The Hindu Business Line : ‘Biggest challenge for retail is underdeveloped supply chain’

Behind the glitz and glamour of the neighbourhood retail chain that you are fond of nowadays (the local kiranawalla is not a priority anymore) is a very efficient supply chain. The job isn’t complete if you happen to have just products stacked up in the shelves. Somebody has to manage the supply chain as well. This is where supply chain management (SCM) comes in. But as far as India is concerned, therein lies the risk too.

From movement and storage of raw materials, inventory, and finished goods from points of origin to consumption – the current retail boom in India can only sustain its momentum if supply chain management is given top priority by retail players. An underdeveloped supply chain cannot help retail stores. It will cause more harm.

“To achieve profitable growth over the longer term in the retail sector, supply chains need to be realigned into efficient, agile and adaptable networks that can handle larger volumes, expand reach, balance costs and address the demographic variations while providing scalability,” said Pinakiranjan Mishra, Partner (Retail & Consumer Practice), Ernst & Young, to BrandLine in an a e-mail interview.

As the process that looks after planning, implementing and then finally controlling the operations of the supply chain as efficiently as possible, the importance of SCM is paramount.

Excerpts from the interview :

Where does India’s back-end supply chain stand today?

The most significant challenge that impedes the development of an efficient and modern retail sector is an underdeveloped supply chain. India today has an underdeveloped unidirectional supply chain that increases inventory build-up and operational inefficiencies for companies.

What about the traditional supply chain?

The traditional supply chain network in India has a host of intermediaries. There are considerable gaps in the transportation and storage network of the country. Third-party logistics providers, a mainstay in any well-developed supply chain, are largely non-existent in India. There is also very little sharing of supply network infrastructure among leading Indian retailers.

Okay. So what is the biggest problem in developing a robust back-end supply chain?

The most significant challenge in developing a smooth supply network is the lack of adequate infrastructure, particularly road infrastructure, reliable power supply, insufficient investments in alternative modes of transport (marine, railways, air transport), a well-connected cold chain and warehousing infrastructure.

Infrastructure. What else?

Lack of technology usage, a fragmented supplier base and a multi-layered tax structure pose significant challenges to the evolution of a streamlined supply network. Local, regional and national regulations pose major hurdles for retailers in obtaining permissions to establish supply chain infrastructure.

Is low optimisation of available infrastructure an issue?

Sure it is! For instance, in transportation, railways could accelerate freight earnings by 100 per cent. Railways today hardly transport about 22 per cent of cargo whereas they don’t suffer from the typical issues of our roadways, such as congestion and poor maintenance.

Guess the rest of the cargo travels by road. Then, what is the problem?

Two per cent of roads constitute national highways but carry 40 per cent of all cargo. Only 48 per cent of villages are covered by road network. Indian cargo travels 250 to 300 km per day vis-À-vis 600-800 km as per international norms. This severely limits the access of rural producers to the consumer markets.

By connecting specific producing regions like ‘food parks’ and building storage and handling capacity, railways could double freight growth from the current 10-11 per cent to about 20 per cent while providing market connectivity to farmers. A study by the US Federal Railroad Administration had revealed that relative fuel efficiency of railways was about 4.5 times that of roadways.

We keep hearing about third-party logistic providers. Is there a market for them?

Third-party logistic providers (3PLs) have a significant opportunity of growth with the outsourced logistics market in India, estimated at $10.2 billion, expected to grow at a CAGR (compounded growth annual rate) of 15-20 per cent during 2007-10, driven by a growing trend towards annual contracts.

Indian companies are increasingly using specialist logistics service providers to reduce costs and focus on their core competence. Growth in industry and trade has created the demand for a range of logistics services including transportation, storage, warehousing and inventory management that benefits the productivity and efficiency of the customers’ entire supply chains. This offers a huge opportunity for 3PLs.

Tell us more about the scope for organised players ...

With 54 per cent share of the retail market and penetration rates of just over 1 per cent, F&G (food and grocery) represents the biggest opportunity for organised players.

Owing to land parcels, multiplicity of regulations, large number of intermediaries and inadequate processing infrastructure, the final price for the products increases significantly.

Consumer prices for fruits and vegetables in India are as high as 3.5 times the farm-gate prices. Milk and dairy products are another large-consumption category and offer huge opportunity for the processing industry, with 35 per cent of milk currently produced undergoing some form of processing.

The emergence of 3PLs, backward integration which is being facilitated by large retailers and the increasing presence of large international retailers will enhance efficiencies in logistics and warehousing.

But can technology help in all of this? Usage is rather low.

You are right. The usage of IT in the back-end supply is fairly low in India. The unorganised sector, a considerable portion of the retail industry, is lagging behind in IT usage. This could be one of the key reasons why IT usage percentage remains low in the Indian retail industry.

Even though technology is available to cater to this segment, factors such as money and low understanding of benefits deter its usage. Currently, national and multi-format retailers are the most aggressive players in IT spending.

This means we are lagging in the adoption of even basic IT in the case of retail ...

No. In fact, Indian retail is quite advanced in basic IT adoption, with enterprise resource planning (ERP), network, and so on as compared to foreign retailers.

However, implementation has not been managed well due to the lack of sector understanding, both with clients as well as IT consultants. Where we are also lagging is in the realm of advanced IT products and solutions such as replenishment planning, analytics, RFID (radio-frequency-identification) and warehouse management systems.

Given the big budgets for IT, what benefits does it have to offer?

Supply chains have evolved into complex networks keeping pace with the increasing demands of retail business. Technology intervention at every level of the supply chain helps track products and provides data visibility.

A couple of key benefits comprise tracking of inventory and leakage, planning and replenishment of SKUs (stock-keeping units), CRM (customer relationship management) and potential of cross-selling other products, performance management across locations and categories, to name a few.

So, if we have IT and developed infrastructure, will that give us an intelligent supply chain?

An intelligent supply chain network aims to help an enterprise understand and operate its business profitably. It utilises past performance to provide a predictive model for future performance. It also identifies deteriorating supplier performance which helps take preventive action.

Significant features of the intelligent supply chain comprise Web-enabled global visibility, ‘componentised’ application architectures, real-time planning/execution linkage and reporting and analytics.

An efficient and effective supply chain execution would help manage costs, ensure product availability and be highly responsive.

In short, what do retailers need to do?

Going forward, retailers would need to collaborate with suppliers to assist them in building required capabilities and manage the demand supply gap.

Simultaneously, retailers would need to work towards building the execution capabilities by establishing robust supply chain performance management framework and developing ways and means to capture unstructured information and using it for competitive advantage.

The retail industry needs to focus on making IT implementation successful and sustainable. Further, they should concentrate on using retail analytics to understand consumer demand side and planning for fulfilment/supply side.

Can the Government boost development of supply chains?

The Government needs to actively engage with the retail players to address taxation and infrastructure issues that would facilitate large-scale investments.

The introduction of a uniform goods and services tax (GST) across the country will allow companies to design a lean and effective supply chain infrastructure.

The Government should also provide tax holidays for cold chain infrastructure investments and encourage the food processing industry to set up in areas near the source. This will cut down losses to farmers and also generate employment.

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