The importance of Contract Manufacturing for the Indian manufacturing industry in the food segment needs to be driven home and who better than a food expert to dwell on it? Dr A S Aiyar, food consultant, spoke to indiamarkets on the problems and opportunities of the food processing industry in India. Contract manufacturing, Dr Aiyar says, is a valuable concept that enables bifurcation of the two major responsibilities that are involved in manufacturing a product for the market. It delinks the ownership and management of the physical facilities on the one hand from ownership and management of the product on the other, thereby helping each of the partner to focus on his/her core activities and leverage their resources to enhance their competitive positions, he says.

In his interview, Dr Aiyar described his experience as an entrepreneur while setting up Noble Soya, a food processing unit. He consciously promoted the provision of product/process development as a service to others and also undertook contract manufacture as a desirable business objective. The company has developed and manufactured diverse products for a large number of Indian and multinational food companies.

According to Dr Aiyar, small and medium enterprises in the long run will have to transform and strengthen themselves in terms of technology and financial inputs. This is a process that he expects to happen in India.

Dr Aiyar has written a paper on ‘Contract Manufacturing for the Robust Growth of the Food Industry’. He observes that large Indian companies and MNCs in India have been using contract manufacture, but not SSIs and medium scale industries. It holds great relevance all over the world, but the Indian industry at large is yet to warm up to it.

The paper says, "Organisations need to channelise their own resources to their core competency areas and to ‘outsource’ other activities to fulfil their total business process. This is a must in the highly competitive developed countries. While the larger companies in the food industry have already enhanced their profitability by ‘outsourcing’ and the continuance of this practice will enable them to maintain the competitive edge, the small and medium enterprises will be compelled to transition to this type of a model due to economic reasons and the pressures of a global market."

That the importance of contract processing has been recognised by the Indian food processing industry is reflected in the fact that several Indian and MNCs use contract manufacturing now. They get their branded products manufactured by others, under contract. For instance, Britannia, Coca Cola, Dabur and HLL. This shows that they wish to concentrate on their core business strengths, he pointed out.

Contract manufacturing facilities with state-of-the-art equipment and requisite technical expertise, where the production capacities are fully utilised can play an important role in achieving global competitiveness, in quality and price. They could be invaluable in developing a vibrant food industry and help realise the Department of Food Processing Industries target the value addition in agro processing from the current 7 per cent to 35 per cent by the end of the decade, requiring an investment of Rs 1,40,000 crore.

The trend in India will be such that large industries will get their work done from small units while setting standards. The small units will be engaged only in manufacturing with technical inputs from the bigger company.
This concept must be promoted with government infrastructure geared towards this as well as a strategy of support for fast development of SSIs is concerned. Importantly, he says, there should be a change in mindsets.

SSIs will not only survive, they will grow and will have strong links with larger organisations. Manufacturing and marketing organisations will have great strength. SSIs in the manufacturing segment have a significant role and it is important that they function at full capacity utilisation. Also, large national companies will prefer to have locations across the country. This will reduce transport and freight costs. They will set up units wherever the raw material is available as this offers locational advantages.

For wannabe SMEs in the food sector, Aiyar has a business idea. "Dry blending is ideal for SSIs. Today’s foods are all dry blended in powder form. It is ideal for contract manufacture."

For SSIs in the manufacturing sector, selling is the biggest problem. Second, to manufacture in an international  market, their products have to be globally competitive - even to just survive. The products have to be competitive in terms of price, which is related to costs, quality and safety. "For a small company, this is tough," he says.