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6/29/2015

TheIndianSupplyChain:ChallengesandTrendsAhead

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7thApril2013
Practice is different from theory.Heard this many a times and it seems apt for
the Indian FMCG supply chain scenario.Still, the value chain is marred with
inefficiencies and change is a dreaded word.Though some unique
characteristicsofIndiansupplychainhasallowedthemtodeliverwhatcouldnot
beachievedbyemulatingsuccessfulsupplychainstrategiesfromotherpartsof
theworld.Buttheinherentinefficienciesandthefragmentedoperatingapproach
is a call for concern.Indian supply chains have been different in quite a few
aspect:
1)Largenumberofintermediaries
2)Restricteduseoftechnology
3)Dependenceonmanualsystems
4)Lessdraftedandstandardprocedures
Large number of intermediaries have allowed penetration into the farthest
pockets of country.Its easier to get a Pepsi bottle than a paracetamol in rural
India.What is remarkable about these companies is the manner in which they
achievedit.Thebottlecoststhesameinametroandinaclusteroffewhutsin
Jharkhand where roads are a rare sight.The product passes downstream from
level to level with a decreasing trend in technology usage and increase in
manual intervention.The greatest challenge to the supply chain is available
support infrastructure.As a new company enters into the market its goal is to
attainamarketsharebeforebreakingeven.Thestrategyistodelaybreakeven
and scale up to be reckoned as a new force in market.This forces firms to
accept the ways and manners that might not be most cost efficient.This
especially becomes a problem in country like India where there is little
infrastructuresupportoutsidethecitylimits.Leansupplychainiswhatthedoctor
orders. But the pill is not there to be taken.Companies in North America and
EuropehaveleveragedtheirsupplychainthroughtheuseofITandadvanced
infrastructure available.Its easier to implement ECR, CPFR or any such
information sharing approach in those parts of the world.Here it is a daunting
task.Consider a firm which sets up an IT support system with demand driven
replenishment.Thenextstepistodeterminethelevelatwhichthedemandisto
becaptured.Morethan70%oftheretailersaresmallwithsalesoflessthan4
lacs/month.TheydonotpossessnecessaryskillstooperateanITsystem,along
withthattheydonotwanttoincuranyadditionaloperatingcost.Uponelevelare
the distributors with the same level of educational background.They generally
use some basic standalone accounting softwares for day to day need.The
furthest these sophisticated system can be implemented is at C/FA level.The
number of hands through which the product passes before being delivered to
the consumer makes it a futile exercise to setup such costly support
infrastructure.The demand can never be captured at SKU level at POS. All the
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6/29/2015

TheIndianSupplyChain:ChallengesandTrendsAhead

seriousaffectsofbullwhip,demanddistortionandinefficientinformationtransfer
will still remain.That explains the reasons why P&G, a pioneer in CPFR
movement worldwide has still not launched it in entirety in India.Many Indian
giantslikeITChaveexperimentedwiththeseapproachesbutimplementationis
stilltoseetheday.
Sotherearelimitedoptionsleftwiththecompaniestoimprovetheirbottomline.
The obvious one is to squeeze margins from other echelons.There are fierce
negotiations and neck in neck competition within the supply chain.And the
most obvious definition of supply chain to serve the customer well suffers a
setback. HUL, considered as the benchmark for supply chains in India for the
level of market penetration, too suffers stockouts of major SKUs. The strategy
seems quite obvious when concerned with serving the customers.Having
understoodtheinternalconstraintstoachievingahighlevelofcustomerservice
level, firms prefer to expand their markets to improve revenues.Hence the
challengesforIndianFMCGcomapniesaretwofold,externalandinternal.
Apartfromthemacroeconomicscenario,thefactorthatweighsheavilyonfirms
is the available infrastructure.Poor transport infrastructure causes larger lead
times.Large lead times causes higher implied demand uncertainty, more
stockouts, damage to perishable items, higher inventory levels and suboptimal
scheduling.The balance sheet becomes evident to these inefficiencies with
squeezed margins.The profits may not reflect the true picture but profiltability
does.The working capital locked with inventories disrupt the cash flows.And
whenweconsidercontributionofFMCGsectorwhichisabout2%totheGDPit
means a lot of money.Apart from this larger picture,consumer is the one who
suffers most with higher prices and less product availability.At the same time,
companies have to resort to discounts to clear off the inventory pile and thus
sacrificingprofits.TheunavailabilityofITinfrastructurecausesduplication,delays
anddistortionintheinformationtransmitted.
All these factors are further aggravated by the internal inconsistencies of the
supply chain.The supply chain partners engage in measures to achieve local
optimization without considering the impact on the entire value
chain.Inconsistencies surmount and supply chain suffers as a whole.The
manufacturer tries to push down the inventories by offering discounts and
records it as sales.As the demand is not there for such a quantity, the retailer
incurs large inventory holding costs and the benefits calculated through
discountedgoodsmaynotberealizedactually.Furthermore,maybetheproduct
doesnotremainindemandforcomingperiodandtheretailermayhavetoincur
huge write down costs.Due to these tendencies there is less support and trust
between supply chain partners and more competition while all of them are
working for the same cause.This reduced trust does not allow retailers and
suppliertopassontheimportantinformation.Consideraretailerwhoisplanning
a promotion in coming week and hence he starts hoarding goods.The supplier
unaware of this fact, forecasts that the demand for the product has increased
and plans the production accordingly.But once retailer receive the desired
quantity he stops putting up the orders.The result is huge inventory pile at
supplier.Suchtrendsarecommonandpervasive.
Considering all these facts and information, the growth that Indian
FMCG industry has achieved is remarkable.But according to the theory of
marginal utility every further improvement will be lot difficult and come at a
higher cost.The way forward is to create integrated supply chains with global
optimized goals that benefits the entire supply chain.But for that trust and
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6/29/2015

TheIndianSupplyChain:ChallengesandTrendsAhead

collaborationisimperative.Thecompaniesshouldinvestinthisbeforegoingfor
VMI, ECR, CPFR kind of initiatives.This collaboration might bring the next big
changeintheIndianretailindustryandbenefittheconsumermost.
Posted7thApril2013byAKSHATSISODIA
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