Comparing Two Approaches to Disrupting Supply Chains and Enabling India’s Producers
In India, there are over 600,000 cooperatives (co-ops) with 240 million members. In these mostly rural co-ops, producers are trapped in exploitive cycles of poverty without the skillsets, capital, or opportunities necessary to succeed. Using the crafts and handloom sector as an example, we’ll illustrate the current supply chain inefficiencies and the key factors contributing to the exploitation of producers. Based on these learnings, we’ll explore how two companies are using innovation to disrupt the cycle and redistribute margins to create a new paradigm of Business as Usual.
Inefficiency and exploitation in the supply chain
India’s handloom/craft sector is a RS 24,300 crore industry with more than 70 lakh artisans, half of which are disbursed across 24,000 co-ops averaging a hundred members each. For insight into the larger supply chain, its helpful to understand how margins are distributed to key players at the per unit level. In the craft sector, artisans acquire raw materials for RS 100, utilize their skills to create a finished good, and then sell them to traders for RS 110-120. The finished good is sold through multiple layers of traders until distributors and retailers at the end of the supply chain purchase it for RS 160-180. The final price of the product to the consumers is around RS 250 to 300. As a result, in the current supply chain, inefficient intermediaries in aggregate receive a margin of 150-200%. Meanwhile, producers are seeing only 10-20% profit margins at best; at worst, producers are forced to sell by weight, in lieu of quality, in order to remain solvent. Adding to their challenges, producers often have to borrow funds to purchase raw materials, further impacting margins and/or locking them into unscrupulous distributors who finance their materials. In addition to challenges associated with pricing, multiple layers of intermediaries insulate producers from consumers, leaving them unable to assess market trends to create differentiated products. Due to lack of differentiation and the control of intermediaries within the supply chain, artisans are forced to operate in a distorted market where their products are being sold as if they were commodities. This inevitably leads to the question: Why are artisans allowing this to occur?
Why artisan products are priced like commodities
Most producers and co-ops are rural entities with very limited local reach and access to capital. Without access to broader markets, there is limited competition for distributing their goods, which means they have less power to demand a market-based price for their products. Enter traders, who provide access and therefore impose structure on pricing, due to an effective monopoly in the system. Traders can then force artisans to create goods at a standard rate. Moreover, producers also lack access to the working capital necessary to procure raw materials for their crafts. Knowing this, traders often provide raw materials outright or via a ‘low-rate’ loan in exchange for a producer’s buy-back commitment to sell the product below the market price or margin. While the interest rates appear to be nominal, they are effectively very high. In summary, monopolistic control of distribution channels and lack of working capital means producers are only able to garner commodity prices and margins.
Why artisan goods are viewed like commodities by consumers
While the crafts sector has been in India for hundreds of years, it has not adapted well to the changes of taste and preference of the modern era. As a result, producers’ skillsets are anachronistic, which is leading to products ill-suited for the demands of a twenty-first century market economy and that are therefore unable to receive a price premium. Moreover, due to a long supply chain, producers lack the market insight and consumer feedback necessary to design their products to satisfy market demands. As a result, producers have difficulty differentiating their products based on demand to achieve a higher premium. As long as producers lack the requisite skills for a modern economy and remain insulated from the market, their goods will continue to be trapped in a commodities cycle.
How GoCoop is breaking the cycle with market access
While traders fill a gap in the economy, they aren’t particularly efficient and are enjoying 150-200% percent of the crafts margin. GoCoop aims to reduce this margin by eliminating layers of intermediaries or middlemen through the creation of a dynamic marketplace. GoCoop is an online social marketplace platform providing co-ops and producers the ability to list and sell their products to larger markets to realize a better price. Through this platform, regional and national marketplaces connect producers to complimentary suppliers, co-ops and wholesale distributors, along with new B2B and B2C opportunities. In the handloom sector for example, this platform enables the following supply chain linkages to occur:
- Processed cotton is procured by Spinning Co-op mills to process and create yarn
- Yarn is pre-processed in Dyeing units
- Designers and other organizations provides designs to Weavers or Co-ops
- Handloom Weavers/Co-ops produce fabric as per the designs
- Traders, Retailers, Exporters procure fabrics from Co-ops or weavers
- Local and regional garment manufacturers and consumers buy the fabrics
In addition to more control over margins, these linkages give producers the chance to interact with the market directly. This provides an understanding of what customers want and the ability to create differentiated products that will fetch a premium margin. To achieve this at scale, every part of the GoCoop platform and experience is built for growth, from the cloud-based open source infrastructure to the monthly subscription model requiring little or no initial investment. This creates a marketplace able to reach more customers, have more influence and disrupt the supply chain further. Through creating this marketplace, GoCoop has enabled a more efficient system that gives co-ops the opportunity to leverage their services to pursue a higher premium and a more equitable share of the margin. In the next 5 years GoCoop is aiming to facilitate online trade and sales for 20,000 co-ops, which would translate to at least 20 lakhs (2 million) families served.
Another example of a company creating a marketplace to empower artisans is the eCommerce company Crafts Villa. Aiming to become the ‘Etsy of Asia’, Crafts Villa cuts out the middle-man to offer over 50,000 products from over 1,000 unique sellers. After a recent infusion of venture capital, Crafts Villa is looking to expand to Thailand and Indonesia as well. To see additional illustrations of B2B or B2C/eCommerce ventures disrupting supply chains to empower artisans, be sure to check out the Artisans/Crafts category within Four Key Areas Transforming Livelihoods where Indian Artisans Online, Nethaat, My Earth Store and many others are explored in greater detail.
How Caravan is breaking the cycle through training and integration
While much of the Indian market has shifted towards modern mass produced goods, there is still an appreciation for unique hand crafted items that come with a story. Fab India has been serving this opportunity at reasonable scale for some years. Caravan has a new approach, utilizing market insight and global-quality design expertise to create high quality products that receive a premium in the marketplace due to their leveraging the expert designs with artisanal skills. In addition to a high quality product, Caravan chose to incorporate the training of artisans into their business model and brand identity.
Since many artisans do not have the skillsets necessary to produce modern goods, Caravan steps in to help co-ops acquire the skills and training necessary perform in the modern market. They are able to do this through a partnership with the National Skill Development Corporation (NSDC), the public private partnership created to help build scalable, for-profit vocational training initiatives (learn more about the NSDC and training & placement services here). Once their members are trained, co-ops are able to receive contracts from Caravan (and other vendors as well), along with the necessary resources and designs to make higher value-add products. Due to their approach to sourcing, Caravan is able to offer consumers high-quality handcrafted goods with a compelling backstory at a premium price. Meanwhile, by cutting out the middlemen, streamlining their supply chain and fostering a relationship with co-ops gives them control over their COGS (cost of goods sold). A higher price point and greater control over COGS makes Caravan willing and able to share success with their newly trained and equipped artisan co-ops via compensation exceeding the statutory wage framework and materially improving the annual income of members. While artisans are not bound in a formal arrangement, Caravan’s assistance with training, coupled with the margins they’re able to share, engenders a level of trust and loyalty that is not common in the sector. Caravan is aiming to train 350,000 artisans during the next decade. Two other similar examples can be seen in Ecokargha, which provides market linkages and training to artisans before facilitating trade over eCommerce and Eco Tasar Skills, which helps silk artisans manage the End-to-End process of creating Fair Trade home textiles and fashion products.
Better Business, or, Business as Usual?
Through leveraging Caravan, GoCoop and other ventures in the space, we’ve given insight into how companies are disrupting the exploitive cycle within the producer supply chain. While both models enable producers and redistribute margins, they do so in significantly different ways. GoCoop gives artisans access to new tools, services and markets based on the belief the free market will disrupt the supply chain and redistribute margins in an equitable way. Meanwhile Caravan integrates the supply chain themselves, ensuring artisans receive training and fair compensation. In both cases the free market is utilized to disrupt the supply chain based on the intrinsic belief that individuals, when given access to the market and choice, ultimately prefer a hand-up rather than a hand-out.
If you enjoyed insight into how disruption is taking place within India’s artisan supply chains, be sure to check out the next Livelihoods article mCommerce: Transforming Business As Usual For India’s BoP, in which we explore how mCommerce ventures are creating new livelihood opportunities for millions in India’s service sector by creating dynamic new business models and marketplaces to meet the needs of a young, tech savvy generation of mobile-first consumers.
Additional Crafts and Artisan Research
For more insight into the Textile and Handicrafts sector, India’s second largest employer after Agriculture and responsible for providing over 10 crore (105M) livelihoods, check out their feature within Four Key Areas Transforming Livelihoods which explores how ventures are empowering artisans. For insight into the trends, potential game changers and more than 20 companies impacting artisans, check out 75 Companies Transforming India’s Livelihoods for insight into how ventures are transforming the livelihoods of artisans and other sectors of India’s BoP.