them expensive - are being deployed to

overcome these challenges e.g. Power back-up through batteries charged by Solar panels,

upgrading BSNL exchanges with RNS kits, installation of VSAT equipment, Mobile Choupals,

local caching of static content on website to stream in the dynamic content more efficiently, 24x7

helpdesk etc.

Going forward, the roadmap includes plans to integrate bulk storage, handling & transportation

facilities to improve logistics efficiencies.

As India's 'kissan' Company, ITC has taken care to involve farmers in the designing and

management of the entire 'e-Choupal' initiative. The active participation of farmers in this rural

initiative has created a sense of ownership in the project among the farmers. They see the 'e-

Choupal' as the new age cooperative for all practical purposes.

This enthusiastic response from farmers has encouraged ITC to plan for the extension of the 'e-

Choupal' initiative to altogether 15 states across India over the next few years. On the anvil are

plans to channelise other services related to micro-credit, health and education through the same

'e-Choupal' infrastructure.

Another path-breaking initiative - the 'Choupal Pradarshan Khet', brings the benefits of

agricultural best practices to small and marginal farmers. Backed by intensive research and

knowledge, this initiative provides Agri-extension services which are qualitatively superior and

involves pro-active handholding of farmers to ensure productivity gains. The services are

customized to meet local conditions, ensure timely availability of farm inputs including credit,

and provide a cluster of farmer schools for capturing indigenous knowledge. This initiative,

which has covered over 70,000 hectares, has a multiplier impact and reaches out to over 1.6

million farmers.

Optimizing the supply chain function is a formidable task and more so in the Indian context

where the supply chain caters to over a billion people and spreads across several hundred cities

and infinite number of villages. To add to the complexity, there is foreplay of factors like regional

variations, infrastructure obstacles, complex tax structure, rising customer expectations, etc.

Conventional approaches to logistics & supply chain design and redesign may not work in India

given the complexity involved. What is required is both indepth knowledge of operating realities

and innovative approaches to optimization.