EXECUTIVE SUMMARY: Sugar maker EID Parry has increased its involvement with critical stakeholders: farmers. It sees them not as suppliers of raw material but as customers. The company, which is part of the Murugappa Group, has worked to make farming a hassle-free occupation. This case study looks at why and how EID Parry achieved the feat.
EID Parry's Nellikuppam sugar plant and its 80,000-acre command area (a specific area allotted to a sugar mill to procure cane) were right in the path of Cyclone Thane, which struck the east coast of Tamil Nadu on December 30, 2011. The storm blew the roof off the factory and badly damaged the machinery. It also levelled 4,000 acres of sugarcane, which meant that nearly 100,000 tonnes had to be harvested and crushed in 10 days to avoid losses to the farmers. Initial estimates suggested that reopening the factory would take at least a month, and the farmers gave up hope of saving the damaged crop. But the company mobilised staff from its other factories and got the plant going again in five days.
"We started the plant without even the roof in place," says Ravindra S. Singhvi, Managing Director, EID Parry (India) Ltd
"Our focus was to safeguard the interest of the farmers - start the plant, harvest the fallen crop, and crush it." It actually made little business sense for EID Parry to hurry to reopen the plant. Crushing the fallen cane actually meant a loss of Rs 4.5 crore, as sugar recovery - the percentage of sugar in the cane - dropped by 0.8 per cent. But the company paid the farmers the full price, despite the lower recovery.
Rs 850 cr
The total amount of loans to sugarcane farmers in EID Parry's command area, which the company will repay from crop proceeds
The decision reflects the importance that the Rs 1,537-crore sugar producer gives to the over 70,000 farmers in its command area of some 200,000 acres. Many sugar mills offer extension services to their farmers, but this Murugappa group company has taken its relationship with farmers to a new level. It sees farmers not as suppliers of raw material but as customers.
On December 26, 2012, the company launched a call centre to answer the queries of farmers in its command area. "Though we have 300 employees at the front end dealing with the farmers, we were not sure what type of queries they ask, what their concerns were and whether we are satisfactorily addressing them," says Manoj K. Agarwal, EID Parry's vice-president for cane.
"The call centre will help us evaluate all this." Each query must be addressed within a certain amount of time, and the issue gets escalated if there is a delay or the farmer is not satisfied. The call centre, at a third-party vendor, gets about 100 calls a day.
The company recently commissioned a 'farmer satisfaction survey' through an independent agency to gauge how happy its 'customers' are with its efforts. "Our aim is to understand the gaps in our service and farmers' expectations," says Singhvi.
EID Parry has a system in place to make farming hassle-free and cashless. The company guides farmers from the moment they plant the cane and register with the company's cane management system.
"We are periodically told when to do various farming activities - soil testing, land preparation, weeding, spraying biocontrol agents, fertilisers and pesticides," says M. Thirumalai, a farmer who grows sugarcane on 18 acres in Vazhapattu village near Nellikuppam, in Tamil Nadu's Cuddalore district. "This makes our life easy." Besides guiding farmers from planting to the harvest, the company has also set up retail shops to make agricultural inputs available to them.
Most importantly, EID Parry has addressed some of the most pressing challenges farmers face in this region. It has a separate finance department for farmers, which reports to the vice president for cane and ensures that farmers get crop loans as well as term funding for bore wells, drip irrigation, and the like.
The company enters into an agreement with a banker and the farmer for such loans, and takes the responsibility of repaying them from the cane proceeds. At any given time, the loan outstanding that the department handles is around Rs 850 crore.
To overcome the labour shortage in the region, the company has brought in 25,000 people split into 2,000 'labour gangs', whom the farmers can deploy to prepare the land or harvest the crop. To promote mechanisation, the company has signed a memorandum of understanding with New Holland Tractors and John Deere. It encourages rich farmers to be entrepreneurs who buy expensive equipment and lease it to others.
"A harvester costs over Rs 1.5 crore, and there is no way a small farmer can buy it himself," says S. Radhakrishnan, head of operations at the EID Parry's Pudukkottai plant, where labour is in short supply. "The farmer-entrepreneur rents out the machine at a rate pre-fixed by the company in consultation with farmers."
P.L. Shanmugam, a farmer in Melapannayur village, Pudukkottai district who has been cultivating cane for 15 years, says: "What is heartening is that the services the company provides, directly or through its service providers, are on credit - they deduct the cost from the cane payment." He says that this, and the loan EID Parry facilitates, has made his farming cash-free. "I do not have to go to a moneylender or pledge jewellery for my agricultural needs any more."
EID Parry's five plants in Tamil Nadu and Puducherry can crush up to 19,000 tonnes of cane a day, generate up to 72 MW, and distil up to 135 kilolitres of alcohol - a byproduct of sugar manufacturing - a day. So the company has plenty of reasons to develop a lasting bond with farmers.
The company has been working to take advantage of Tamil Nadu's climate to make sugarcane a yearround crop (it is normally sown once a year). This would let it run its factory for more than the traditional 180 days a year. In 2011/12, the company crushed for close to 300 days.
The company provides services on credit and deducts the cost from the cane payment. It has made my farming cash-free. I need not go to a moneylender.
Farmer, Melapannayur village
"Crushing for a longer time helps the company sweat its asset better and improve its operating margins," says T. Rajasekar, Vice President, Operations, who manages the company's Nellikuppam and Puducherry plants. "But to achieve that, the company needs close to 5.7 million tonnes of cane annually. This would mean expanding the cane area and more importantly, ensuring farmers do not shift to other short-term and high-realisation crops."
There is one more reason to have good ties with farmers. The law that binds a farmer to a sugar mill may soon change. A committee on sugar reforms led by C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, has recommended doing away with the concept of command area. This means farmers can sell cane to any mill they wish. This could create problems for sugar mills, which have viewed farmers as captive suppliers. "Farmers will go to the efficient company," says Managing Director Singhvi. EID Parry is positioning itself to take advantage of that emerging scenario.
The company's efforts have paid off so far. Its handholding and other services have resulted in higher yields. Average cane productivity in the company's command area was 32 tonnes per acre, as against the national average of 27 tonnes. This has meant higher incomes for farmers, and they have responded by offering more cane to the company. In 2012/13 the company crushed 5.2 million tonnes, up from 2.8 million in 2010/11.
*SETTING UP A VIRTUOUS CYCLE OF RESPONSIBILITY*
ISB Assistant Professor (Organisational Behaviour) Amit Nandkeolyar
EID Parry is developing a lasting commitment with its most important stakeholder - the farmers. Stakeholder commitment has been shown to be helpful for organisations as it leads to better financial performance.
When the command area for farmers is removed for the sugar industry, farmers will be free to sell their produce to any company. But they are likely to stay with EID Parry due to a decades-long symbiotic relationship.
Helping key stakeholders is a forward-looking corporate strategy, as it helps build managerial capabilities by promoting stronger employee involvement with farmers, and reduces the uncertainty due to the decontrol of the sugar industry. These activities could help EID Parry (a) become more responsive in dealing with crises and external changes and (b) build its organisational reputation.
'A high level of CSR helps build a positive image with bankers, customers and suppliers, which can improve access to capital and attract better employees'
Providing interest-free loans and absorbing losses in times of adversity are seen as good management practices, usually subsumed under Corporate Social Responsibility (CSR). Empirical evidence suggests that organisations are more likely to do well financially as they internalise such practices. A high level of CSR helps build a positive image with bankers, customers and suppliers, which can improve access to capital and attract better employees.
From a pure reciprocity perspective, EID Parry has helped people in adversity, and it is likely that they will repay the company when it needs a helping hand. A captive satisfied base means dedicated labour, a readymade supplier base, and word-of-mouth publicity in the region. This becomes a virtuous cycle, in which CSR helps organisations be more productive, and that in turn helps create additional resources for a sustained level of CSR activities.AMIT NANDKEOLYAR,
Assistant Professor of Organisational Behaviour, ISB
*INITIATIVES COULD INFLUENCE THE ENTIRE INDUSTRY*
PwC Executive Director (Operations Consulting) Ravind Mithe
The Rangarajan committee's recommendation to decontrol the sugar industry has been welcomed by both the industry and farmers. Given that the command area/cane reservation concepts will cease to exist, companies will have to explore ways to secure cane supply, and look at "strategic partnerships" rather than mere transactional relationships with farmers.
EID Parry is a company with foresight. Its belief in inclusive growth has led it to work with producers in its command area. Since 2000, it has been involved with farmers in areas such as yield improvement, financing and child education.
It has also used means such as a farmer census to identify potential. It has been educating farmers on the economic benefits of cane plantation, crop management and farmer history cards. All this, when decontrol was a distant dream.
'EID Parry's deeprooted initiatives will give it a far better and deeper supply chain advantage'
These deep-rooted initiatives will give EID Parry a better and deeper supply chain advantage. PwC India's engagements with Indian agro industries in various states and sectors show that the Indian farmer is becoming a wiser businessman who understands that a long-term partnership with a company committed to community development and economic growth is more advantageous than short-term perceived gains.
After decontrol, there may be some small-time migration, but farmers would soon feel the need to choose the right partner. EID Parry would have the edge. Its initiatives could have an impact on the industry, as some will become essential - not just desirable - practices for sugar mills to secure their cane supply.RAVIND MITHE,
Executive Director -Operations Consulting, PwC
(Views expressed here are personal)
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