The E-choupal is significantly different from the average commodities trading. The tobacco business had led ITC to gain expertise in land procurement through its group company Indian Leaf Tobacco Ltd. which was later merged with ITC. The same was utilized when ITC decided to foray into hotel business through the Welcome group of hotels.
ITC has decades of experience in agriculture in terms of research, procurement as well as distribution. It has been effectively utilized in the E-choupal's model of translating social commitment into a business. Its guiding management principles are:
ITC has followed an approach of adopting the best practices of the existing system and combining them with the organizational expertise. It has looked at redefining roles of the inefficient providers such as the commission agents. ITC has not meddled with areas of the system where it would not be able to add/ provide significant value.
Increasing the share of the whole pie
Currently, the village trader serves as a centralized provider of cash, seed, fertilizer, pesticides etc. He is like a one stop shop. The benefits of the same are:
Risk management in terms of an accurate assessment village dynamics by the trader
Service aggregation reduces overall transaction costs by aggregating services
But there is a downside too. Extensive dependency is created on the village trader which may result in exploitative tendencies. Changes have been introduced in terms of:
Cooperatives trying to provide agricultural inputs,
Rural banks providing credit
Mandis being a better marketing channel
IT as a driver
IT which makes for 20% of the cost of E-choupal, serves as the facilitator in:
Delivering real-time information independent of a transaction. This is a diversion from the mandi system where delivery, pricing, and sales happen simultaneously, thus binding the farmer to just one of the agents for information.
Providing an efficient communication mechanism
Risk Assessment
Following were the risks identified with the business model:
The community-based business model would suffer with developing expertise in computing
Threat of unionization from the sanchalaks who are ITC's partners from the village community
Management of Bureaucracy
The Agricultural Produce Marketing Act prohibits procurements outside the mandi. ITC convinced the government that E-Choupals would not only honor the Act but function in line with the government's goals. ITC would not use the mandi infrastructure for its procurement, and would incur its own costs with the E-Choupal infrastructure. ITC chose to pay the mandi tax even though government agreed to grant them a waiver for continued procurement through the E-choupal. This again stresses on the social outlook of the company.
THE BUSINESS MODEL
The model is based on a network of E-Choupals which are nothing but information centers equipped with a computer connected to the Internet, located in farming villages. It functions as an e-commerce hub. A local farmer known as a sanchalak (coordinator) runs the village E-Choupal, and the computer is usually located in his home. ITC also incorporated a local commission agent, known as the samyojak (collaborator) in the supply chain, who provides logistical support. The company has a target to provide an E-Choupal to serve about 10 villages in a five kilometer radius. Today the network reach exceeds a million farmers in nearly 11,000 villages through 2,000 E-Choupals in four states (Madhya Pradesh, Karnataka, Andhra Pradesh, and Uttar Pradesh).
The logic behind recruiting a local farmer from the community as the sanchalak is:
The sanchalak is selected to provide trust, which is the most vital component in any rural household, in ITC's system.
Savings on developing and maintaining a separate kiosk for the computer
The sanchalak is a computer literate acting as an important interface for the illiterate farmers
The E-choupal also breeds small scale entrepreneurs in the sanchalaks who receive a commission for every transaction processed through the E-Choupal and also benefit from increased social status very important in a village.
Sanchalaks undergo training at the nearest ITC plant. They are provided education on basic computer usage, the functions of the E-Choupal Web site, basic business skills, as well as quality inspection of crops. They also receive product training directly from the manufacturer.
A secondary, but important, role is played by the samyojaks, or cooperating commission agents.
Samyojaks earn income from ITC by providing logistical services substituting the lack of rural infrastructure. They provide information and market signals on trading transactions to the E-Choupal system.
ITC uses these agents as providers of essential services, not as principals in a trading transaction. They are especially important in the initial stages of setting up the E-Choupals, because they are well versed with the financial status as well as crops grown by the farmers, what kind of families they have, and could provide guidance on who would be seen "acceptable" as a good sanchalak.
Since the E-Choupal system by-passes the agent-controlled mandis and has considerably reduced income from commission income, why would the agents agree to cooperate with ITC? The reasons are:
The company continues to buy produce through the mandis
And significant commissions are offered for samyojak services
THE E-CHOUPAL SYSTEM
The re-engineered supply chain is quite different from the existing system and has the following stages:
The figures below show how information flow and the physical flow have changed in the new supply chain over the old supply chain
Old Supply Chain and Information Flow
FarmerMandi
(CAs)
ITC
Other Buyers
Product
By oxcart; no travel reimbursement
Weight measure
(Payment to farmers)
Authorised Price
Price discovery by
Word-of-mouth
Product
Physical Flow
Info flow
New Supply Chain and Information Flow
Mandi
(CAs)
Farmer
ITC
Samyojak
Oil, lamps, seed, etc
Sanchalak
Internet
Prices
Weather
Best Practices
Market conditions
Authorized Price
Soybeans
Physical Flow
Info flow
E-Choupal Supply Chain
Pricing
The previous day's mandi closing price determines the benchmark Fair Average Quality (FAQ) price at the E-Choupal. The benchmark price remains static for any particular day. The previous day's mandi prices are communicated to the sanchalak through the e-Choupal portal. The commission agents placed at the mandi are responsible for entering daily mandi prices into the E-Choupal. If at all the
Internet connection fails, the prices are communicated over a phone call.
Inspection and Grading
To initiate sale, the farmer would bring a sample of his produce to the E-Choupal. The sanchalak inspects the produce and assesses the quality, makes appropriate deductions to the benchmark price and provides a conditional quote to the farmer. The quality tests are performed in the presence of the farmer. The benchmark price is the upper limit on the price a sanchalak can quote.
E.g.:
If a farmer chooses to sell his soy to ITC, the sanchalak gives him a note providing his name, his village, particulars about the quality tests, the approximate quantity and the conditional price.
Weighing and Payment
The farmer takes the note from the sanchalak and proceeds with his crop to the nearest ITC procurement hub which is ITC's point for collection of produce and distribution of inputs sold into rural areas. Some of these are simply ITC's factories that also act as collection points. Others could be performing only warehousing operations.
At the ITC procurement hub, a sample of the farmer's produce is taken and set aside for laboratory tests. A chemist visually inspects the crop and verifies the assessment of the sanchalak. It is important to note that this is the only test assessment before the sale. Laboratory testing of the sample for oil content is performed after the sale but it does not alter the price. The pricing is therefore, based solely upon tests that can by understood by the farmer.
Foreign matter deductions are accepted based on the presence of stones or hay, based upon the visual comparison of his produce with his neighbors.
ITC is working hard to change farmer attitudes towards laboratory testing. It uses the subsequent lab tests to reward farmers with bonus points if their quality exceeds the laboratory norm. Farmers can redeem their accumulated bonus points at the end of the year through the E-Choupal for farm inputs, or as contributions toward insurance premiums.
After the inspection, the farmer's cart is weighed on an electronic weighbridge, first with the produce and then without it. This difference is used to determine the weight of his produce.
Hub Logistics
After completing the inspection and weighing, the farmer collects his payment at the payment counter. The farmer is reimbursed for transporting his crop to the procurement hub. Every stage of the process is appropriately documented. The farmer is given a copy of lab reports and receipts for his records.
Samyojaks, are entrusted with the responsibility of payment, except at procurement centers near large ITC operations where ITC self handles cash disbursement. Samyojaks also handle procurement hub logistic such as labor management, bagging (if necessary), storage management, transportation from the hub to factories, and handling paperwork for the crops procured at the hub. For his services, the samyojak is paid a commission of 0.5%
SUPPLY CHAIN GAINS
Farmer Gains
Prior to the introduction of E-Choupal, farmers' access to agricultural information was incomplete or totally inconsistent. The only sources of information were word of mouth within the village. E-Choupal allows farmers daily access to prices of several nearby mandis.
Thus, farmers have access to prices and make the critical decision of when and where to sell their crop.
As mentioned earlier, farmers no longer bear the cost of transporting their crops to the mandi and are reimbursed for transport to the procurement hub. The transaction at the ITC hub is also much faster than at the mandi, taking no more than two or three hours. Moreover, ITC's electronic weighing scales are much more accurate and are hence not susceptible to sleight of hand like the manual weighing system at the mandi.
The system also does not require produce to be bagged, which avoids the loss of produce by spillage. Thus the E-Choupal system has definite efficiency in logistics and transaction management
Finally, the ITC procurement center is a professionally run operation where the farmer is treated with respect just like a customer. Though intangible, this is affecting the way farmers conduct themselves with a level of self confidence.
The incremental income from a more efficient marketing process is about US$6 per ton, or an increase of about 2.5% over the mandi system. The available information through E-Choupal can be used by the farmers to improve yields.
The seed, fertilizers, and consumer products offered through E-choupal cost substantially less than through other local sources .Thus, there are economic benefits to farmers, and it is having a measurable impact on what farmers choose to do: in areas covered by E-Choupals, E.g.:
The percentage of farmers planting soy has increased dramatically, from 50 to 90% in some regions, while the volume marketed through mandis has dropped by 50%.
ITC Gains
The commissions paid to the agents under the mandi system were not excessive, but because of the inefficiencies, the cost of intermediation was between 2.5 and 3% of procurement costs. While retaining commissions paid for the sanchalaks' services, the 0.5% commission paid to them is significantly less than the costs associated with the mandi system.
Direct reimbursement of transport costs to the farmer is half of what ITC used to pay the commission agents for transport to their factory. Removal of intermediary manipulation of quality resulted in higher levels of quality in E-choupal procurement. This results in higher oil yields, which, in turn, leads to higher profits for ITC.
E-Choupal also allows ITC to develop long-term supplier relationships with farmers and attain supply security. Risk is managed in the E-Choupal system by a strong information infrastructure. Sanchalaks and samyojaks working on behalf of ITC provide excellent information on pricing, product quality, expected yields etc. This allows ITC to plan better for its future operations.
In the mandi system, 7-8% markup was achieved on the price of soybean from the farm the factory. Of this, 2.5% was borne by the farmer while 5% was borne by ITC. With E-Choupal, ITC's costs are down to 2.5%.
The figure above shows transaction costs incurred by the farmer and ITC per metric ton of soy procured in the mandi and E-Choupal. In absolute numbers, both the farmers and ITC are now saving about US$6 (Rs 270) per metric ton [i]
