Amul: Deary Cooperative in India Essay

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. A subset of strategies followed by AMUL would still be very useful. Thus, firms that are contemplating addressing large undeveloped markets or have an intention of taking advantage of extensive but marginal supplier base would still benefit. Introduction 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 tu rn (about 400 kilometers away). India ranked nowhere amongst milk producing countries in the world in 1946. The producers of Kaira district took advice of the nationalist leaders, Sardar Vallabhbhai Patel (who later became the first Home Minister of free India) and Morarji Desai (who later become the Prime Minister of India). They advised the farmers to form a cooperative and supply directly to the Bombay Milk Scheme instead of selling it to Polson (who did the same but gave low prices to the producers). Thus the Kaira District Cooperative was established to collect and process milk in the district of Kaira. Milk collection was also decentralized, as most producers were marginal farmers who would deliver 1-2 litres of milk per day. Village level cooperatives were established to organize the marginal milk producers in each of these villages. The first modern dairy of the Kaira Union was established at Anand (which popularly came to be known as AMUL dairy after its brand name). The new plant had the capacity to pasteurise 300,000 pounds of milk per day, manufacture 10,000 pounds of butter pe r day, 12,500 pounds of milk powder per day and 1,200 pounds of casein per day. Indigenous R&D and technology development at the Cooperative had led to the successful production of skimmed milk powder from buffalo milk – the first time on a commercial scale anywhere in the world. The foundations of a modern dairy industry in India had just been laid as India had one of the largest buffalo populations in the world. We move to year 2000. The dairy industry in India and particularly in the State of Gujarat looks very different. India has emerged as the largest milk producing country in the world. Gujarat emerges as the most successful State in terms of milk and milk product production through its cooperative dairy movement. The Kaira District Cooperative Milk Producers’ Union Limited, Anand becomes the focal point of dairy development in the entire region and AMUL emerges as one of the most recognized brands in India, ahead of many international brands. Starting with a single shared plant at Anand and two village cooperative societies for milk procurement, the dairy cooperative movement in the State of Gujarat had evolved into a network of 2.12 million milk producers (called farmers) who are organized in 10,411 milk collection independent cooperatives (called Village Societies). These Village Societies (VS) supply milk to thirteen independent dairy cooperatives (called Unions). AMUL is one such Union. Gujarat Cooperative Milk Marketing Federation or GCMMF is the marketing entity for products of all Unions in the State of Gujarat. GCMMF has 42 regional distribution centers in India, serves over 500,000 retail outlets and exports to more than 15 countries. All these organizations are independent legal entities yet loosely tied together with a common destiny. In a recent survey GCMMF was ranked amongst the top ten FMCG firms in the country while AMUL was rated the second most recognized brand in India amongst all Indian and MNC offerin gs. 2nd Phase: In 1966, Amul hired Sylvester daCunha, then managing director of the advertising agency AS to design a new ad campaign for Amul Butter. daCunha designed an add campaign as series of hoardings with topical ads, relating to day-to-day issues.[14]The campaign was widely popular and earned a Guiness world record for the longest running ad campaign in the world. Since the 1980s, cartoon artist Bharat Dabholkarhas been involved with sketching the Amul ads, who rejected the trend of using celebrities in advertisement campaigns. Despite encountering political pressure on several occasions, daCunha’s agency has made it a policy of not backing down. Some of the more controversial Amul ads include one commenting on Naxalite uprising in West Bengal, on the Indian Airlines employees strike, and the one depicting the Amul butter girl wearing a Gandhi cap. Amul hired DraftFCB+Ulka for the brands of Amul milk, chocolates, paneer, ghee, ice-cream. The establishment of Amul is also known as White Revolution. The White Revolution of India inspired the notable Indian film-makerShyam Benegal to base his film Manthan (1976) on it. The White Revolution ushered an era of plenty from a measly amount of milk production and distribution. Aside from the great measurable success that this project was, it also demonstrated the power of â€Å"collective might†. A small set of poor farmers of Kheda district in Gujarat had the vision and foresight to act in a way that was good for the society and not for the self alone. There have been several factors driving the restructuring of the dairy business (which has chiefly been organized around cooperative principles). These include efficiencies in managing fewer large plants versus a number of under-utilized small plants, need for more milk supply (and declining membership), need to offer wide variety, improvements in trucking & milk handling thereby facilitating long hauls, opening of new international markets (also markets for new products), seeking marketing clout and need to bring investment from outside the cooperatives. AMUL in India has learnt from many experiences and has been influenced by practices in dairies around the world especially in its formative years. It has, however, formed it own organizational structure (i.e., AMUL is a cooperative of village cooperatives) to bring about a change in the lives of marginal farmers of India. The AMUL experience has attracted considerable interest from the development community – predominantly an thropologists, development & agriculture economists, and political scientists. Key areas of their enquiry have been the role of AMUL in reducing social and economic inequality in the region of the cooperative, the sociology of cooperation, interface of the dairy cooperative and the rural power structure, relation of the State and the Cooperative and the role of government in its growth (interestingly, AMUL has successfully managed to exercise its independence from the government unlike other cooperatives in India), elements & replicability of the cooperative movement at Anand, cost effectiveness of subsidies to AMUL (in its initial years) etc. A few studies have evaluated the operational effectiveness of the operations at AMUL. Studies have reported usage of mobile veterinary dispensaries, wireless sets to link mobile units to service centers as early 1951, developing a programme of cross breeding of cows in early 1970s etc. that have led to a phenomenal rise in productivity of milk (Patel, 1988). 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. 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 simplicity and had their feet rooted firmly amongst people whom they had mobilized – the poor farmers of Anand. The foremost amongst them was Tribhuvandas Patel 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 members. 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 them. Verghese Kurien was one such manager who would, first, shape the destiny of the Union and then the milk movement throughout the country. Several young people left better paying jobs to help create a dream of making India the milk capital of the world. Kurien had learnt the persuasive charm of Tribhuvandas through plain speaking and had soon created a cadre of highly capable managers to whom he had delegated both management as well as commitment. These leaders were created at the village, district and state levels in different organizations of the network. Tribhuvandas knew that his fledgling cooperative needed a technocrat manager who shared his concern for the farmers and also had the tenacity to organize marginal producers. Convincing farmers to join the cooperative required commitment bordering on stubbornness, a can do attitude and a desire to change lives of poor people. Verghese Kurien had those skills and had linkages to the government. He was charismatic in his communication and committed in his effort. Over a period of time, he developed a very close link with the poor farmers who, as he always says, â€Å"w ere his employers† at the cooperative. He would travel through the villages along with Tribhuvandas and work out the details of how the milk collection cooperative would work, how trucks would pickup milk from village societies, how the cattle would have to be taken care of and how all of this would help the poor milk farmer come out of poverty and the clutches of the middleman. Operational details were meticulously planned and executed. And then, he along with two of his close associates would work on the design of the dairy plant including conducting experiments to create powder out of buffalo milk – a task that was ridiculed by all who heard of it including the international aid agencies in the dairy industry. Tribhuvandas and Kurien were able to convince the government also of the value of his efforts and secured funding for several projects of the cooperative. Kurien’s biggest strength lay in his ability to convince people that the cause of rural farmers was important thus establishing an important shar ed value. Subsequently, he could convince the government to replicate the AMUL model in almost all states of 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. To summarize, the dual strategy of simultaneous development of the market and member farmers has resulted in parallel growth of demand and supply at a steady pace and in turn assured the growth of the industry over an extended period of time. Cost Leadership: AMUL’s objective of providing a value proposition to a large customer base led naturally to a choice of cost leadership position. Given the low purchasing power of the Indian consumer and the marginal discretionary spending power, the only viable option for AMUL was to price its products as low as possible. This in turn led to a focus on costs and had significant implications for managing its operations and supply chain practices (described later). Focus on Core Activities: In view of its small beginnings and limited resources, it became clear fairly early that AMUL would not be in a position to be an integrated player from milk production to delivery to the consumer. Accordingly, it chose a strategy to focus on core dairy activities and rely on third parties for other complementary needs. This philosophy is reflected in almost all phases of AMUL network spanning R&D, production, collection, processing, marketing, distribution, retailing etc. For example, AMUL focused on processing of liquid milk and conversion to variety of dairy products and associated research and development. On the other hand, logistics of milk collection and distribution of products to customers was managed through third parties. However, it played a proactive role in making support services available to its members wherever it found that markets for such services were not developed. For example, in the initial stages, its small and marginal member farmers did not have access to finance, veterinary service, knowledge of basic animal husbandry etc. Thus to assure continued growth in milk production and supply, AMUL actively sought and worked with partners to provide these required services. Managing Third Party Service Providers: Well before the ideas of core competence and the role of third parties in managing the supply chain were recognized and became fashionable, these concepts were practiced by GCMMF and AMUL. From the beginning, it was recognized that the core activity for the Unions lay in processing of milk and production of dairy products. Accordingly, the Unions focused efforts on these activities and related technology development. Marketing efforts (including brand development) were assumed by GCMMF. All other activities were entrusted to third party service providers. These include logistics of milk collection, distribution of dairy products, sale of products through dealers and retail stores, some veterinary services etc. It is worth noting that a number of these third parties are not in the organized sector, and many are not professionally managed. Hence, while third parties perform the activities, the Unions and GCMMF have developed a number of mechanisms to retain control and assure quality and timely deliveries (see the sub-section on Coordination for Competitiveness later in the paper for more details). This is particularly critical for a perishable product such as liquid milk. Financial Strategy: AMUL’s finance strategy is driven primarily by its desire to be self-reliant and thus depend on internally generated resources for funding its growth and development. This choice was motivated by the relatively underdeveloped financial markets with limited access to funds, and the reluctance to depend on Government support and thus be obliged to cede control to bureaucracy. AMUL’s financial strategy may thus be characterized by two elements: (a) retention of surplus to fund growth and development, and (b) limited/ no credit, i.e., all transactions are essentially cash only. For example, payment for milk procured by village societies is in cash and within 12 hours of procurement (most, however, pay at the same time as the receipt of milk). Similarly, no dispatches of finished products are made without advance payment from distributors etc. This was particularly important, given the limited liquidity position of farmer/suppliers and the absence of banking facilities in rural India. This strategy strongly helped AMUL implement its own vision of growth and development. It is important to mention that many of the above approaches were at variance with industry practices of both domestic and MNC competitors of AMUL. 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. Building an organizational network that would represent the farmers and the customers was the most complicated task. A loose confederation was developed with GCMMF representing the voice of the customers, the Unions representing the milk processors and the village societies representing the farmers. Competition in the markets ensured that the entire network was responding to the requirements of the customers at prices that were very competitive. The task of ensuring that returns to the farmers was commensurate with the objectives with which the cooperatives were setup was achieved through representation of farmers at different levels of decision making throughout the network – the board of directors of societies, Unions and the Federation comprised farmers themselves. In order to ensure that most returns from sales went to the producers, the intermediaries had to operate very effectively and on razor thin margins. This turned out to be a blessing in disguise – the operations remained very â€Å"lean† and started to provide cost based advantage to the entire network. AMUL establ ished a group to standardize the process of organizing farmers into village societies. In addition to establishing the criteria for selecting members, the group had to train the VS to run the cooperative democratically, profitably and with concern for its members. This included establishing procedures for milk collection, testing, payment for milk purchased from member farmers and its subsequent sale to the union, accounting, ensuring timely collection and dispatch of milk on milk routes established by the union, etc. The Village Societies Division at AMUL acts as the internal representative of village societies in their dealings with the Union. Cooperative development programmes at the village level for educating & training its members have become an important part of the strategy to build this extensive network. Milk procurement activity at AMUL comprises development and servicing of village societies, increasing milk collection, procurement of milk from societies & its transport to the chilling locations, and resolving problems of farmers and village societies. Thei r stated objective is to ensure that producers get maximum benefits. The Village Societies Division coordinates these activities. Milk collection takes place over a large number of pre-defined routes according to a precise timetable. The field staff of this division also help village societies interface with the Union on various issues ranging from improvement of collection, resolving disputes, repair of equipments to obtaining financing for purchase of equipment etc. In addition, they are also responsible for the formation of new societies, which is an important activity at AMUL. In essence, the organization structure of AMUL allows effective utilization of resources without losing the democratic aspiration of individual members. It is obvious that such a system needs charismatic leadership to achieve consensus across issues – a process that has long-term benefits for any organization. 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 coul d be generated by converting the same to high value products. Interestingly, advertisement & promotion (a la FMCG) was not considered to be enough of value addition and hence the budget was kept relatively small. Instead, GCMMF preferred a lower price with emphasis on efficiency in advertising. In this context, GCMMF provides umbrella branding to all the products of the network. For example, liquid milk as well as various milk products produced by different Unions are sold under the same brand name of AMUL. Interestingly, the advertising has centred on building a common identity (e.g., a happy & healthy â€Å"cartoon† AMUL girl) and evoking national emotion (e.g., the key advertising slogan says â€Å"AMUL – The Taste of India†). GCMMF also plays a key role in working with the Unions to coordinate the supply of milk and dairy products. In essence, it procures from multiple production plants (the thirteen Unions), which in turn procure from the Village Societies registered with each Union. GCMMF distributes its products through third party distribution depots that are managed by distributors who are exclusive to GCMMF. These distributors are also responsible for servicing retail outlets all over the country. GCMMF sales staff manages this process. Retailing of GCMMF’s products takes place through the FMCG retail network in India most of whom are small retailers. Liquid milk is distributed by vendors who deliver milk at homes. Since 1999, GCMMF has started web based ordering facilities for its customers. A well-defined supply chain has been developed to service customers who order in this manner.