Global Competitiveness in Retail

Supply Chain
Challenges, Strategies & Recommendations

Sanjay Upendram, Founder & CEO

September 01st , 2010

Management consulting | Leadership Development | Experiential Learning

Contents
ƒ Retail sector
− Key Challenges and Opportunities in Indian Retail sector
− Key Recommendations
ƒ Key Challenges and Recommendations
− FMCG Supply Chain
− Consumer Electronics
− Fashion Industry
− Food Industry Supply Chain

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 Can we handle the truth? India in 2020

India Growing
ƒ FDI in various sectors ( US$ 36
billion in 2009)
US
Japan
ƒ Promising consumer markets:
41% of India’s middle-class
Germany (climbers) and 58 % of the total
UK disposable income.
France
Italy
ƒ Significant investment ($500 B) in
logistics infrastructure
Canada development
China
Brazil
Mexico
India
Russia
0 5,000 10,000 15,000 20,000 25,000

GDP (US$bn)

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Retail Sector is bound to grow driven by modern retailing and the
large traditional retailing

ƒ The Indian retail sector currently is

the fifth largest in the world with a
size of over $410 billions and
estimated to be 30% of GDP
10% CAGR

ƒ Modern retail which represents

5% of the total retail is set to grow
at 20% to 25% in the coming
years.
Source: Amarthi Consulting Analysis

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Food and groceries sector constitute majority of the retail market…while
clothing and textile sector constitute majority of the organized sector

Category-wise retail market shares and organized penetration

(Source: CRISINFAC)

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According to World Bank study on logistics India ranks 47th
globally and represents a disadvantage
Int. International Tracking and
LPI Rank Country LPI Customs Infrastructure shipments Logistics Quality and Competence Tracing Timeliness
27 China 3.49 3.16 3.54 3.31 3.49 3.55 3.91
28 South Africa 3.46 3.22 3.42 3.26 3.59 3.73 3.57
29 Malaysia 3.44 3.11 3.5 3.5 3.34 3.32 3.86
30 Poland 3.44 3.12 2.98 3.22 3.26 3.45 4.52
31 Israel 3.41 3.12 3.6 3.17 3.5 3.39 3.77
32 Bahrain 3.37 3.05 3.36 3.05 3.36 3.63 3.85
33 Lebanon 3.34 3.27 3.05 2.87 3.73 3.16 3.97
34 Portugal 3.34 3.31 3.17 3.02 3.31 3.38 3.84
35 Thailand 3.29 3.02 3.16 3.27 3.16 3.41 3.73
36 Kuwait 3.28 3.03 3.33 3.12 3.11 3.44 3.7
37 Latvia 3.25 2.94 2.88
Amarthi
3.38
Consulting
2.96 3.55 3.72
38 Slovak Republic 3.24 2.79 3 3.05 3.15 3.54 3.92
39 Turkey 3.22 2.82 3.08
estimates
3.15
India’s
3.23 3.09 3.94
40 Saudi Arabia 3.22 2.91 3.27 inefficient
2.8 supply 3.33
chain 3.32 3.78
41 Brazil 3.2 2.37 3.1
results
2.91
in over $65 Billion
3.3 3.42 4.14
42 Iceland 3.2 3.22 3.33 3.1 3.14 3.14 3.27
43 Estonia 3.16 3.14 2.75 in
3.17 excess costs
3.17 2.95 3.68
44 Philippines 3.14 2.67 2.57 3.4 2.95 3.29 3.83
45 Lithuania 3.13 2.79 2.72 3.19 2.85 3.27 3.92
46 Cyprus 3.13 2.92 2.94 3.13 2.82 3.51 3.44
47 India 3.12 2.7 2.91 3.13 3.16 3.14 3.61
48 Argentina 3.1 2.63 2.75 3.15 3.03 3.15 3.82
49 Chile 3.09 2.93 2.86 2.74 2.94 3.33 3.8
50 Mexico 3.05 2.55 2.95 2.83 3.04 3.28 3.66
51 Panama 3.02 2.76 2.63 2.87 2.83 3.26 3.76

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Key challenges in Indian retail sector supply chain

Company Level Country Level

ƒ Poor supply chain infrastructure
ƒ Product proliferation and variety -
ƒ 2% of the road network carry 40% of
ƒ High diversity in terms of the freight
consumers demographics, income
levels, seasonality etc ƒ Only 20% capacity addition in railway
network since independence but traffic
ƒ 70% of the population is in rural increased 10 (ten) fold.
India living across 627,000
villages ƒ Capacity constraints at airports lead to
20-30% additional fuel consumption.
ƒ High levels of intermediation ( 5 to
6 levels) ƒ 30% of farm produce worth USD 13
billion gets wasted due to lack of
ƒ 14.3 million retail outlets (1 M integrated cold chain infrastructure.
urban & 13.3 M rural) with multiple
formats ƒ Complex taxation structure distort the
supply chain For Ex: CST, excise duty,
ƒ Sub optimal supply chains (costs service tax, differential VAT at state
vary between 12% and 50%)
levels lead to inefficient supply chain.

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 Company Level
Key recommendations

Supply Chain
Supply Chain Design
Design and Configuration
and Configuration
• Design Supply Chain to suit products / customers – rural and urban
• Leverage tax laws and incentives
• Build collaboration beyond traditional boundaries
• Design appropriate network structure
Design Green Supply Chain

Operations
Product
ProductDesign
Design Sourcing
Sourcing Operations Sales
Sales&&Service
Service
& Logistics
• Reduce product • Develop strategic • Explore options for • Develop and strengthen
proliferation sourcing options unbundling channel partners
• Develop common • Outsource non-core • Postpone product
platforms activities customization

Information Technology
Information Technology
• Leverage IT effectively for supply chain integration and visibility

Supply Chain Organization

• Develop the right Supply Chain Organization and effective performance management

Supply ChainManagement
Supply Chain Management
• Develop a pull and agile responsive systems to build in efficiencies

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Key recommendations

Country Level

ƒ Rapid implementation of supply chain infrastructure:

− Need for 20-30 expressways (connecting the hubs and spokes)
− 72,000 km of highways by 2015
− Rapid implementation of Dedicated Freight Corridors
− Over 1,500 million tones of additional port capacity by 2020
− 15-20 logistics parks
ƒ Implementation of GST: Clear definition of taxable subjects and applicable laws.
ƒ Critical transformation of logistics in India can only be achieved through the
coordination across industry, government and all relevant groups of ministries
adopting global best practices with a clear implementation focus.

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 Typical FMCG supply chain has several levels of intermediation with
increasing complexity
Supply chain planning &
management

Contract
Self
manufacturin
Manufacturing
g

Outbound
transportation

Source: Amarthi Analysis Depots 50 to 60

Carrying &
Forwarding agents 3,000 to 4,000

Distributors /
Stockists 50,000

Large Retailers Medium retailers Small retailers

(Hypermarkets) (Supermarkets) (Grocery shops) 1.5 to 2 million

Consumers 20 to 30 million

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Key challenges and recommendations for FMCG supply
chain

Challenges Recommendations
ƒ Wide Variety of goods: Household ƒ Optimizing the entire supply
care, Food and Beverages, Personal chain by considering factors
Care affecting cost, service, quality,
responsiveness
ƒ High level of intermediation: 6-8
levels in FMCG ƒ Reducing supply chain costs by
reducing intermediaries
ƒ Multiple formats and retailing: 14.3
million retail outlets ƒ Adoption of quick response
strategies
ƒ Reaching rural population: 70 % of
the population lives in 627,000 ƒ Agreements with suppliers and
villages logistics service providers
ƒ Poor supply chain infrastructure ƒ Strategic supplier selection
ƒ Minimal of point-of-sale information ƒ Use of data analytics and IT
ƒ Lack of optimized supply chain: ƒ Use of product de-proliferation
Supply chain driven by taxation strategies
structure.
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 Majority of the existing supply chains have evolved due to past policies
and not necessarily due to holistic business considerations….

Existing Supply Chain Future State Supply Chain

Sourcing Conversion Distribution Sales
Evolution Design
Supplier Factory Depot AW • Raw Material supply
Dealer/Retailers Consumer

• Demand/Supply scenario (rural,Consumer

urban,
seasonality, demographics)
Supplier Factory Depot AW Dealer/Retailers Consumer
• Leverage and collaborate with partners to
• Monopoly restriction
distribute to rural markets (NGOs, SHG)
Consumer
• Supplier availability • Global and National supply chains
Factory Depot AW
Consumer
• Taxation • Product and Customer Mix

Suppliers, Authorized• Total cost of operation – Mfg, Labour

Contract Mfg Products
Depots Wholesalers
Manufactur Plants
ers • Service levels
Order Order
Replenish • Taxation (GST, VAT) and Incentives
ment • Infrastructure (Roads, Ports, Power, Gas,
System Logistics)
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 A methodical process should be used to identify the optimal location
and network to design the supply chain

100 likely locations

JAMMU KASHMIR

PUNJAB HIMACHAL PRADESH

UTTARANCHAL
• 50 segments of 220 HARYANA ARUNACHAL PRADESH

DELHI
x 220 KM each SIKKIM

RAJASTHAN UTTAR PRADESH

• 100 likely locations BIHAR

ASSAM
MEGHALAYA
NAGALAND

MANIPUR
from these 50 GUJARAT JHARKHAND TRIPURA
segments MADHYA PRADESH
WEST BENGAL
MIZORAM
CHHATTISGARH
ORISSA

20 chosen locations for MAHARASHTRA

based on Supply Chain • Optimize based on: ANDHRA PRADESH

Parameters Competitive Strategy,

Location, Cost, GOA
Service Levels, KARNATAKA

Optimization Model Inventory, Quality, TAMIL

Taxation KERALA NADU

Scenario Analysis

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Learning Supply Chain from Ants

Ants Optimization
ƒ Ant Colony Optimization
– Pheromones, Routing
ƒ Swiss Supermarket
Chain, Migros and Italy’s
leading Pasta maker,
Barilla manage their daily
deliveries from central
warehouse to retail
outlets using AntRoutes
– best routes, delivery
sequence etc.
ƒ Ant Optimization
Algorithms and AntNet –
Information at Nodes of
travel path

Source: The Economist, August 14th, 2010

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Typical supply chain of Consumer durables industry

Raw
materials
Exports
Company
Manufacturer warehouse / C&F
agent
Distributor
Retailers Consumers
(Super stockist)
Imports Source: Amarthi Analysis

Large Retailers

Service Supply Chain

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Consumer durables – challenges and recommendations
Challenges Recommendations

ƒ Large Variety of goods -- New ƒ Product de-proliferation strategy

products, Seasonality, Brand variety
ƒ Frequent promotions: Out-of-stock ƒ Collaboration across supply chain
rates between 8 percent to a ƒ Use of multi-modal transportation
staggering 70 percent.
ƒ Retail and promotion event
ƒ Uncertain demand: Average forecast synchronization
accuracy of just 50%.
ƒ Collaborative forecasting, inventory
ƒ Poor of point of sales information management
ƒ Short lifecycle replenishment: Life ƒ Use of hub and spoke model
cycle < 6 months
ƒ Inventory pooling
ƒ Managing Service supply chain: 2-4
weeks to get a spare part. ƒ Postponement strategies
ƒ Handling and weight to volume
optimization

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Product proliferation has a huge impact on the supply chain
efficiency and effectiveness

Product Complexity
ƒ Product proliferation is
Set Up
driven by different
Part Variety On time delivery
choices flavors, colors,
sizes, packaging, design
Inventory
etc.
Quality
Product Variety Material Handling ƒ Proliferation increases
Costs complexity and cost due
Stability of MPS to manufacturing,
Process Variety
Product Flexibility inventory, parts,
Supporting distribution, service,
Services
promotions, branding etc.
Direct Impact Indirect Impact ƒ Critical to rationalize
portfolio of products by
Each SKU could cost approximately $40,000 to considering customer
maintain in your system requirements,
competition and
profitability
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De-proliferation initiatives can be implemented by a detailed
variant/build combination analysis …

The proposed packaging for the consumer durable

will reduce build combinations from 79,000 to less
than 1,300

Model XX YY

Style Deluxe
Deluxe LX
LX Deluxe
Deluxe LX
LX

Options ab
ab xy
xy ce
ce ba
ba er
er bg
bg ga
ga co
co to
to

Packaging
2 3 1 2 3 1 1 1 1
Color 1 2 1 1 2 2 2 2 2

Rating
1 1 1 1 1 1 1 1 1
Power
2 4 2 3 2 4 2 4 2 3 1 4 2 3 1

Cost 1 1 1 1 1 1 1 1 1

Size 2 2 2 2 2 2 2 2 2

Shape 4 0 5 1 5 4 0 5 1 4 0 2 0 4 0 2 0

Finish 18 9 18 9 27 18 9 18 9 15 10 15 10 15 10 15 10

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 Key challenges and success factors in Fashion supply chain

Challenges
ƒ Large Variety of goods: Varies across gender,
age, size, quality, brand, price, seasonality,
rural/urban, regional variation. Choice changes
every 100 km. 1000’s of products.
ƒ Frequent changes and demand variability: in
trends and seasonal demand changes: Shorter life
cycle
ƒ Lower customer lead time: While many retailers
take 4-12 months. Zara, an international retailer
which is known for its supply chain has a lead
time of only 30 days
ƒ Errors in demand forecasting: 40-50% SKUs do
not sell which account for 12-20% of the inventory.
ƒ Multiple formats and retailing: Mass market,
Economy market Sports market, Premium market
and Luxury.
ƒ Lack of point of sale information
Source: Fashion logistics and quick response by Martin Christopher, Bob Lowson and Helen Peck
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Key recommendations for efficient supply chain in fashion industry

Source: Developed by Harrison, Christopher & Van Hoek (1999)

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Zara’s agile supply chain

Zara is able to design and produce a new product in 22 days as opposed to

9 months by the competitors.

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Supply Chain Visibility Enhancement Systems

Factory
Material
Fill rates,
Reporting OTD
systems Material HO Sales
Top Mgmt Back-orders, dept.
inventories, Production
forecast err. schedule
Sales Material Depot
Team
Sales, Depot
Inventories orders
Material
Dealer
Complaints
&Product
feedback Dealer
information orders
Material
Complaints Retail
& feedback Complaints order
& feedback
Customer
Complaints &
feedback

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 Present Scenario: Food Value Chain in India

Cost Build Up For One Kg. Basket Of Fruit (INR)

11.6
2.5
1.7

4.1

3.3

FARMER TRADER WHOLESALER RETAILER CONSUMER

PRICE

Retail Markups
350%

220%
160%
100%

FARM GATE PRICES MILK FISH FRUITS &VEGETABLES

Source: Food Processing Industries in India: Opportunities & Challenges, http://agricoop.nic.in/rabi06/JS(MKTG).ppt

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Key challenges in Food supply chain
Pre-processing
ƒ Fragmented Farming: 80% of farmers own land less than 2 hectares with an average size
of land holding of just 0.53 ha.
ƒ Post harvest loss and freshness: 30-35% of India’s 60 million tonnes of fruits and
vegetables worth INR 580 billion get wasted.
ƒ Disconnect from the consumer: No information regarding demand, prices to the farmer.
ƒ High intermediation: E.g: An apple farmer receives only 15% of the end consumer price.
ƒ Lack of supply chain Infrastructure. E.g. cold chain

Retail
ƒ Multiple formats and retailing: 14.3 million retail outlets catering to different levels of income groups.
ƒ Lack of infrastructure: Just-in-time and other cost-saving techniques do not work as trucks takes
days to travel a few hundred miles.
ƒ Lack of continuous power supply: Only 12 hours of power supply in rural areas.
ƒ Loss due to breakage and material handling: 1-2 % loss of products
ƒ Demand forecasting: Erratic sales, introduction of new goods, changing promotions and prices
ƒ High operating costs in the cold chain: 28% of the total expenses for Indian cold storages compared to
10% in the West.
ƒ Absence of value added services in logistics industry: For example, Tagging, barcoding,
packaging.
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Key recommendations and opportunities in Food value chain

Recommendations
ƒ Data integration across stake
holders – farmers and end users
ƒ Efficient material handling systems
and flexible containers to minimize
breakages and wastage
ƒ Integrated cold supply chain.
ƒ Goods movement synchronization
through efficient transport
scheduling
ƒ Demand Forecasting and producing
accordingly

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 usanjay@amarthi.com
+91 9866774092
+91 40 66106726
www.amarthi.com
Management consulting | Leadership Development | Experiential Learning

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