Case study
Milk & Fresh Products – a Division of VRS Foods Ltd
Heading: From fragmented to focused: How VRS Foods (Milk & Fresh Products) overhauled operations and regained profitability
Organizational profile
A major player in India’s private dairy industry, the organization is part of a Rs 3200+ crore food enterprise, with its headquarters in Delhi. The Milk and Fresh Products division is the flagship business and well-known for its diverse range of dairy products. With its brands enjoying popularity, particularly in the northern region of the country, the milk and fresh products business accounts for more than 15% of total revenues of the food enterprise, which also manufactures a range of ingredients like lactose, whey proteins, casein etc.
The Milk and Fresh Products business’ primary product portfolio consists of a variety of dairy products like bagged milk (with variants like full cream, toned, double toned, skimmed etc), curd (dahi), buttermilk (chaach), cottage cheese (paneer) – all requiring special storage conditions and with a low shelf life of 2 -7 days. The company also manufactures products like dairy whitener and other dry ingredients, where more flexible storage is possible.
The company has manufacturing plants situated at Sahibabad, Gulaothi, Sandila and Gorakhpur in Uttar Pradesh, Ahmednagar in Maharashtra and Malanpur in Madhya Pradesh, and a pan-India distribution network. It also exports to US, UAE, Europe, South East Asia.
Operating model
Milk procurement is decentralised. Milk collection centres function as regional hubs, with several such centres being present across different regions of a state. Milk is collected both from individual farmers and bulk contractors, with the company manning the collection and transportation and maintenance of the cold chain. For instance, in Uttar Pradesh there are 23 milk collection centres, and milk is sourced from more than 1,00,000 farmers.
Retail sales were mainly handled by general trade and distributors, while in certain areas company-owned and -run sale depots were used for direct sales. Salesmen also serviced the third-party channels. The Marketing function was centralised, while the Sales function was driven at the regional level, with decision-making often influenced by local dynamics.
Problem context
Milk consumption is steadily growing in India, with the organized packaged dairy business gaining market share vis-à-vis unorganized players. Increasing urbanization, rising incomes, growing health consciousness and a youthful population ensures that growth remains steady and constant. Despite this, the company started witnessing declining sales volumes from FY 2019-20 onwards. The alarm bells rang hard when that trend worsened and wipedout profits, leading to cash losses over the subsequent years.
Understanding what went wrong
A closer look at the sales and procurement functions revealed several gaps in operational synergy. Functional heads were not closely in touch with field sales and procurement teams, leading to issues of inconsistent quality, inadequate territory coverage, overspending and disconnect with retail frontend. Further, there was duplication of control and oversight – for instance, a single territory/ region was overseen by the Sales head, Channel Head, as well as, the Marketing Head. This led to fragmented efforts and differing goals. The field staff lacked single-minded focus on sales as the primary goal.
The situation was further exacerbated by an external environment that was highly competitive – both on the procurement and retail front. Margin pressures from distributors and retailers led to low operating margins. Multiple players in the market meant a multitude of discounts and cost cutting. The writing on the wall was clear. High operating efficiency was critical for survival.
Pivoting around
To pinpoint problem areas, first sales and procurement data was analysed across a variety of parameters. For the first time, there was detailed tracking of collections made each morning from villages. Software platforms were used to reconcile daily collections with crates despatched, orders received and sales made. Customer data and sales organization was done through SAP, with Tableau being used to run deeper analytics. This helped to integrate different processes that had, till now, been, segregated – affording a single view of procurement to sales.
On the foundation of data-backed understanding, the next change involved streamlining the middle management, unifying accountability and linking operational targets with performance and pay. Different positions for sales, marketing and channel handling were done away with, and one regional level head was appointed with functions consolidated.
There was clear and regular communication of operational performance – like sales achieved, product and distribution costs – to the sales and procurement teams. This created a sense of urgency as daily losses or gains became evident to everyone. It also gave greater visibility to field teams, allowing for a quick pivot in correction. Customer videos regarding product quality and service hurdles were also shared with the frontline teams to give a real feel of issues faced and identify bottlenecks at the micro level.
Channel rationalization was done based on granular data, with unprofitable channels or those with improper brand synergy being discontinued. The company felt the need to develop more effective sales channels and an exhaustive market study was undertaken. The company set the goal of being among the top 3 players in the regions where it operated. Extensive competitor benchmarking was done of the entire supply chain, right up from the village level. This included detailed understanding of the most profitable and customer preferred channels, below-the-line activities, customer segments and product preferences. Reinforced with this knowledge, the company decided to operate self-run retail stores. Starting small, it was decided that 3% of the total retail presence – which was traditionally serviced entirely by the general trade and a mix of distributors – would now be owned and run by the company. This would lead to deeper customer understanding and a more effective sales strategy. Most importantly, it would break the stranglehold that third-party retailers and distributors now had.
The detailed market study also helped to determine opportunistic sales targets, ideal margins, BTL activities that were effective and the most lucrative markets and customer segments. Armed with this knowledge, the company was now fully equipped to roll out an overhauled sales and marketing strategy. Soon new targets were cascaded to the sales and marketing teams, with performance being incentivized. Specific routes were earmarked that would only be serviced by company salesman, with daily logging of status reports and regular sales analysis. Attractive schemes, targeted discounts, fully loaded product mixes and greater push for high-value products were other aspects of the strategy that got implemented.
Outcome
The operational overhaul and cost optimization exercise concluded in FY 2022-23. The drop in consumer sales was arrested, with no downturn recorded for four continuous quarters vis-a-vis the previous years. Gross operating margins showed sharp improvement and reporting-feedback-decision making cycles significantly shortened, indicating much greater agility in the sales and marketing functions. With losses reversed, and cost management greatly enhanced, the bottomline turned from red to green. The company is now focusing on a new Growth phase that will add further momentum to its healthy bottomline.
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