Ingredient sourcing is a critical process in the business of herbs and spices. India is one of the leading producers of herbs, spices, and agricultural commodities. Pepper, cardamom, soybean, scented rice, wheat, and nutraceutical ingredients in semi-processed or fully processed forms are some of the key commodities exported from India to the Middle East, Asia Pacific region, Europe, and the United States. To source efficiently from India, it is important to understand where these commodities are found, who grows them and how they are managed.

Some herbs and spices grow wild and require collection from forests. Forests in India are controlled and managed by state forest departments. Indian forests are managed on strict conservation protection principles. Logging of green trees is prohibited in most forests of India. The collection and sale of herbs from the forest areas are undertaken largely by state-owned forest product development entities. The collection process, too, is state-controlled. For some of the major herbs, collectors are offered collection prices fixed by the state in advance of the collection season.

Minor medicinal herbs and forest products are either freely collected by local communities or collection rights are auctioned by state authorities. Small local contractors buy these rights. The produce collected directly by villagers is sold to intermediaries in village markets. Intermediaries act as collection agents for bigger wholesale merchants.

Some natural products such as pepper, cardamom, cinnamon, berries of Embilica officinalis, many medicinal plants, and agricultural commodities are commercially cultivated. India’s regulatory and social structures have placed limits on the maximum permitted parcel size ownership of land. Ingredient suppliers have to interact with large numbers of individual suppliers/producers. The sale of major commodities such as pepper, tea, and cardamom is mediated by state entities or cultivator cooperatives.

India, like the United States, is a federation of states. Each state has its own set of laws and regulations. Governance differences and business climate vary from state to state. The new government at the federal level is making many across-the-board regulatory changes aimed at reducing red tape for businesses. A concept of competition between states labeled “competitive federalism” has been introduced. States are competing with each other to attract businesses and investment. Sourcing strategies that focus on better-governed states will benefit the industry.

Ingredient sourcing from India is often done by the United States and other international companies in semi-processed or fully processed form. Processors based out of India act as white-labeled suppliers to companies. These white-labeled suppliers have built producer-to-manufacturing unit supply chains.

Ingredient sourcing strategies vary from company to company. Smaller companies prefer procurement agents and sourcing companies. There are several types of sourcing agents available in India. The larger ones have built sourcing supply chains from collectors to storehouses. Others source products from small regional suppliers. In a fragmented market like India, comprehensive due diligence of your ingredient supplier is critical.

U.S. companies often look to secure a year-round supply. This helps reduces idle plant time and improve manufacturing efficiency. Companies are opting for various sourcing options depending on their inclination and investible capacity. Some have sought joint ventures with Indian ingredient processors and suppliers. Others have opted to explore acquisition options.

The big boys in the industry, like fast-food retailer McDonald’s and others, have built sourcing channels directly from cultivators to processing units. They have invested in processing plants. Robust quality and process control mechanisms have been implemented in such plants. Plant location selection is made after comprehensive due diligence—including ingredient availability and taking into account state-specific taxation, regulation, land availability, infrastructure, and governance practices. The companies use India to sell into the domestic market, exporting the surplus elsewhere.

In addition to the aforementioned factors, a cost-reduction, efficiency-improvement ingredient sourcing model should include the following basic steps:

1. Spend analysis—This analysis should include both direct and indirect costs. The outputs are used as a benchmark to compare against the projected cost-efficiency gain.

2. Process re-engineering—An end-to-end process flow analysis that includes ingredient sourcing, logistics, storage, and semi-processing processes will help identify redundancies, and process re-engineering helps reduce sourcing costs.

3. Ingredient sourcing price analysis—Most companies only focus on this aspect and often seek to beat down the suppliers to a minimum price. Such strategies are often counterproductive and could affect assured regular supplies. Producers will supply when prices are low, and there is a commodity glut but stop when these rise.

4. Mapping the supply chain from supplier to the port of entry—Transport infrastructure within India is a major challenge. The sourcing model should include mapping the supply chain and a logistics cost analysis.

5. Due diligence of suppliers and other players in the supply chain—The supplier market in India is fragmented. There are many small-time players in the market. A due diligence and supplier antecedent review will help reduce supply risk.

6. Regulatory and governance risk analysis—Given the federal structure of both the United States and India, a regulatory and governance risk analysis is critical to get the maximum bang for each sourcing dollar.

These tasks can be performed by an in-house team of experts from within the sourcing company but are best addressed by deploying a multidisciplinary team of consultants. Such a team should not just have procurement specialists but also business process re-engineering, supply chain optimization, subject domain, and regulatory specialists. The entire team needs to be supported by an efficient financial analyst who does the benchmarking and future cost projection numbers. Based on my experience executing such projects, cost savings in ingredients sourcing and efficiency can be reduced to 10 to 20 percent of benchmark costs.

Published in Natural Products Insider.

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Sudhirahluwalia, Inc