Background and Business Model
Small producers of milk in the state of Gujarat established Amul Diary in 1946. This was a reaction to the inefficient, corrupt monopoly (Polson) in place at that point of time. The objective was the ensure that the small fragmented milk producers received the maximum possible remuneration while creating low cost high quality products for consumers, while eliminating the middlemen. Ensuring availability and providing great service to both the suppliers and consumers was of great importance as well.
The main challenges to effectively achieving Amul’s vision are
- Highly fragmented, small scale supplier base
- Low income consumers
- Lack of infrastructure
- Milk is a highly perishable good
- Lack of capital
Amul has very effectively aligned its business and operational models to achieve its vision since its launch.
Amul has effectively managed both upstream and downstream partners in establishing one of the most complex supply chains across the globe. The producers bring milk to the village cooperatives (foot/bicycle), which is then transported to the unions by specialised trucks. From the union’s production facility, milk is transported to wholesale distributors who then transport the milk to retailers in specialised trucks.
All of these processes are outsourced to third party logistics and retail partners to ensure efficient execution. A stringent verification process and guarantees for the safety of the milk products are required from channel members before they are on-boarded to the network.
To the wholesalers and retailers, Amul offers reasonable margins on a high volume good. It offers support in demand prediction, reducing the potential bullwhip effects that might arise from inexperienced sales partners. It also offers easy repayment programs for capital investments in infrastructure (freezers etc) by the retailers.
The heads of the village cooperatives sit on the management of the union at the district level. The heads of the unions at the district level comprise the governing board for the federation. This board appoints the chairman of Amul diary. This strategy has effectively ensured that the management has “skin in the game”.
The incentive structure is also aligned in that it reward suppliers who generate the most amount of business, which is judged based on a mix of the quality and quantity of milk supplied.
Increasing the Supply of Milk
As we saw in the e-choupal case, increasing the supply of product leads to better economies of scale (optimizing sunk costs). To this end, the unions provide various aids to the milk producers (like cattle-feed, veterinary aid, technical training) obtained at a low cost due to large scale sourcing, to increase supply. Aids are also aimed at overall community development.
Bridging Gaps in a Fragmented/Unstable Supply Side Market
Given the fragmented nature of the producers, supply tends to vary based on various factors, but demand remains fairly constant. The unions have invested in cold storage facilities to ensure that surpluses can be stored and redistributed to village level centers that are facing a shortage of supply, efficiently reducing supply instabilities.
An automatic Milk Collection System was established that could identify and test the quality/quantity of milk. This leads to time saving since over 1000 producers enter a village cooperative each day and increased transparency.
Enterprise-wide Integrated Application Systems were used to align various sub software systems in place. A Geographic Information System was also established to view supply disparities in real time. Cyber stores have been recently launched as well.
One of the most interesting things about Amul is how a dairy cooperative evolved into a social commentator through their advertisements. The cartoon is usually has the Amul mascot (Amul Girl) in a current context with a catchy tagline. These ads have now become an establishment of their own right, elevating Amul’s brand image from just a diary cooperative to a household name outside the diary products context.
Amul diversified into various diary products such as milk powders, butter, cheese, yogurt, ice creams and a number of other variations specific to the Indian market. It has managed to capture significant market share in others. This move was highly strategic once the brand image (quality at affordable prices) and distribution chains were established – a clear indication of successful horizontal integration.
Business Strategies for Managing Complex Supply Chains in Large Emerging Economies: The Story of AMUL; Chandra, Pankaj; Tirupati, Devanath; IIM A – April 2003
A case study of AMUL cooperative in India In relation to organizational design and operational efficiency; Prasad, Ruchira; International Journal of Scientific & Engineering Research Volume 4, Issue 1, January-2013 1
“Role of Cooperatives in Inclusive Growth – Comparative study of success of AMUL & Lijjat Papad in India.” Victoria, Queen and Ingale, M.K.