The Hindu Business Line : Supply chain tangle, untangle

A few years ago we went to Agatti in the Lakshadweep Islands for a holiday. Poor flight connectivity ensured that we had to endure a voyage by sea on our return. I specifically use the word ‘endure'- this is one journey I would never recommend to anyone looking for a holiday. Primarily because the ship is more like the equivalent of an upcountry passenger train used to transport a mix of people and goods.

However, watching the plethora of goods being loaded and unloaded from the hold of this ship was an interesting diversion and also offered me a good insight into the complexity of managing supply chain in a country as vast and diverse as India.

In the pictures alongside, there are the usual products of consumption as also a bed and a mattress. Imagine the extreme geographies in India and the myriad avenues of transportation used to supply products to the remote corners of the country.

However, the unfortunate reality is that even in places with relatively good road networks, the supply chain mechanisms are so disparate that it is fast becoming an Achilles heel in the country's corporate retail story.

Consider the following facts:

The Indian's monthly household consumption is still dominated by grocery and fresh produce. Most of this is sourced and transported from places quite far away from the consumption points.

This is done using the age-old supply chain mechanism that is effective but definitely not efficient by any stretch of the imagination and has a minimum of four or five intermediaries.

The lack of proper storage or cold chain facilities results in disproportionate wastage levels, the value of which is recovered from the buyers, with the end-consumer paying for the inefficiency of the entire chain.

Is it any wonder that the difference between the price that a farmer gets versus the price that a consumer pays in an urban market could be anywhere from two times for something like potatoes and as much as four times for tomatoes?

This makes me wonder about the myriad stories I am reading in almost every newspaper and magazine about the price rise of food products as also fruits and vegetables. Is this a reality? Yes, of course it is. The weekly vegetable bill validates this.

But is this flowing down the chain to yield better prices for the farmers? That is debatable. Even corporate retailers, who had announced mega plans for investments in the supply chain, direct sourcing from farmers, and such, are nowadays purchasing their requirements from wholesale traders or consolidators.

Why are retail chains depending on wholesale markets when there is no denying the fact that corporate retail has invested in distribution centres and logistics? Is there something that everyone is missing?

My guess is that most chains are modelled along the lines of the chain store concept that operates internationally and which leverages the supply chain though a network of distribution centres. However, implementing the same idea in India, especially in the nascent stages of corporate retail's evolution, might not be the best of ideas. Internationally, the context is different and here is how:

Chain stores dominate the market place and have a significant share of sales. Even the mom and pop stores usually purchase from cash-and-carry stores. As such, most of the distribution and supply chain management falls within the purview of the retailer instead of the manufacturer.

Cold chains and efficient supply chains ensure minimal wastage and maximum value realisation for perishables such as farm produce.

Groceries are not a major component of the shopping basket and hence the sales mix is dominated by branded products.

In India, the distribution and logistics costs for most Indian chains are 3-5 per cent of their sales. A major chunk of this expenditure is spent on managing the distribution centres. The bulk of products handled by the distribution centres are branded, for which the manufacturer already has an established distribution mechanism. The trade-off question that eludes an answer in the current state of corporate retail is: Do manufacturers perceive enough value in the retailers' supply chain to help underwrite their costs by offering incremental margins?

If the retailer is not getting at least 3 per cent incremental margins, the entire cost and effort of managing the distribution centres is not worth it. And this is apart from the other components of incremental margins due to the differentiated cost structure of chain stores. From the manufacturers' perspective, their distribution mechanism cannot be done away with because it caters to 90 per cent of the market. In light of this, the question is whether the distribution centres of the chain stores are worth the cost and effort.

Do corporate retailers need to think of an innovative new approach to distribution and supply? One idea would be to leverage the manufacturer's distribution mechanisms in the urban markets and not waste time and effort in duplicating it, especially at incremental cost. Such efforts would only make the overall system inefficient and that cost has to be borne by someone, usually the customer.

But then, wait a minute. Retail is all about aggregating values and managing the supply chain. If that is true, how come I am actually suggesting otherwise? Is this idea a step backwards?

Not at all.

Corporate retailers need to redirect their energy and efforts with regards to the supply chain and aggregating volumes to product categories where there is value to be unlocked.

Simply put, an interim strategy till volumes build up would be to depend on the manufacturer's distribution while investing in creating a sourcing and distribution machinery for categories such as grocery, fruits and vegetables. This is actually in direct contrast to what is being done, wherein chains depend on wholesalers for fruits and vegetables while investing in distribution mechanisms for branded products.

Instead, by depending on the wholesale markets for produce and, maybe even certain grocery products, an opportunity is being missed and what an opportunity it is!

An opportunity to redefine the agri-segment!

An opportunity to contribute to nation-building by reducing agri-wastage!

An opportunity to empower and enrich the farmer!

The flip side to this opportunity story is the unrealised sales potential of the rural and semi-urban markets. Almost everyone, barring a few chains, are obsessed with the consumption story of urban markets. There is no denying the fact that urban markets have higher penetration of products and, therefore, offer better sales potential. But here is the twist in the tale: If everyone rushed into the same or similar high potential markets, obviously each would be left holding a fragment that would be far from remunerative for anyone.

The old story of two salespersons visiting the same island where the natives were barefoot comes to my mind. One pursued other options as there was no market on the island and the other created a market as there was no footwear!

The consumption story will roll out in the rural and semi-urban areas and increase only when there are adequate products to consume as also adequate disposable incomes. Rural India is by no means poor. Therefore, it remains to be seen who innovates supply chain mechanisms to make inroads into the vast geographies of India and reap the benefits by reaching out to the farmers and gaining their trust, loyalty and grabbing a share of their wallets.

Regardless of the consumption story, the potential for investing in a robust supply chain for categories where value can be unlocked is enormous and it is bound to be a huge competitive advantage in the years ahead. Anyone interested?

The writer is a retail professional with extensive multi-format exposure in India and has been a part of the team that pioneered organised retail in India. His blog on Indian retailing, An Indian & A Retailer, can be found at http://v-rajesh.blogspot.com/

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