Mahindra War Room 2018 Logistics Caselet

MAHINDRA LOGISTICS -
GOING BOLD IN FMCG LOGISTICS IN THE POST-GST ERA

The Logistics function has its origins in the Military, and initially dealt with the movement
of equipment and people in a synchronized fashion rapidly and efficiently. The practices
slowly found their way into the Corporate Sector in the 1950s, evolving the traditional
“purchasing” and “transportation” functions into “Logistics” and “Supply Chain” as we
know them today. Today, Logistics plays an ever increasing role in corporate growth, as
about 5-25% of the cost of a product is typically attributed to it. Companies such as
Walmart thrived on significant strengths built up in Supply Chain Management, gaining a
big edge over rivals for decades before the dawn of the Ecommerce era.

The Indian Logistics Industry is estimated at about INR. 7 Trillion as per CRISIL
estimates. With India’s GDP growing over the decades and infrastructure expanding,
Logistics business is getting more specialized and crucial to business success. Seeing
this potential, Mahindra Group entered the Logistics business in 2008 focusing on Rural
Transportation Systems, evolving their experience in transporting automobiles and
tractors across the country for decades. The entry was spearheaded by Mahindra
Partners - the USD. 1 Billion internal incubator of new businesses for the Mahindra
Group, which supports a portfolio of diversified ventures in Retail, Boats, Steel Trading,
Clean Energy and Media with seed and growth capital. Mahindra Partners also
constantly explores new opportunities for growth in new and emerging areas, adapting
Mahindra’s strengths in brand, governance, innovation and creative business modeling.

Mahindra Logistics is a classic 3rd Party Logistics solution provider, offering both Supply
Chain Management (SCM) and People Transport Solutions (PTS). Under SCM,
services offered include Transportation, Distribution, Warehousing, In-factory Logistics
and Value Added Services across 350 client and operating locations, serving over 200
corporations across Automobile, Engineering, Consumer Goods, Pharma, Ecommerce
and Bulk. Supply chain solutions include domestic long-haul transportation by road and
rail, international transport for exports & imports by sea and air, secondary & tertiary
transportation, last mile logistics, and e-commerce services. Mahindra Logistics’
warehousing solution spans 13 million square feet across different formats. Another
offering is the in-plant logistics to manufacturing plants, with value-added services such
as ‘Just-in-time Linefeed’ to a production line.

In people transport, Mahindra Logistics is among the few national players providing
Corporate Mobility Solutions to over 100 corporations in IT, ITES, BPO, Financial

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Services, Consulting and Manufacturing Industries, through a network of over 500

business partners spanning 12 cities and over 120 client and operating locations across
India. With these credentials, Mahindra Logistics has been awarded the ‘Best 3PL
Company of the Year’ for 2016 by Logistics Asia.

The Indian logistics market has started to get more organized, with a slew of
technology-aided disruptions and is estimated to grow 10-15% annually. The present
Government’s commitment to infrastructure and favorable policies including the GST
are expected to drive significant growth in India’s Logistics sector.

LIVE BUSINESS CHALLENGE: GOING BOLD IN FMCG LOGISTICS IN THE POST-

GST ERA

Among the different Industry segments, 3PL Logistics for Consumer Durables and Fast
Moving Consumer Goods (non-durables) is estimated at INR. 22 billion by CRISIL.
Logistics costs usually account for 5-7% of the Industry Revenue. The current estimated
size of Consumer Durables industry is INR. 2200 billion and that of the FMCG is INR.
3600 billion. The combined size of both sectors is INR. 5800 billion. Considering this,
the size of 3PL of both sectors at 5-7% of the combined industry size should be in the
range of INR. 290 billion to INR. 406 billion. But the actual size, estimated at INR. 22
billion, is significantly lower. This is attributable to the significant presence of Clearing &
Forwarding agents, commonly referred to as C&F Agents in FMCG.

Fast Moving Consumer Goods (FMCG) usually comprises Foods & Beverages (18%),
Healthcare (32%), Household and Personal Care Products (50%). In FMCG Supply
Chain, Raw Materials are sourced from the vicinity of manufacturing locations. Once
manufactured, the goods flow through the supply chain in a hub and spoke model, often
through company owned Central Warehouses attached to the manufacturing plant. A
typical Central Warehouse distributes goods to several State Warehouses located
across the country. Depending on the demand, goods from the State Warehouses are
dispatched to dealers and distributors. To develop and maintain an efficient supply
chain, companies focus on availability of products in the complex distribution network.
As a tool to increase market penetration, a growing number of companies are focusing
on launching smaller packaged size products to address the needs of consumers at the
lower end of the economic scale. With intensified competition, companies offer more
choice to end customers, resulting in an a constant rise in the number of Stock Keeping
Units (SKUs) to ensure product availability. These SKUs are sold across an estimated 9

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million outlets across India, with typical organized FMCG players reporting visibility in 2
million or fewer outlets.

The concept of Clearing & Forwarding Agents has been prevalent for a long time in
FMCG distribution. C&F Agents are responsible for managing the godown, and loading
goods for delivery to dealers and distributors. Usually the players for each leg of
distribution - primary transportation, warehousing, and secondary transportation - are
different, though some players offer both warehousing and secondary transportation.

In the past, FMCG companies appointed C&F agents and stocking points in almost all
states across the country, to gain advantage of Central Sales Tax. With the
implementation of GST, CRISIL Research expects warehousing costs for the FMCG
industry to drop, as warehouses set up earlier for tax incentives are now expected to
consolidate. GST is also expected to increase share of 3PL players, owing to
warehouse consolidation and need for reliable, organized players in transportation.
Instead of managing for tax efficiency, the distribution chain now has to be managed for
supply chain efficiency. This need is bound to trigger innovative distribution models in
the Post-GST FMCG supply chain. For secondary distribution, FMCG companies are
looking at alternatives such as directly shipping to retailers from large regional
distribution centers, bypassing distributors altogether.

Given that the GST is here to stay, how has the present GST structure affected
conventional FMCG distribution? In this scenario, what are the challenges faced
by FMCG companies, and what is the “right” secondary distribution model for
FMCG companies in the post-GST era? What secondary distribution services and
model can Mahindra Logistics offer to address the opportunities arising from this
need? And what are the strategies and approaches adopted by other 3PL
providers? Which FMCG companies, products and geographies should Mahindra
Logistics target and how?

Evolve a strategy for a leading 3PL player like Mahindra Logistics to thrive in the
opportunities ushered in the Post-GST Era.

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