Supply Chain Optimization- The next frontier in Indian Retail

Posted in Operations & IT Articles, Total Reads: 5035 , Published on 25 October 2011
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From its humble beginnings as kirana stores to the modern day shopping malls, Indian retail has come a long way. Many households in India still earn their living owning a stand-alone store.Modernization of this sector started initially with a rush for occupying premium space in cities and experiments with different store formats. Most of the retailers invested in the front end of retailing such as prime locations, improving store interiors, better sales staff and so on. But now the battle is increasingly shifting towards improving the back end processes such as procurement, transportation and warehouse management.

 

Improving back end processes to gain competitive advantage in this sector is not a new concept. Wal-Mart is a needs a special mention as a pioneer in perfecting supply chain practices such as Continuous replenishment programs (CRP), Cross docking, Floor ready merchandise (FRM) and so on. These innovations helped it remain ahead of the pack and made it the biggest retailer in the world. Many retailers replicated its business processes and have survived the tough competition in this sector.

Indian organized retail is poised to grow at a CAGR of 35% for the next five years. But the players who adopt sound supply chain practices will have a first mover advantage when the industry starts consolidating in a decade. According to an estimate, the current logistics and supply chain costs in India is around 10% of the retail price compared to 5% in North America. This may be attributed to factors such as poor infrastructure, lack of economies of scale in transportation, complex taxation procedures and so on. But few retailers have been pro-active on this front trying their best to manage within the constraints. For example Future Group has invested in its subsidiary, Future Logistics Solutions to integrate warehousing, distribution and transportation. Instead of relying on third party logistics (3PLs), discount retailers need to invest in bringing the end to end supply chain management in-house. This may need huge up-front investment, but will pay off in the long run.

But specialty retailers such as those who deal with lifestyle products may find partnering with 3PLs highly beneficial. Many indigenous Logistics service providers such as Gati, Safe Express, AFL logistics are now expanding like never before and can be potential candidates for a long term relationship. But care needs to be exercised in selecting the 3PL because such a partnership has long term implications. The 3PL should have the ability to be flexible, innovative and evolve in response to the changing business needs. The table given below summarizes the processes required to develop varying degrees of partnership with a LSP.

Level 1

Level 2

Level 3

Transportation

Freight Forwarding

Warehousing

Inventory Management

Order Fulfillment

Pallet tracking

Route optimization

Cross docking

Network management

With Indian retailers now venturing into previously unexplored areas such as Fresh fruit and vegetable retail, agile supply chains are ever more important. According to Food Corporation of India, 40% of fresh produce goes to waste due to lack of infrastructure and inefficiency in supply chains. This leads to various other illnesses such as inflation and wildly fluctuating prices (for example, of onion!). The cure lies in developing cold chains. A leading example would be the collaboration between Radhakrishna Hospitality services (RKHS) and McDonalds. RKHS is the first Indian LSP to use multi temperature vehicles with a temperature range of -18C to 4C which helped in load consolidation. It supplies fresh produce such as cabbage, lettuce and milk to McDonalds adhering to the strict hygienic standards demanded by the client. On the contrary, Reliance Fresh, for example failed to take off partly due to its inability to develop a sustainable supply chain.

A special case can be made of the growing online retailing industry in India. In the past year, many ventures have sprung out which are making big revenues such as Flipkart.com, Letsbuy.com and so on. This has forced retailers who have traditionally been brick-and-mortar such as Homeshop18, Future bazaar to set up similar ventures. This sector will also see consolidation in a few years and the ones who survive will be the ones with efficient supply chains. A similar thing happened in the US Online retail industry in 2000s when Amazon.com survived the dot com bust because it had got right the basic fulfillment processes.

With innumerable intermediaries, Indian Retail is so highly fragmented that inefficiencies creep in from every nook and corner. Unless supply chain is optimized by reducing the middlemen, it is the consumers who will end up getting fleeced. The problem is even more acute in case of food retail where the actual producers; the farmers; get only a small fraction (sometimes as low as 5%) of the sale value. The conglomerates have already eliminated the middle men to a large extent and are now dealing with the manufacturers directly. But the medium size retailers’ only chance of survival is by pooling the purchase orders with their competitors, giving them the buyer power to negotiate with producers. Excessive logistics and inventory costs can be avoided by careful inventory planning which can further ameliorate the disadvantage they have in economies of scale.

On the other hand the Indian consumer is now no longer patient to wait for the product to appear in the shelves; he demands a greater assortment of products at even lower prices. The only way to achieve these dual goals of increased product mix on shelves and reduced costs is by supply chain optimization.

This article has been authored by Rohit D from IIM Lucknow


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