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Middleman-As you Risk, so you Reap

, August 21, 2014, 0 Comments

risk reward-marketexpress-inMiddleman in the food supply chain has come to be identified as an unnecessary exploitative element, to be dispensed with, without any alternative being put in place. As in other emerging markets, in India too, an intermediary or the middleman is perceived as one feeding upon the labour of food producer. The negative perception gets magnified due to presence of too many intermediaries.

Consider how the farm produce moves in India. ‘Farm to fork’ chain is exceptionally long; farm harvest passes through several hands, four at the least, before the retail consumer gets to consume it. In many instances, the end consumer pays 3-5 times the price that the food producer gets. Situation is compounded by the lack of adequate infrastructure, like storage and movement, of the supply chain. These factors prompt the stakeholders to find a way to circumvent the cumbersome value chain and cut out the elements which they consider

Where does the axe fall?

Before readying the scalpel to take out intermediaries or middlemen from the value chain, it is imperative to understand the roles that each of these intermediaries perform. The string of inter-related functions requires financial capability, specialist knowledge or a combination of both. As the producers focus on their core activity of production, they pass on the task of moving the produce to the end consumer to other players a.k.a. intermediaries. These intermediaries provide wider market exposure, thereby leaving producers to conserve and invest scarce capital in core activities rather than in marketing. Farmers or producers, as we have used the term here, do not always have easy access to affordable capital – the middlemen take away this pain.

With an intermediary in place, the transaction between the producer and the consumer becomes ‘one-to-many’ instead of ‘many-to-many’, thereby reducing the complexity of transactions, the selling costs and time. The argument for having an intermediary is clearly established; not having one has high opportunity cost associated.

Risk-Reward Test

There has to be a clearly identified function, while moving the product from producer to customer, that a specific intermediary can perform and only he can perform it most efficiently. This is the necessary condition for the existence of intermediaries. What follows from this is that the movement of goods from producer to consumer has to be broken down into specific identifiable tasks, risks and efforts associated with each task mapped onto them and based upon the value added by each intermediary and risk undertaken, the remuneration set for each task.

Remuneration out of sync with the risks and efforts associated with the task has to be right aligned; these tasks or functions also offer the scope for applying the scalpel. Yet, before wielding the scalpel, each and every activity has to be accounted for and not left orphaned, as that would create a gap in the value chain and disrupt the supply chain. Indian agriculture value chain being too long and inefficient is a fit candidate for rationalization, but not before being put through the Risk-Reward test.