The Beer Game of Agri Input Retail

The classic Beer Game is fun to play in Supply Chain 101 Class. Until you consider it's implications on the Indian farmers and the agri-input supply chain.

Have you played the beer game before[0]?

Picture your friendly neighbourhood retailer who sells beers. I know that’s a stretch of imagination, especially in India. But, play along with me, will you?

The retailer buys beer from a wholesaler, who in turn buys from a brewery. This beer is delivered once a week to the retailer. If the retailer wants beer, he has to place an order with the wholesaler and a few weeks later, the beer is delivered to him.

Picture a scenario when there's a small uptick in demand for beer.

Maybe the nearby youth hostel decided to celebrate. Or perhaps there's a popular sexist beer commercial that’s going viral. The Marwari retailer sincerely follows Gandhi’s dictum towards the customers and to be safe, he orders a couple of extra cases of beer. 

He's not the only retailer to do this. Others do it too. The wholesaler, who receives the orders, notices and surmises that there's a spike in demand, decides to increase his orders as well from the brewery. Pretty soon, the brewery notices that something is happening. 

What happens eventually is this.

Order flow and product flow

Image Source: thebeergame.org

The beer game is now a common fixture in most B-Schools, taught in their Supply Chain 101 classes.

Its history is more fascinating than the game itself.

It comes from the brilliant mind of Jay Forrester who used his electrical engineering mind which intuitively understands “how current flows down wires and charges accumulate in capacitors”[1] and put it to use in his consulting work with General Electric.

When managers at General Electric noticed huge swings in production levels at one of their factories — swings much larger than the swings in consumer demand, he began to connect the dots and started framing the problem in terms of systems and their feedback loops.

This was the original schematic diagram which was published in the classic HBR 1958 article titled, “Industrial Dynamics: A Major Breakthrough for Decision Makers”

In his article, he showed how a small increase in the volume of retail sales can make the retailer’s orders more volatile, the distributor’s orders even more volatile and the factory’s production more volatile still. This pattern came to be known as the bullwhip effect.

The Beer Game has been playing out sadly for several decades in the agri-input retail, making farmers buy agri-inputs that are either unnecessary or appropriate, causing them further undue economic stress.

Understanding Bull Whip Effect is crucial if you want to connect the dots between the culture of pump and dump, undercutting practices in the agri-input trade channel, spurious pesticides, sales returns, delayed payments and static go-to-market approaches in the agri-input industry.

I began to understand this couple of years ago during a fascinating conversation with my agribusiness mentor and dear friend Jagadeesh Sunkad. And today, after all these years of travelling, field visits, meeting various stakeholders in the agri-input value chain, I can confidently assert this.

If you want to seriously transform the agri-input supply chain, here is your biggest challenge.


Bull Whip Effect in Agri-Input Retail

In an earlier interview I had published in my blog, Jagadeesh Sunkad elaborated a framework which became a useful mental model in understanding how trade channels work.

As I had written earlier,

Channel in their interaction with farmers has an unsaid, but broad classification of agri-input products.

  • Products that are Must Have

  • Products that are Good to Have

Hybrid Seeds and Chemical Fertilizers such as Urea, Diammonium Phosphate (DAP) fall under Must Have category. Pesticides, Herbicides, Fungicides, Plant Growth Regulators belong to Good to Have category.

Farmers and Traders have typical behaviour about Must-Have products. From selling at thin margins to giving credit to promoting products in the market. Thanks to the way the industry is structured, Channel does not make much money on Must-Have products.

A dealer is trying to push Good to Have products to the farmers because his business thrives on that category. For Good to have products, the Channel insists that agri-input manufacturers provide fat margins, because he tells them, "I have a captive base of X farmers and I can push it. But I am going to charge you for it."

The trade channel pushes “Good to Have products” to farmers in their pursuit of the margins, long credit cycles and loyalty schemes. Whenever the sales team visits the Channel to showcase a new product, the first response from the channel is more often, “What schemes will you offer me to sell this?”.

Now when channel relies on schemes to sell products, it has two fundamental implications:

1) The Channel doesn’t have the right skin in the game to offer objective agronomy advice and sell appropriate agri-inputs to farmers.

2) Agri-Input firms have no reliable mechanism to gauge demand as they move downstream in the supply chain.

Of course, this is not to discount the extreme vagaries of climate and other factors which are beyond control. Demand for agrochemical products could depend on a variety of external factors including

  • Day of Rain : How early or late can we expect rains during the season and how much it rained?[2]

  • Crops in neighbour’s plot: Could the insects have migrated from neighbour’s plot?[2]

  • Variation of acreages for high-value crops like cotton.

  • Temperature patterns: Higher or lower temperatures demand different products[2]

  • Around 50-60% of the sale in a year takes place between June to September, which forces companies to build up stock in advance as per forecasts[2]

The last point is crucial, as it justifies why companies have a legitimate reason to pump products to cope with the uncertainty of not just the climatic conditions, but also the rural infrastructure to deliver the products during the season.

This pumping becomes dumping when the goods are not taken back.

This is one of the reasons why sales return is one of the biggest pain points for the agri-input sales teams. GST for Agrochemicals is 18% while for fertilizers it is 5%. Imagine the hassle when you are claiming tax credits.

It’s a double whammy for farmers as he can’t even claim input tax credit.

Allow me to unpack the two implications in greater depth.

1) The Channel doesn’t have the right skin in the game to offer objective agronomy advice and sell appropriate agri-inputs to farmers.

The farmer reposes trust and loyalty mostly towards the channel - dealers, distributors and retailers - for a simple reason. It is the trade channel which offers credit to farmers through a written slip to buy seed or pesticides.

The trade channel, by the virtue of their relationship, has a strong grip over the catchment of farmers who are creditworthy, and it is this exclusive relationship which earns the high margins they enjoy for "Good to Have" products - from agri-input manufacturers.

Puneet Singh Thind, a farmer from Haryana and convenor of Rashtriya Kisan Sangathan, in an interview with Ruralmarketing.in spelt this out lucidly.

"[With] lack of awareness, farmers easily prefer non-genuine pesticides if a retailer gives 90 days credit on fake products and only 30 days credit or maybe no credit on genuine products"

This is the crucial reason why this industry is rife with spurious products. And this happens with the full cooperation of the distributor, dealer and retailer.

Think about it.

Even if there is adequate awareness about the harmful effects of the pesticides on the crop, farmer and environment, would it be possible for the farmer to take a rational decision concerning the use of spurious pesticides amidst his power equation with the channel?

Since spurious pesticides exist in a spectrum of admixture of genuine and fake chemicals, I have personally heard instances where farmers have been provided by retailers with a portfolio combination of branded product for a select number of sprays and fake products with limited chemical potency for the remaining number of sprays to optimize costs.

This point is critical because the easiest way to misread my perspective is to believe that I am painting the trade channel as a villain here when all I am stating is this.

The Channel values its relationship with farmers more than its relationship with the agri-input manufacturers.

If I were to make a boring cartoon on the conflict between the agri-input manufacturers and the trade channel, it would be this.

No matter how much efforts agri-input manufacturers make in deploying brand security/protection teams, IP Officers on the field to eradicate spurious pesticides in the channel and the market, unless they don’t address structural skin-in-the-game issues, this will be a never-ending Tom-and-jerry chase.

2) You have no reliable mechanism to gauge demand as you move downstream in the supply chain.

This must be obvious if you’ve understood the previous point. How else would the trade channel maintain its captive relationship with the farmer base unless there is information asymmetry on the field at the last mile?

Whether you sell agro-chemical or seeds, the further you move from the channel towards your customer, the poorer the visibility you have of stock and consumption data, distribution network, and field marketing activities.

Yes, you heard me right. Given the power equations, the field officer guy who is slogging out in the village has more reasons to be in cahoots with the channel than his contractual employer, agri-input firm. Do you think he will have the right skin in the game to give accurate data of sales and stock in the channel?

If you start connecting the dots across the supply chain, here is how the bull-whip effect plays out in the agri-input value chain.

Ultimately, the entire agri-input supply chain suffers from each player undercutting each other.

No guesses to find out who is at the farthest losing end of this undercutting game.

Farmer.

  1. How do we remodel the agri-input supply chain to create an objective mechanism to gauge demand from the field at a village, taluka and district level?

  2. How do we deploy newer digitally empowered agronomy business models in which the channels and the last-mile field team have the right skin in the game to offer objective agronomy advice to farmers and sell appropriate products to farmers?

These are not simply technology questions.

These are hard political problems that are begging to be solved.

Are Agritech startups working in the agri-input supply chain listening?


P.S. Special thanks to Jegadeesh Sunkad for many insightful conversations which birthed this article.

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Foot Notes

[0] I adapted and sketched a simpler illustration of the Beer Game from Beyond First Order Newsletter from The Ken

[1] From the Obituary of Jay Forrester in the New York Times

[2] TOC ICO Conference Entry for Dhanuka Agritech