15 April 2006
BUSINESS CASE TO BE ANALYSED: Akash Paul was finding it hard to bet on the profitability of a proposed new venture when there was hardly any precedent of such a model in the country, which is one of the largest producers as well as biggest market for fresh produce.
The model proposed a value proposition based on quality, shelf life, size and hygiene. It stressed controlled post harvest process with procurement partnership with sales through distinct marketing channels to sell different grades at different prices in main cities to begin with. But most important of all was a new definition of an organisational set-up.
This could not be achieved without a wired system which connects everything from farm to fork and gives real time information to all decision-makers concerned. Executives would require a thorough diagnostic dashboard to understand produce health, supply issues, problem sources and market pulse continuously. Thus, investments in a mature enterprise solution with supply chain capabilities along with sound analytical tools were suggested. A customised solution for basic enterprise solution by an experienced IT vendor who understands the company and location would fit the bill.
Finally a solution from leading global enterprise resource planning (ERP) vendor was implemented. It took lot of time to train people on the processes and using on state of art systems. However, Mr Paul, was still wondering at the end of six months whether the venture will really break even at the end of the third year as projected.
Source: O P Wali, associate professor , IIFT
ANALYSIS BY DEVANGSHU DUTTA, Chief Executive, Third Eyesight
Most consumer, product-supply chains have evolved into fairly complex chains for two main reasons. Firstly, despite all the talk about removing intermediaries, there are still many people involved in the entire supply chain at different levels – for no reason but that they do add some value in the steps they are handling. Whether this is breaking of bulk, or handling of disparate products, shipping or storing goods, or providing bridge finance, each intermediary is in the chain because he has a role to play.
Secondly, and more importantly, product diversity has increased tremendously. Whether it is the number of brands available of biscuits, or the number of types of melons, or the package sizes of shampoos, the growing market has created more suppliers, more product segments and more variety for the retailer to handle.
With perishable items, a third factor gets added in: date of production and shelf-life. Clearly, even in a developing market like India which has lax regulation and low compliance, consumers are increasingly aware of perishability of products. And as companies grow in size and profile, their vulnerability to litigation also increases.
The retailer, who is the critical link between the consumer and the rest of the supply chain, must effectively manage not just the diversity and the perishability, but also communicate with and manage with the rest of supply chain. And given the nature of the complexities, Mr Paul’s business would have no choice but to implement an effective IT system that would keep the company’s executives clued into the information on as near-time a basis as feasible. For a company that is planning operations at a certain scale, even the opening of one store without the IT system would create a huge gap to overcome in subsequent growth.
However, the IT system alone cannot guarantee the success or failure, and certainly not the profitability of the venture. Technology may be seen as the easy quick-fix, or as the stick with which to drive process discipline. But to me it is the last link in a chain that begins with ‘People’ and leads to ‘Processes’. Without the right orientation, training and skills, effective processes cannot be created. Without effective processes, the best IT system in the world is, at best, very effectively enabling a bad organisation.
The advantage of an existing branded product is that it is more ready for roll-out than a bespoke (custom-developed) system would be. Not just would it take more time to create a bespoke solution, it would also require the involvement of senior management. Senior management time is a rare commodity in the best of times – in a start-up business, it is even more scarce.
There is also the premise that a branded IT product that has been implemented across other companies will have some amount of best practice built in. With the assumption that poor practices are not also built into the system, it might actually help the management to leap-frog the business learning curve.
On the other hand, Mr Paul may be paying for features and capabilities in the branded IT product that his fledgling business will not use for a long time. Customisation and implementation needs may also push the cost over the limit.
Therefore, the ERP system must be evaluated just like any other business investment or expense.
There must be a clear rationale for it, a very clear set of objectives and deliverables, and a well-structured programme and project plan for implementation. Like any other investment, it must also be evaluated for returns.