Supply Chain and Logistics Management: Key to Success in Retailing


By

Vijay Prakash Anand
Sr. Lecturer
IES Management College
Opp. Lilavati Hospital, Bandra Reclamation, Mumbai-400050
 



"Interdependence is a higher value than independence"
Stephen R. Covey in 'The 7 Habits of Highly Effective People'

As rightly said in the above book by Stephen Covey, the value of interdependence is as much important in the business of Retail as it is important in the business of life. Standing on the threshold of a retail revolution and witnessing a fast changing retail landscape, the retail sector is poised for a big leap. Currently retail sector in India accounts for Rs. 55,000 crore ($12.4 billion) business at current prices in the calendar year 2006, increasing its share to 4.6% of the total Indian Retail Value that stood at Rs. 12,00,000 crore ($270 billion). With the potential of crossing Rs 2,00,000 crore ($45 billion) business by the Year 2010, generating employment for some 2.5 million people in various retail operations and over 10 million additional workforce in retail support activities including contract production & processing, supply chain & logistics, retail real estate development & management etc.; the retail sector is growing at a scorching pace of about 37 percent in 2007 and expected to grow by 42 per cent in 2008. With this enormous growth, the retail sector is also facing challenges on the fronts of escalating real estate cost, scarcity of skilled workforce and structured supply of merchandise.

Importance of Supply Chain and Logistics Management

One of the most important challenge in organized retail in India is faced by poor supply chain and logistics management. The importance can be understood by the fact that the logistics management cost component in India is as high as 7% -10% against the global average of 4% - 5% of the total retail price. Therefore, the margins in the retail sector can be improved by 3% - 5% by just improving the supply chain and logistics management.

In India, with demand for end-to-end logistics solutions far outstripping supply, the logistics market for organised retail is pegged at $50 million and is growing at 16%. It is expected to reach $120-$130 million by 2010. Organised retail on the other hand is growing at 400% and is expected to reach around $30 billion by 2010.Even supply chain and logistics firms like Hong Kong based Heng Tai Consumables and ABS Procurement Co and ACM China (the greenhouse specialist) is also eying the opportunity for managing the supplies.

The supply chain management is logistics aspect of a value delivery chain. It comprises all of the parties that participate in the retail logistics process: Manufacturers, Wholesalers, Third Party Specialists like Shippers, Order Fulfillment House etc. and the Retailer. Here, logistics is the total process of planning, implementing and coordinating the physical movement of merchandise from manufacturer to retailer to customer in the most timely, effective and cost efficient manner possible. Logistics regards order processing and fulfillment, transportation, warehousing, customer service and inventory management as interdependent functions in the value delivery chain. It oversees inventory management decisions as items travel through a retail supply chain. If a logistics system works well, the retail firm reduces stock outs, hold down inventories and improve customer service – all at the same time.

Logistics and Supply Chain enables an organized retailer to move or store products more effectively. Efficient logistics management not only prevents needless movement of goods, vehicles transferring products back and forth; but also frees up storage space for more productive use.

Retail analysts say on-time order replenishments will become even more critical once the Wal-Mart/ Bharti combine begins operations - the American retailer works almost entirely on cross-docking and is likely to demand higher service levels, including potential levies for delays in shipment.

The efficiency and effectiveness of supply chain and logistics management can also be understood by the fact that m odern retail stores maintain lower inventories than traditional retail. In India, generally in the traditional kirana stores, three weeks inventories are kept; while in a modern retail store like Hypercity, it's nine days and it's  under two weeks for Food Bazaar. Now, it is beneficial for both the manufacturer as well as the retailer. If we go through the following food supply chain in India, we find that a lot can be improved by maintaining the supply chain and logistics.

Food Supply Chain in India:

In India, about 60 percent of food quality is lost in the supply chain from the farm to the final consumer. Consumers actually end up paying approximately about 35 percent more than what they could be paying if the supply chain was improved, because of wastage as well as multiple margins in the current supply structure. The farmer in India gets around 30 percent of what the consumer pays at the retail store. Compare this with the situation obtaining in the USA, where farmers can receive up to 70 percent of the final retail price and wastage levels are as low as 4 to 6 percent. One can easily understand the benefits that could be generated from emulating those practices and tapping that expertise for the supply chain in India.

As supply chain Management involves procuring the right inputs (raw materials, components and capital equipments); converting them efficiently into finished products and dispatching them to the final destinations; there is a need to study as to how the company's suppliers obtain their inputs. The supply chain perspective can help the retailers identify superior suppliers and distributors and help them improve productivity, which ultimately brings down the customers costs. At the same time, Market logistics helps planning the infrastructure to meet demand, then implementing and controlling the physical flows of material and final goods from point of origin to points of use, to meet customer requirements at a profit.

Till now most retailers in India have invested majorly into the front end, but relatively little on the back end and supply chain. Even in countries like the USA, Germany and England, where organized retail is highly developed; supply chain efficiency is a major concern. The nature of retail sector in India is different from other countries around the world. The organized retail sector in India is highly fragmented and there are huge inefficiencies in the supply chain.

The most important part of retailing business is to find a balance between investing in front-end and back-end operations. The channel dynamics is going to change over next couple of years as the retailers start growing in size and their bargaining power is likely to increase. Probably that would bring some kind of mutual understanding between manufactures and retailers to develop strong supply chain network. In such a scenario, both the existing operators and new operators must put collaborative efforts to phase out inefficiencies in the supply chain network.

Now, let us try to find out what efforts are being taken up by the big retailers in India like Future Group with retail stores like Big Bazaar and Pantaloons, Reliance Retail and Wal-Mart & Bharti to improve the efficiency and effectiveness of supply chain and logistics. We will also try to find out the changed role of Agriculture Produce Marketing Cooperatives and third party sourcing firms. 

Future Group

Future Group is the country's leading retail business group that caters to the entire Indian consumption space. It operates through six verticals: Future Retail (encompassing all lines of retail business), Future Capital (financial products and services), Future Brands (all brands owned or managed by group companies), Future Space (management of retail real estate), Future Logistics (management of supply chain and distribution) and Future Media (development and management of retail media spaces).

The group's flagship company, Pantaloon Retail (India) Limited operates over 5 million square feet through 450 stores in 40 cities. Some of its leading retail formats include, Pantaloons, Big Bazaar, Central, Food Bazaar, Home Town, EZone, Depot, Health & Beauty Malls and online retail format, www.futurebazaar.com.

The group's joint venture partners include Italian insurance major, Generali, French retailer ETAM group, US-based stationary products retailer, Staples and UK-based Lee Cooper and India-based Talwalkar's, Blue Foods and Liberty Shoes.

Future Group is working on the vendor network as well as the logistics network. The company has identified up to 40 anchor vendors, each with turnovers of US$45 million, to achieve economies of scale. The group is also keen to ensure that its smaller vendors are able to reach turnovers of around US$1 million and a growth rate of 40% annually, to be able to pass on the benefits of scales. The company is also working towards bringing its 1,200 vendors online, like Wal-Mart.

Going further in this direction, the Future Group has also launched Future Logistics initially aimed at handling the supply chain logistics of the group. However, sensing immense opportunity in this area, the company is now looking to offer its services to its 1000-odd vendors, spread across consumer related goods, to reach a targeted turnover of about Rs.700 crore by 2010.The thrust at present will be on modes of surface transport like roads and rail only. However, at a later stage, sea and air modes might also be considered as per the requirement, said sources.

In India, Future group derives significant economies of scale in managing their supply chain. With more than 170000 products, the company maintains a strong supplier relationship in a partnership mode, avoiding the exploitative supplier – buyer transactional philosophy. The IT enabled back-end operations and supply chain management increases the reliability and efficiency of the business.

As part of the operation, Future Group is also undertaking to reduce its warehousing costs through a consolidation process. In a country like India, where most retail stores are located in the heart of the city—where rents are high and storage space is scarce—supply chain management has even more serious business implications. Future Logistics now handles two-and-a-half million SKUs (or stock keeping units) a day across the Future Group's various retail formats around the country. By 2010, this number is expected to increase to more than 30 million SKUs a day. Even with 98% accuracy, some 600,000 pieces will not be delivered correctly, resulting in an estimated sales loss of more than Rs 4 crore a day.

The biggest driver in consumer logistics is going to be zero defect in managing the supply chain. While infrastructure, technology, automation, processes and people will all play an important role, zero defect can only be achieved through vertical integration across the entire supply chain—from raw material supply, production, wholesale and retail. The different parts of the supply chain will no longer be able to work in silos as they do today.

Reliance Fresh

Reliance Retail is also going to open one store for every 3,000 families within a radius of 2 km across all locations by 2011. The company is competing directly with the large number of traditional local provision stores. Reliance Retail is either going to set up new stores in the identified areas or take over existing stores. The company has already done that in Mumbai and other cities.

Of the four million sq ft of retail space to be created under the "Reliance Fresh" brand (for groceries), one million will be through acquisitions. The retailer is also moving into laundry, personal care and apparel product lines, in which it plans to launch private labels. Reliance is planning to roll out its specialty format stores this year, beginning with consumer durables, for which it has struck sourcing deals with companies in Hong Kong, the Chinese mainland and with Videocon in India.

To strengthen its links with farmers, the company is setting up integrated agri-retail business centres, which include three processing and distribution centres, 51 retail outlets for farmers and 75 rural business hubs, all with an investment of US$445 million. Many companies, looking at the retail boom in food and grocery, are setting up ventures to help retailers source these goods.

Reliance Logistics Ltd part of Reliance Industries Ltd, currently handles Reliance Retail's logistics services.

Wal-Mart and Bharti

The success of Wal-Mart is well known all across the world. One of the major factors behind their success is the right implementation of supply and logistics management. Now the same Supply Chain and Logistics Management take a front seat here and that's why Wal-Mart is coming to India in a joint venture with Bharti Group. Here, Wal-Mart is going to manage the back end operation, while Bharti will manage the front end operations.

Wal-Mart has also stated that it would replicate its global supply chain model in India, while taking into account the unique features of the Indian market. They are also going to emphasise on local sourcing of goods. Besides sourcing locally, Wal-Mart, through its international operations is also in a position to source globally. The company is set to roll out its first set of stores by the first quarter of 2008, in cities that have a population of one million. Wal-Mart claims it will take 35% of the Indian retail market by 2015.

It is the sheer importance of the logistics management that Wal-Mart's fully-owned logistics arm Gazeley has already confirmed its India foray and is going to look after the Wal-Mart and Bharti retail venture. They are closely studying various logistics providers like Radhakrishnan Foods, before they finally closes on its India model. Again, Bharti Enterprises is directly negotiating with the rail authorities instead of negotiating with a logistics provider.

Wal-Mart and Bharti FieldFresh

Just like Reliance Fresh, Bharti Group in a joint venture with NM Rothschild is launching Field Fresh to provide premium quality fresh produce to markets worldwide. It has over 5,000 acres of land under cultivation all over the country producing many varieties of fruits and vegetables and is planning to double land under cultivation by the end of 2007.

The company is to supply fresh produce to the Bharti-Wal-Mart venture. To ensure best qualities and varieties, Field Fresh has engaged ACM China, an industry leader in building greenhouses, to set up state-of-the-art glass-based greenhouses at the Field Fresh Agri Centre of Excellence in the Punjab. Field Fresh is also planning investments to the tune of US$220 million in the backend, including investments in cold chains and warehouses. Bharti's Field Fresh will enter this segment within the next three months. A number of companies are also venturing into this segment to service the backend needs of retailers.

Agriculture Produce Marketing Cooperatives in India

The Indian Retail Revolution is also changing the way farm produce was marketed in India. Now even the farmers are getting benefited due to less or no middlemen involved in the selling process. Till now, the Indian fresh produce marketing was controlled by state-owned Agriculture Produce Marketing Cooperatives (APMCs). Now it is also changing with reforms in the APMC Act in many states. This has opened up the space for private players, and all major retailers are setting up private 'mandis' (marketplaces), from where they can directly source their requirements of fresh foods. Almost everyone in the retail sector like Reliance, Future Group, Bharti – Wal-Mart, Subhiksha are setting their bases at the places of farm produce to source vegetable, fruits and other farm products.

Sourcing Firms

Besides the presence of retailers in the countryside for farm produce sourcing, now there are also few players; who are helping various retail chains for their sourcing requirements. For instance, DCM Shriram Consolidated Ltd (DSCL) is in the process of tying up with them to source fruits and vegetables from farmers and supply to the retail chains. DSCL is already doing this for Future Group's Food Bazaar, south based Subhiksha and RPG's Spencer. The new tie-ups would help the company to operate on economies of scale, and to operate all over the country.

Conclusion

Therefore, with the generous use of Global and Local Experiences, Indian retailers are going to improve their bottom lines with efficient management of Supply Chain and Logistics. At the same time, Indian Retailers like Future Group with retail stores like Big Bazaar, Pantaloons and Reliance Retail are also going to show the world as to how it can be managed in a more innovative and efficient manner.
 


Vijay Prakash Anand
Sr. Lecturer
IES Management College
Opp. Lilavati Hospital, Bandra Reclamation, Mumbai-400050
 

Source: E-mail December 7, 2007

          

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