Published: November 01, 2014
As an organisation that connects 3.5 million farmers with around 1 billion customers, Amul has a unique supply chain, from cow to consumer. To facilitate this, Amul’s distribution network comprises 54 sales offices, 6,000 dealers and one million retailers, one of the largest networks in India. With significant reliance on manual collection methods, particularly post-dated cheques, Amul worked with partner bank BNP Paribas to improve its receivables process to improve operational efficiency and control. In addition, however, as a pioneer of best practices in India, Amul recognised that the project represented a valuable opportunity to promote electronic payment methods, with benefits across the supply chain.
Cash management is an essential business function that underpins our extensive supply chain. We purchase milk daily, and pay farmers at the point of delivery to one of our collection centres. Eighty per cent of payments are made in cash, although we are working with various banks as part of a financial inclusion programme to encourage producers to open bank accounts. However, with no ATMs in many villages, this will take some time, although we hope that around 80% of payments will be through banking channels in the next two or three years, particularly with new payment methods, such as mobile payments, now emerging strongly.
Having made payments to farmers, we then collect remittances from distributors. These distribution partners purchase milk from Amul on a ‘cash and carry’ basis and we do not offer credit. Distributors and retailers provide post-dated cheques to Amul towards the payment of future milk supply orders. These cheques are sent to our bank, BNP Paribas, for clearing, settlement and reconciliation, and milk is supplied to the respective distributor/ retailer. Some are now using electronic payment methods.
The system of post-dated cheques creates a number of challenges, particularly given the scale of our distribution network. In the past, cheques were stored at each branch, and paid daily. This created an enormous administrative overhead with very high operating costs. Although we follow a ‘stop supplies’ policy in case a cheque is cancelled or not honoured (e.g., in case of error), we still run the risk of non-payment by dealers. Errors in cheque management are a significant issue, with 3-4% of cheques bounced back due to error, with supply and relationship implications as well as financial issues. Storing cheques could also result in fraud, theft or damage through fire or flood.
To address these challenges, we needed a robust, scalable receivables management system that would support the diversity, scale and geographic reach of Amul’s distribution network, both for cheque clearing and the growing volume of electronic payments we anticipate in the future. Consequently, we worked with BNP Paribas to analyse our supply chain and identify a series of objectives that would inform a new solution. As a result of this process, we outlined the following requirements:
By doing so, we would be able to reduce our administration overheads, support and promote the use of electronic payment methods, shorten our receivables cycle and create a scalable solution for the future.[[[PAGE]]]
To achieve this, we worked with BNP Paribas to structure a solution which included outsourcing the management of post-dated cheques to the bank. This was supplemented with an electronic receipts solution with virtual accounts (eReceipts) to enable rapid automated reconciliation and posting to distributor accounts, an interbank mobile payment service (IMPS), and direct debits through the national automated clearing house (NACH).
The first step was to outsource Amul’s Mumbai branch’s entire cheque management process to BNP Paribas. All cheques that we receive from distributors are now transferred (at the time of receipt) to BNP Paribas’ central cheque processing centre and stored in their fire-resistant vaults. This avoids the need for us to store and manage cheques, reducing both risk and administration cost, and eliminates the need to maintain storage facilities.
Secondly, we have started to work proactively with retailers and distributors that have more sophisticated financial processes to demonstrate the benefits of electronic payment. These distributors can now use eReceipts, leveraging electronic payment systems such as RTGS (real-time gross settlement) and NEFT, with funds credited to Amul’s collection accounts. Although this is an ongoing process, it has already proved very successful in some parts of India as distributors recognise the advantages to their business.
Mobile payments (IMPS) are becoming increasingly important amongst distributors. IMPS is an instant, 24x7, interbank electronic fund transfer service that enables customers to use mobile devices to access their bank accounts and initiate fund transfers securely with immediate confirmation. IMPS is proving a valuable means of supporting distributors who operate in remote locations. In parallel, we are implementing a direct debit solution through NACH to receive bulk payments from some distributors.
By promoting the use of electronic payment solutions that meet the diverse needs of our distributor network, we are able to reduce both direct and indirect costs associated with physical cheque collection and processing, accelerate receivables to improve working capital management, and avoid any interruption to supply.
This has been a pioneering project undertaken in conjunction with BNP Paribas. BNP Paribas has been instrumental in providing outsourced solutions for cheque storage and processing services which, when combined with innovative electronic payment solutions, positions Amul as a leading ambassador of financial efficiency in India. We have already accelerated our receivables processing by two days, which is highly significant given that each day is worth $10 - $12m in working capital terms, in addition to administrative savings. Security and accuracy of processing has been increased, which improves operational efficiency and control but also leads to better supplier relationships.
Our relationship with BNP Paribas continues to go from strength to strength and, together, we are pioneering a new generation of cash and liquidity management in India. Looking ahead, as Amul continues to develop our international footprint, we look forward to developing our relationship further, with the start of new marketing units in the United States.
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