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Global Competitiveness in Retail Supply Chain

Challenges, Strategies & Recommendations

Sanjay Upendram, Founder & CEO

September 01st , 2010

Management consulting | Leadership Development | Experiential Learning

- 2 -Confidential, please do not distribute or copy. Amarthi Consulting

Contents

Retail sector − Key Challenges and Opportunities in Indian Retail sector

− Key Recommendations

Key Challenges and Recommendations− FMCG Supply Chain

− Consumer Electronics

− Fashion Industry

− Food Industry Supply Chain


Can we handle the truth? India in 2020

0 5,000 10,000 15,000 20,000 25,000

RussiaIndia

MexicoBrazilChina

CanadaItaly

FranceUK

GermanyJapan

US

GDP (US$bn)

FDI in various sectors ( US$ 36 billion in 2009)

Promising consumer markets: 41% of India’s middle-class (climbers) and 58 % of the total disposable income.

Significant investment ($500 B) in logistics infrastructure development

India Growing


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

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

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

10% CAGR


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)


According to World Bank study on logistics India ranks 47th

globally and represents a disadvantage Int. LPI Rank Country LPI Customs Infrastructure

International shipments Logistics Quality and Competence

Tracking and 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 3.38 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 3.15 3.23 3.09 3.94

40 Saudi Arabia 3.22 2.91 3.27 2.8 3.33 3.32 3.78

41 Brazil 3.2 2.37 3.1 2.91 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 3.17 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

Amarthi Consulting estimates India’s

inefficient supply chain results in over $65 Billion

in excess costs


Key challenges in Indian retail sector supply chain

Product proliferation and variety -

High diversity in terms of consumers demographics, income levels, seasonality etc

70% of the population is in rural India living across 627,000 villages

High levels of intermediation ( 5 to 6 levels)

14.3 million retail outlets (1 M urban & 13.3 M rural) with multiple formats

Sub optimal supply chains (costs vary between 12% and 50%)

Company LevelPoor supply chain infrastructure

2% of the road network carry 40% of the freight

Only 20% capacity addition in railwaynetwork since independence but traffic increased 10 (ten) fold.

Capacity constraints at airports lead to 20-30% additional fuel consumption.

30% of farm produce worth USD 13 billion gets wasted due to lack of integrated cold chain infrastructure.

Complex taxation structure distort the supply chain For Ex: CST, excise duty, service tax, differential VAT at state levels lead to inefficient supply chain.

Country Level


Supply Chain Design and ConfigurationSupply Chain Design 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 structureDesign Green Supply Chain

Product DesignProduct Design SourcingSourcing OperationsOperations & Logistics Sales & ServiceSales & Service

• Reduce product proliferation

• Develop common platforms

• Develop strategic sourcing options

• Explore options for unbundling

• Outsource non-coreactivities

• Develop and strengthen channel partners

• Postpone product customization

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

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

• Develop the right Supply Chain Organization and effective performance management

Supply Chain Organization

Key recommendations Company Level


Key recommendations

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

Implementation of GST: Clear definition of taxable subjects and applicable laws.

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.

Country Level


Typical FMCG supply chain has several levels of intermediation with increasing complexity

Depots

Consumers

Outbound transportation

Distributors / Stockists

Medium retailers (Supermarkets)

Contract manufacturin

g

Supply chain planning & management

Large Retailers (Hypermarkets)

Self Manufacturing

Carrying & Forwarding agents

Small retailers (Grocery shops)

Source: Amarthi Analysis

20 to 30 million

1.5 to 2 million

50,000

50 to 60

3,000 to 4,000


Key challenges and recommendations for FMCG supply chain

Wide Variety of goods: Household care, Food and Beverages, Personal Care

High level of intermediation: 6-8 levels in FMCG

Multiple formats and retailing: 14.3 million retail outlets

Reaching rural population: 70 % of the population lives in 627,000 villages

Poor supply chain infrastructure

Minimal of point-of-sale information

Lack of optimized supply chain: Supply chain driven by taxation structure.

Challenges

Optimizing the entire supply chain by considering factors affecting cost, service, quality, responsiveness

Reducing supply chain costs by reducing intermediaries

Adoption of quick response strategies

Agreements with suppliers and logistics service providers

Strategic supplier selection

Use of data analytics and IT

Use of product de-proliferation strategies

Recommendations


Majority of the existing supply chains have evolved due to past policies and not necessarily due to holistic business considerations….

Supplier Factory

Factory

Factory

Depot

Depot

Depot

AW

AW

AW

Sourcing Conversion Distribution

Dealer/Retailers Consumer

Sales

Dealer/Retailers

Consumer

Consumer

Consumer

Consumer

Supplier

Mfg Plants Depots

AuthorizedWholesalers Products

OrderOrderReplenish

ment System

Suppliers, Contract

Manufacturers

• Monopoly restriction

• Supplier availability

• Taxation

Existing Supply Chain Evolution

• Raw Material supply

• Demand/Supply scenario (rural, urban, seasonality, demographics)

• Leverage and collaborate with partners to distribute to rural markets (NGOs, SHG)

• Global and National supply chains

• Product and Customer Mix

• Total cost of operation – Mfg, Labour

• Service levels

• Taxation (GST, VAT) and Incentives

• Infrastructure (Roads, Ports, Power, Gas, Logistics)

Future State Supply Chain Design


A methodical process should be used to identify the optimal location and network to design the supply chain

100 likely locations

20 chosen locations for based on Supply Chain

Parameters

Optimization Model

Scenario Analysis

PUNJAB

JAMMU KASHMIR

HIMACHAL PRADESH

HARYANA

RAJASTHAN

GUJARAT

MAHARASHTRA

KARNATAKA

GOA

KERALATAMILNADU

ANDHRA PRADESH

MADHYA PRADESH

UTTAR PRADESH

BIHAR

ORISSA

WEST BENGAL

ASSAM NAGALAND

MANIPUR

MIZORAMTRIPURA

MEGHALAYA

ARUNACHAL PRADESH

CHHATTISGARH

JHARKHAND

UTTARANCHAL

SIKKIMDELHI• 50 segments of 220

x 220 KM each

• 100 likely locations from these 50 segments

• Optimize based on: Competitive Strategy, Location, Cost, Service Levels, Inventory, Quality, Taxation

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Learning Supply Chain from Ants

Ant Colony Optimization – Pheromones, Routing

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.

Ant Optimization Algorithms and AntNet –Information at Nodes of travel path

Ants Optimization

Source: The Economist, August 14th, 2010


Typical supply chain of Consumer durables industry

Company warehouse / C&F

agent

Consumers

Exports

Distributor (Super stockist) Retailers

Manufacturer

Raw materials

Large Retailers

Imports Source: Amarthi Analysis

Service Supply Chain


Consumer durables – challenges and recommendations

Large Variety of goods -- New products, Seasonality, Brand variety

Frequent promotions: Out-of-stock rates between 8 percent to a staggering 70 percent.

Uncertain demand: Average forecast accuracy of just 50%.

Poor of point of sales information

Short lifecycle replenishment: Life cycle < 6 months

Managing Service supply chain: 2-4 weeks to get a spare part.

Handling and weight to volume optimization

Challenges

Product de-proliferation strategy

Collaboration across supply chain

Use of multi-modal transportation

Retail and promotion event synchronization

Collaborative forecasting, inventory management

Use of hub and spoke model

Inventory pooling

Postponement strategies

Recommendations


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

Direct Impact Indirect Impact

Part Variety

Product Variety

Process Variety

Set Up

Inventory

Material Handling

Stability of MPS

SupportingServices

On time delivery

Quality

Costs

Product Flexibility

Product proliferation is driven by different choices flavors, colors, sizes, packaging, design etc.

Proliferation increases complexity and cost due to manufacturing, inventory, parts, distribution, service, promotions, branding etc.

Critical to rationalize portfolio of products by considering customer requirements, competition and profitability

Product Complexity

Each SKU could cost approximately $40,000 to maintain in your system

- 18 -

De-proliferation initiatives can be implemented by a detailed variant/build combination analysis …

Style

XX YY

DeluxeDeluxe LXLX DeluxeDeluxe

ceceabab xyxy ererbaba bgbg gaga coco toto

LXLX

Packaging

Color

Rating

Power

Cost

Size

Shape

Finish

2

1

1

2

1

2

4

18

3

2

1

4

1

2

5

18

1

1

1

3

1

2

5

27

2

1

1

2

1

2

4

18

3

2

1

4

1

2

5

18

1

2

1

4

1

2

4

15

1

2

1

3

1

2

2

15

1

2

1

4

1

2

4

15

1

2

1

3

1

2

2

15

Model

Options

0

9

2

1

9

0

9

2

1

9

2

0

10

1

0

10

2

0

10

1

0

10

The proposed packaging for the consumer durable will reduce build combinations from 79,000 to less than 1,300

Confidential, please do not distribute or copy. Amarthi Consulting


Key challenges and success factors in Fashion supply chain

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.

Frequent changes and demand variability: in trends and seasonal demand changes: Shorter life cycle

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

Errors in demand forecasting: 40-50% SKUs do not sell which account for 12-20% of the inventory.

Multiple formats and retailing: Mass market, Economy market Sports market, Premium market and Luxury.

Lack of point of sale information

Challenges

Source: Fashion logistics and quick response by Martin Christopher, Bob Lowson and Helen Peck


Key recommendations for efficient supply chain in fashion industry

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


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.


Supply Chain Visibility Enhancement Systems

Customer

Dealer

Depot

Factory

Retail order

Dealer orders

Depot orders

Production schedule

Complaints & feedback

Product information


Back-orders,inventories, forecast err.

Sales, Inventories



Reporting systems

Sales Team

Top Mgmt

Material

Material

Material

Material

Material

HO Sales dept.

Fill rates, OTD


Present Scenario: Food Value Chain in India

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

FARMER TRADER WHOLESALER RETAILER CONSUMER PRICE

3.3

4.1

1.72.5 11.6

Retail Markups

FARM GATE PRICES MILK FISH FRUITS &VEGETABLES

350%

220%160%

100%

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


Key challenges in Food supply chain

Fragmented Farming: 80% of farmers own land less than 2 hectares with an average size of land holding of just 0.53 ha.

Post harvest loss and freshness: 30-35% of India’s 60 million tonnes of fruits and vegetables worth INR 580 billion get wasted.

Disconnect from the consumer: No information regarding demand, prices to the farmer.

High intermediation: E.g: An apple farmer receives only 15% of the end consumer price.

Lack of supply chain Infrastructure. E.g. cold chain

Pre-processing

Multiple formats and retailing: 14.3 million retail outlets catering to different levels of income groups.

Lack of infrastructure: Just-in-time and other cost-saving techniques do not work as trucks takes days to travel a few hundred miles.

Lack of continuous power supply: Only 12 hours of power supply in rural areas.

Loss due to breakage and material handling: 1-2 % loss of products

Demand forecasting: Erratic sales, introduction of new goods, changing promotions and prices

High operating costs in the cold chain: 28% of the total expenses for Indian cold storages compared to 10% in the West.

Absence of value added services in logistics industry: For example, Tagging, barcoding, packaging.

Retail


Key recommendations and opportunities in Food value chain

Data integration across stake holders – farmers and end users

Efficient material handling systems and flexible containers to minimize breakages and wastage

Integrated cold supply chain.

Goods movement synchronization through efficient transport scheduling

Demand Forecasting and producing accordingly

Recommendations

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Management consulting | Leadership Development | Experiential Learning

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www.amarthi.com

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