From Cow To Consumer: A Pioneering Cash Management Model
by R.S. Sodhi, Managing Director, GCMMF Ltd (Amul)
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.
Devising a solution
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:
- Build a robust receivables framework to handle paper-based clearing efficiently;
- Structure an electronic receipts solution to support the distributors that pay electronically;
- Establish a mobile banking solution to enable distributors to transfer funds 24/7 using mobile phones rather than account-based electronic transfers;
- Facilitate direct debits to enable us to ‘pull’ cash in a controlled way.
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.