Augmenting Farm to Fork Value Chain: FreightFox's Strategic Commodity Flow Analysis Redefines Potato Freight Procurement for FMCG Industry Leader

Our client, a prominent FMCG industry leader with a revenue of approximately INR 9,000 Cr. in FY23, confronts significant hurdles in efficiently sourcing potatoes, a critical commodity for their operations. The success of their business hinges on the seamless and cost-effective delivery of this essential product, primarily cultivated in Uttar Pradesh, Gujarat, Madhya Pradesh, Punjab, West Bengal, and Assam.

With a remarkable YoY revenue growth of around 29%, the strategic procurement of freight for potatoes emerges as a pivotal challenge. This case study outlines the issues in the agricultural transportation and logistics sector, highlighting the intricacies of seasonal variations, competition with other commodities, and the dynamic nature of the freight market that affects our client directly.

The objective is to offer a concise yet comprehensive overview of the obstacles our client faces, paving the way for a detailed examination of strategic solutions aimed at optimizing the potato procurement processes.

The challenge

As one of the largest potato chip brands globally, our client’s entire business relies upon continuous and cost-effective delivery of one of the most essential and sought-after commodities in India - Potato. 

The complexities in their value chain comprise the transportation of patented-quality potato seeds to farmers and the subsequent lifting of harvested potatoes from diverse farms to manufacturing facilities or designated cold warehouses.

The primary obstacle arises from the inherently skewed and seasonal nature of potato arrivals, peaking from January to March. As a perishable commodity, there is a pressing need to swiftly transport potatoes from scattered farms to temperature-controlled storage facilities. This urgency during the peak season necessitates a rapid deployment of a high volume of trucks to prevent wastage and damage.

Complicating matters, the demand surge in areas approximately 300-500 kilometers from major cities or industrial centers poses challenges in securing trucks at optimal prices, desired volumes, and at the right time. Any disruptions in schedules and increased costs directly impact our client's overall throughput, impacting both top line and bottom line.

Furthermore, the absence of seasonal analysis and adaptive pricing has left our client tied to fixed rates, annual contracts, and a heavy reliance on transport partners. This lack of flexibility results in financial losses and wasted time. Intense competition for transportation resources, combined with logistical complexities, further impedes the timely and cost-effective procurement of potatoes, adding layers to the multifaceted challenges faced by our client.

Commodity flow analysis

To understand the intricacies of commodity flow, we we assessed and analyzed the potato arrivals at major market centers like Indore, Shajapur-Ujjain corridor, Agra, Punjab, Gujarat, etc. to clearly understand the drivers and decisions around the flow of potatoes within India. We also looked at commodity movement and competition, with a specific focus on potatoes in two key markets: day-to-day vegetable use and processed food.

In FY2024, India's potato production reached an impressive 50.71 million metric tons, with Uttar Pradesh contributing significantly at around 31.33%.

Our client strategically focuses on Punjab, contributing approximately 5.62% of the total production and is renowned for its seed-grade potatoes. Additionally, Gujarat, accounting for around 7.45%, specializes in low-sugar content potatoes ideal for processed food. These regions serve as the preferred distribution hubs for our client, facilitating shipments to diverse states such as Uttar Pradesh, Madhya Pradesh, and West Bengal.

Given our client's multi-state operations, sourcing raw materials from Punjab, Madhya Pradesh, Uttar Pradesh, West Bengal, Gujarat, and Bihar is imperative. Each state provides unique products aligning with our client's requirements.

To identify optimal solutions, we expanded our analysis beyond our client, modeling freight costs and capacity fitment based on five critical factors:

• ‍Competing Commodities (Arrival Overlap): In examining commodity flow amid competition and arrival overlap, focus on evaluating commodity value density (value relative to weight or volume) and considering pricing differentials between regions. These factors are particularly pertinent in the context of this case study, where the competing commodities are onions and soya beans. Understanding these dynamics is crucial for enhancing efficiency and making informed strategic decisions in logistics, ultimately optimizing commodity flow coordination.

• Competing Destinations (Attractiveness Factor): This factor revolves around assessing the market's favorability, specifically in terms of pricing and the accessibility of lucrative destinations. Understanding the attractiveness of different destinations is crucial for decision-making regarding where to send commodities. It involves considering market conditions, pricing dynamics, and potential profitability.

• Quantity Moved (Affinity Factor): The Affinity Factor involves reflecting on price differentials and consumption patterns to determine the quantity of commodities moved. Affinity, playing a pivotal role in the analysis, helps understand how price differences between regions and consumer demand influence the amount of a particular commodity that is likely to be transported.

• Freight Attractiveness (Impedance Factor): The Impedance Factor focuses on evaluating the price attractiveness of the freight used in the movement of commodities. Assessing the attractiveness of freight is vital for understanding the cost implications and efficiency of the chosen transportation method. It considers how the freight cost influences overall logistics decisions.

• Value Density: Value Density, crucial for economic efficiency in transportation decisions, calculates the value per unit volume of transported potatoes based on price per kilogram and space efficiency. Our integrated approach acknowledges Affinity factors defining demand and consumption gaps, Attractiveness factors influencing pricing differentials, and Impedance factors impacting commodity flow inversely with distance, optimizing overall commodity flow dynamics.

Depending on the high or low values of the above factors discussed distinct scenarios will shape the impact on our client.

Understanding competing commodities and freight movement

Potatoes face competition not only from similar crops but also from soybeans in Madhya Pradesh, onions in Maharashtra, and various commodities in Gujarat. 

These commodities, using the same trucks for transportation, impact our client's potatoes directly. It's advisable to assess competing commodities' movements before planning.

The challenge arises when these commodities vie for the same trucks, leading to unfavorable value density for potatoes. Our observations highlight that 14 tyre trucks dominate these movements, especially in regions like Shajapur Mandi, with a daily throughput of 110-150 trucks.

Broker diffusion is high in active regions like Shajapur, with truck outflows exceeding 500. The freight market for these trucks is divided between local and national Transport Service Providers (TSPs).

Unions like Patiala and Channo control movements from these locations. Patiala Union, with 600 trucks, experiences peak placements during wheat, paddy, and potato seasons, with varying freight rates.

Critical questions arise, such as predicting simultaneous movements of other commodities and determining the opportune time for potato transportation. Timing is crucial, considering the influence of value density and perishability. Higher perishability, even with lower value density, can incentivize transporters to prioritize timely movement, underscoring the need for strategic decision-making to avoid potatoes taking a back seat.

Introducing the SAIL Strategy

To address our client's procurement challenges, we proposed a streamlined seasonal analysis for improved agricultural transportation and logistics efficiency. We strategically modeled freight costs and capacity fitment, considering all five factors mentioned above.

Recognizing the importance of discerning peak and lean seasons for potato transportation, our solution emphasizes optimizing freight costs during these periods through the Seasonal Analysis for Adaptive Rate Structure Integration in Logistics (SAIL) strategy.

Our recommended approach to streamline freight costs involves dynamically implementing different slabs for peak and lean seasons. Specifically, during peak seasons, the first slab covers 0-20 trucks, with a second slab for 21-40 trucks, as demand for more rarely exceeds this amount. We also suggested introducing a third slab at a higher rate to enhance the attractiveness of the first two slabs.

Identifying the lean season as February to March, with significantly higher cumulative demand, we conclusively proposed adapting the SAIL strategy to logically zone these seasons for effective freight procurement and contracts. Additionally, by benchmarking this data against industry standards, our client gains the agility to capitalize on market fluctuations. 

Today, this streamlined solution has enhanced our client's ability to secure potatoes in a timely and cost-efficient manner without capacity shortfalls, strategically positioning them in the dynamic agricultural landscape.