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Subject: BPSM Case No. 6( For C,D & F Div’s only)
Amul – Transcending Barriers
Amul is the name derived from the Sanskriti word “Amulya,” which means invaluable. Formed in 1946, it is a brand name managed by an Indian co-operative organization, Gujarat Co-operative Milk Marketing Federation Ltd. (GCMMF), which in 2012 is jointly owned by 3.03 million milk producers in Gujarat, India. Amul is based in Anand, Gujarat and has been a successful example of co-operative organization. Amul spurred the white Revolution in India, which in turn made India the largest producer of milk, and milk products in the world. It is also the world’s largest vegetarian cheese brand.
Amul is the largest food brand in India and world’s largest pouched milk with an annual turnover of US $2.2 billion (2010-11). GCMMF is the largest food products marketing organization of India. Over the last five and a half decades, dairy co-operatives in Gujarat have created an economic network that links more than 3.1 million village milk producers with millions of consumers in India. These co-operatives collect on an average 9.4 million liters of milk per day from their producer members, more than 70% of whom are small, marginal farmers and landless laborers and include a sizeable population of tribal folk and people belonging to the scheduled castes.
Currently, the Unions making up GCMMF have 3.1 million producer members with milk collection average of 9.10 million liters per day. Besides India, Amul has entered overseas markets such as Mauritius, UAE, USA, Oman, Bangladesh, Australia, China, Singapore, Hong Kong and few South African countries.
History
The seeds of this unusual saga were more than 65 years back in Anand, a small town in the state of Gujarat in western India. The exploitative trade practices followed by the local trade cartel triggered off the co-operative movement. Angered by unfair and manipulative practices followed by the trade, the farmers of the district approached the great Indian patriot vallabhbhai Patel for a solution. He advised them to get rid of middlemen and form their own cooperative, which would have procurement, processing and marketing under their control.
In 1946, the farmers of this area went on a milk strike refusing to be cowed down by the cartel. Under the inspiration of Sardar Patel, and the guidance of leaders like Morarji Desai and Tribhuvandas Patel, they formed their own cooperative in 1946.
This cooperative, the Kaira District Cooperative Milk Producers Union Ltd. Began with just two village dairy cooperative societies and 247 liters of milk and is today better known as Amul Dairy, Amul grew from strength to strength thank to the inspired leadership of Tribhuvandas Patel, the founder Chairman and the committed professionalism of Dr. Verghese Kurien, who was entrusted the task of running the dairy from 1950.
Lal Bahadur Shastri, then-Prime Minister of India, decided that the same approach should become the basis of a National Dairy Development policy. He understood that the success of Amul could be attributed to four important factors. The farmers owed the dairy, their elected representatives managed the village societies and the district union, they employed professionals to operate the dairy and manage its business. Most importantly, the cooperative were sensitive to the needs of formers and responsive to their demands.
The National Dairy Development Board was set up in 1965 with the basic objective of replicating the Amul model. Dr. Kurien was chosen to head the institution as its Chairman and asked to replicate this model throughout the country.
Vision and Core Values
AMUL’s business strategy driven by its twin objectives of: * Long term, sustainable growth to its member farmers * Value proposition to a large customer base by providing milk and other dairy products at a low price
External Considerations
Milk production has to compete in economic terms for allocation of resources of production with other competing options such as crop cultivation. In recent years, Indian dairy farmers have been facing soaring input costs which have adversely impacted viability of milk production as an economic activity. Some reports even suggest that in certain regions of India, farmers are finding it more profitable to sell their cattle to meat & leather industry, rather than continue milk business.
The same reports also suggest that this phenomenon has already led to closure of some milk cooperatives in many parts of India. If true, this indicates a disturbing trend, which if it continues unchecked can severely undermine the self-sufficiency of Indian dairy sector, achieved through sixty years of hard work. One must ensure remunerative price of milk to the farmers, even if this implies further increase in prices of milk and dairy products to the consumers in the short term. While urban consumer may have to bear the burden of short-term inflation in milk and milk products, they will benefit long term price stability due to accelerated growth in milk production.
How ever there is a trade off in the short run: while focused on the farmers, the company may not be able to provide value-for-money to the customers. It is not sure as to such market conditions would really enhance the company’s prospects.
Internal considerations
The company’s main focus is to play a leadership role in Indian dairy industry and leading the Indian dairy cooperative sector thereby making AMUL the world’s largest milk producer. We can see AMUL is sticking to its products line i.e. milk and its variants after having experimented with other product lines like pizzas, cheese, burgers, ketchup etc.
AMUL’s Vision
A strategic vision describes the route a company intends to take in developing and strengthening its business. Its lay out the company’s strategic course in preparing for the future. AMUL’s strategic vision has been articulated as: “Provide remunerative returns to the farmers and also serve the interest of consumers by providing quality products which are good value for money.”
Ethical and Stated Core Values
The following has been measures for fulfilling the vision and ethical aspects of the company:
Fair Pricing
Amul has long been implementing the fair pricing model for the consumer as well as the farmer, who sells the milk to the respective cooperative society. The first step towards discharging the Corporate Social Responsibility (CSR) is the business philosophy of the GCMMF. It is two-fold-to serve the interests of milk producers and two, to provide quality products to consumers as value for money. The milk producers are paid for their milk in accordance with market factors and realization of value for their produce.
Quality
Amul follows Total Quality Management (TQM) to ensure high quality of its products. It has carried out comprehensive change processes in TQM) to ensure that they are one step ahead in quality management. Under quality assurance program, the federation has supported the member unions for strengthening infrastructure for quality and clean milk production by implementing various Central and State government programs.
Advertising & Promotion
Honesty in advertising, to misrepresent products and services is wrong regardless of the setting or target market – developed or developing market, rich or poor consumers. Amul consciously made efforts to advertise the true and key features regarding quality of the products.
Distribution
At Amul, CSR has been defined as the commitment of business to contribute to sustainable economic development working with employees, their families, the local community, and society at large to improve their quality of life, in ways that are both good for business and good for development. In Amul “Yatrathe” distributors and their salesmen are taken on a visit to Anand. During this visit they are shown dairy plants, their upkeep, international standards of hygiene and quality, the practices adopted for clean milk production, and above all the cooperative philosophy. Through one to one talk with the farmers, the distributors and salesmen realize AMUL is a large business of small farmers.
Amul’s Business Model
The Amul Model is a three—tier cooperative structure. This structure consist of a Dairy Cooperative Society (DCS) at the village level affiliated to a Milk Union at the District level which in turn is further federated into a Milk Federation at the state level. The above three-tier structure was set up in order to delegate the various functions; milk collection is done at the Village Dairy Society, Milk Procurement & Processing at the District Milk Union, and Milk & Milk Products Marketing at the State Milk Federation. This helps in eliminating not only internal competition but also ensuring that economies of scale are achieved. As the above structure was first evolved at Amul in Gujarat and thereafter replicated all over the country under the Operation Flood Programme, it is known as the ‘Amul Model’ or ‘Anand Pattern’ of Dairy Cooperatives.
The Amul pattern aims at maximizing the farmer’s profit while ensuring efficient delivery of quality milk at a reasonable cost to the consumer, thus meeting a marketing as well as social development challenge. It operates in a three-tier structure:
The Village Society
Replicating the Anand model, a village Dairy Cooperative Society (DCS) is formed by milk producers. Any producer can become a DCS member by buying a share and committing to sell his stock of milk exclusively to it. Each DSC has a milk collection center where members take their daily stock of milk. Each member’s milk supply is tested for quality, and the payments are based on the percentage of fat and the SNF content. At the end of each year, a portion of the DCS’ profits is used to pay each member a patronage bonus, depending on the quantity of milk. The District Union
A ‘district cooperative milk producers’ union’ is “owned” by the dairy co-operative societies. The union buys the milk from all the societies and processes and markets the fluid milk and products. Most unions also provide a range of inputs and services to DCSs and their members, such as feed, veterinary care, and artificial insemination. The employees of these district unions train and provide consulting services to support the local DCS leaders and staff.
The State Federation
The district level cooperative milk producers’ union in the state comprises of the ‘state federation’, which in turn is responsible for marketing milk and milk products of the member unions. Some federations also manufacture feed and support other union activities.
The Amul pattern involves people in their own development through cooperatives where professionals are accountable to leader elected by producers. The institutional infrastructure – village cooperative, dairy and cattle feed plants, and state and national marketing – is owned and controlled by farmers.
The Amul pattern’s success led to the certain of similar structures of milk producers in other districts of Gujarat, drawing on Amul’s experience in project planning and execution. Between 1977-78 and 1991-92, the production of milk in Gujarat increased from about 2-mt to approximately 3.6-mt-an average growth of about 4.3 percent per annum.
Financial Strategy and the AMUL Model
AMUL’s finance strategy is driven preliminarily 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 market 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 many thus be characterized by two elements: 1. Retention of surplus to fund growth and development 2. Limited/no credit, i.e. transactions are essentially cash only
For example, payment for milk procured by village societies is in cash 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 if both domestic and MNC, competitors of AMUL.
Revenue Patterns
GCMMF has crossed the USD 2-billion turnover mark (Rs. 9,774 Crore) in 2010-11. The federation’s turnover grew at compounded annual growth rate (CAGR) of 12% in the last four years.
The organization achieved USD 1-billion turn over in the 33rd year of its formation, while it look just four more years to add another 1 billion USD to it. GCMMF has set an ambitious target of crossing Rs. 12000-crore turnover mark in 2011-12. The market share of various categories of products has also gone up. The butter sales showed growth of 26% in 2010-11, while the milk pouch sale shot up 34% in the same period. The beverage range of dairy products sold under Amul like lassi, Flavored-milk, and butter-milk have shown growth of 28%.
The federation has undertaken its largest ever distribution expansion exercise to extend its reach to smaller towns and semi-urban areas. GCMMF plans to appoints 150 super distributors with a view to extend its reach to 3,000 new smaller towns and semi-urban areas in 2011-12.
GCMMF’s plan to add 2,000 more outlets during the current fiscal year take the total number of exclusive parlors in parts of the country to 8,000. Further, to expand the network and make chilled products available, the co-operative will be hiring 200 super distributors this year. During 2010-11, Amul brand sold 70-lakh liter of packaged milk every day. GCMMF is selling 17-lakh liter of Amul pouched milk in Delhi alone out of the total 35 lakh liter milk sold outside Gujarat. Milk procurement by the cooperative giant in 2010-11 was 93 lakh kilograms per day, which was now, touched 96 lakh kilograms of milk/day.
In addition, 6 to 7 lakh kilograms per day milk and milk solid is being procured from other cooperatives in the country to take case of additional demand of the consumers. The average milk price paid to farmer has also increased from Rs. 337 per kg last year to average prices of Rs. 425 per kg fat.
Amul has emerged as a major force to reckon with. In spite of aggressive competitors and market pressures, the co-operative model has reinforced the efficacy of social entrepreneurship extending beyond the definition. The GCMMF has stood out as a legend and symbol of a new approach and dimension to business and profitability.
Analyze
The challenges confronted by Amul initially & the challenges that it is likely to confront in future with respect to the product, place, position, price and end user ( Farmer & Customer)
The implication of value chain? Where does the value lie for Amul?
Using the Ansoff’s Model, analyze the options for Amul and discuss whether the choices adopted by Amul are relevant?
Adopting the five force framework, identify challenges that Amul can encounter and areas it needs to focus to remain competitive and relevant? Can it still pursue the co-operative business model?