May 11, 2020

Enabling Indian Food and Beverage Supply Chains During COVID19 and Beyond

Enabling Indian Food and Beverage Supply Chains During COVID19 and Beyond

Food and beverages (F & B), the fourth largest sector in the Indian economy, has continuously endeavored to keep the supplies of essential goods up and running in the wake of the COVID19 pandemic. While the F & B sector had garnered annual revenues of USD 52. 75 bn in FY 2018-19, it had been experiencing growing headwinds over the last 12 months before the onset of the COVID19 pandemic. It was able to register a growth in value in January and February in FY 2019-20 to the tune of 8.6%. Still, the recovery was cut short by the outbreak of the COVID19 pandemic in March, with growth slipping to 6.2%, owing to disruptions to its supply chain emanating from a wide range of factors. 

How Does the Geographical Footprint of Indian F & B Affect Its Supply Chain Ecosystem?

The Indian F & B industry finds the presence of several large enterprises with a geographical footprint spread over 40 Mega Food Parks across the country. These Mega Food Parks may be further classified into the categories of: in operation, in progress, and in principle. Five of the top enterprises in the F & B industry in the country run food processing and manufacturing facilities at 17 “in operation” Mega Food Parks, with four such Mega Food Parks each in the north, west, and south and two each in the east and the north-east respectively. These large enterprises also have food processing facilities across the 21 “in progress” Mega Food Parks, with eight of these being distributed across the north, five across the southern states, and four across the central-south zone. The industry is characterized by the presence of a well-established distribution network, and non-price competition between the organized and unorganized segments. Traditionally the industry has benefited from the easy availability of raw materials from farmgate players, low labor costs, and value addition by post-farmgate players and MSMEs. 

What Are the Supply Chain Risks and Operational Challenges Facing Indian F & B Now?

From the standpoint of an analysis of the supply chain risks and operational challenges facing the Indian F& B industry, the following factors assume significance:

  • the epidemiological dynamics across the geographical footprint of Indian F & B 
  • the regulatory guidelines for crop harvesting and threshing and social distancing measures to prevent the spread of COVID 19
  • the dependence of Indian F & B enterprises on global suppliers and markets
  • the dependence of Indian F & B enterprises on supplies for value-added services
  • finally, the supply chain risks emanating from a breakdown of contractual obligations and compliance mechanisms in hotspots, red zones, and containment zones

How Does the Spread of the COVID19 Contagion Impact the Indian F & B Industry?

From the standpoint of large Indian F & B enterprises, it is essential to note that its geographical footprint across the Mega Food Parks and beyond farm gates has a direct bearing on the food supply chain and exposure to COVID19 led disruptions. 80% of the final products manufactured and processed by Indian F& B industry comprises of non-food grain items like poultry, dairy farm products, fruits and vegetables, sugars, permissible additives and preservatives, and edible oils and are driven perishable food supply chains (FSCs). These are low-shelf life products, with 60% of volumes being handled by non-farmgate players. Further, a whopping 85% of the FSC is handled by MSMEs that are dynamic and clustered near and in towns. The dynamics of the contagion thus far indicate that urban areas with a high density of population and congested physical environments are especially vulnerable to risks of transmission of the #COVID19 pandemic. 

What to Make of the Regulatory Guidelines and Standard Operating Procedures to Combat COVID19?

An analysis of the Indian FSC on the lines of segregation of farmgate players, post-farmgate participants, and downstream MSMEs can enable F & B enterprises to act with prudence and proactively map contingency and recovery mechanisms to ensure compliance with regulatory measures. 

Farmgate Players in Indian FSC

The Department of Agriculture, Cooperation, and Farmers’ Welfare, Government of India has issued guidelines for harvesting and threshing for farmgate participants in the FSC. While foodgrain items make for only 20% weight of the FSC in India, the dependence on several critical agro-based products hold relevance to the F & B enterprises.

Post-Farmgate Players in Indian FSC

Indian F & B enterprises face higher exposure to post-farmgate activities that account for 60% of the FSC. Data reported in the National Sample Survey 2011-12 suggests that post-farmgate activities are undertaken in semi-urban areas, towns, and tier-II cities in regions that are close to farm areas. Such physical proximity has traditionally served to reduce the TAT of cargo, reduce logistics costs, and added a measure of speed to the FSC that holds relevance for perishable goods. The low rates of morbidity and mortality reported thus far, coupled with easy access to healthcare services and regulated commercial real estate, make post-farm gate participants less likely to be disrupted by the COVID19 pandemic. Furthermore, the presence of organized labor makes it easier to implement social distancing measures stated by the Ministry of Home Affairs vide the National Directive on COVID 19 Management and Standard Operating Procedures.

MSMEs in Indian FSC

MSMEs form the third key stakeholder group in Indian FSCs. NSSO 2011-12 data suggests that MSMEs handle between 72% and 83% of the F & B products consumed in India for wholesaling, processing, logistics, distribution, and retailing, all of which are labor-intensive and operate with high densities of workers in small commercial real estate. Given the trajectory of the COVID19 metrics thus far, it makes sense to suggest that MSMEs that are engaged in the downstream supply chain are the most susceptible to COVID19 risks. With 80-90% of retailing and distribution being routed through MSMEs operating in densely populated urban areas, the downstream of the Indin F & B supply chain stands at risk of being disrupted. 

How Does Dependence on Suppliers for Value Added Services Affect Indian F & B Enterprises?

Dependence of Indian F & B enterprises on domestic MSMEs for class C items like packaging and labeling adds to the supply chain risks. Given the economic environment of MSMEs as discussed above, the withdrawal of people from workforce participation, compromising with regulatory guidelines, and exposure to red zones and containment areas make them susceptible to supply chain disruptions. Further, the bundling of services like third-party logistics and warehousing makes MSMEs more vulnerable to the risks of COVID19, thus raising the risks of inflated costs of packaging, warehousing, and distribution and higher turnaround time of cargo thereby affecting market outreach of enterprises.

Recommendations for Making Indian F & B Supply Chains More Efficient Now.

The Indian F & B industry, while being a leading player in the resolution of the impasse, is required to make its supply chain more efficient to withstand the disproportionate impact created by the Covid19 pandemic. Following operational and supply chain measures are recommended for deployment in the short-run (next two financial quarters):

  • Map Exposure to Local Supplier Network in Red Zones and Containment Areas

In the wake of the VUCA (volatility, uncertainty, complexity, and ambiguity) elements that have been accentuated owing to the dynamics of the contagion across India, it makes sense for Indian F & B enterprises to regularly assess the on-ground developments across red zones and containment areas. Given the challenges that are likely to emerge in the downstream distribution of food products, a switch to smart packaging to enable more excellent track and trace of SKUs during the supply chain journey can create customer delight in times of crisis. 

  • Periodic review of HVACR in Plants and Warehouses and PPE

Given the prerequisites of the operating environment that the F& B industry has, there is a necessity to periodically monitor and review the working condition of cold storages and cold chains to ensure the freshness of perishable products. The most important measures to ensure the safety of the lives of people and ensure minimum disruption to production routines are the optimal procurement of personal protective equipment and regularization of the MRO supply chain. Periodic quality control audits of HVACR (heating, ventilation, air conditioning, and refrigeration) can enable the easy downstream distribution of food products when these are still fresh and fit for human consumption.

  • Gradually Evolve to Sustainable Packaging to Protect Edible Contents to Address Health Risks

The immediate supply chain risks posed by the COVID19 pandemic to the downstream activities of wholesaling, retailing, and distribution of F & B products call for enterprises to take greater cognizance of the trust deficit among customers by the need for social distancing. Enterprises can do well to invest in partnering with suppliers that have the necessary capabilities of new product development and industrial-scale to provide tamper-proof packaging solutions that insulate the contents of edible items from the risks of contamination by pathogens during the supply chain journey. With the likelihood of a new normal of contactless delivery and models of low touch distribution, Indian F & B enterprises may like to drive pilot projects of innovation in sustainable packaging for edible items and scale-up deployment across product categories to reduce costs. 

  • Advance Booking of Logistics and Warehousing Capacity to Counter Surge in Domestic Demand

With an eventual reopening of the economy over the next financial quarter, a surge in domestic demand can hit logistics costs and, by implicit economic rationale, may invite a need for optimization of inventory holdings. Booking of logistics and warehousing capacity can reduce demand-pull inflationary pressures. Vendor managed inventory services for holding inventories can enable Indian F & B enterprises to unlock cash and rationalize working capital usage over the short term.

Beyond COVID 19: What is Next for the Indian F & B Supply Chain?

The COVID 19 pandemic, while having disrupted the downstream supply chains of Indian F & B enterprises offer a vast spectrum of takeaways that are likely to lead to the evolution of a new normal. Currently, the F & B retail market is dominated by food grocery stores and food services, both of which are growing at a CAGR of 25%. The overarching reliance on MSMEs for retailing and distribution routed through the manual workflow may witness a paradigm shift. It should enable Indian F & B enterprises to invest in temperature-controlled supply chain capabilities in urban areas, thereby allowing them greater control over the supply chain, volumes, and value. Given the non-price competition in the packaged F & B industry, a new technology-driven approach to the procurement of packaging and labeling can: reduce TAT of perishable goods, bring visibility into the supply chain journey of every unit of product, strengthen brand equity and reduce spoilage of food products.