• ITVI.USA
    15,378.070
    -88.350
    -0.6%
  • OTLT.USA
    2.743
    0.001
    0%
  • OTRI.USA
    20.820
    0.290
    1.4%
  • OTVI.USA
    15,350.040
    -89.040
    -0.6%
  • TSTOPVRPM.ATLPHL
    3.280
    -0.020
    -0.6%
  • TSTOPVRPM.CHIATL
    3.190
    0.050
    1.6%
  • TSTOPVRPM.DALLAX
    1.560
    -0.030
    -1.9%
  • TSTOPVRPM.LAXDAL
    3.420
    0.090
    2.7%
  • TSTOPVRPM.PHLCHI
    2.220
    0.050
    2.3%
  • TSTOPVRPM.LAXSEA
    4.080
    0.000
    0%
  • WAIT.USA
    126.000
    1.000
    0.8%
  • ITVI.USA
    15,378.070
    -88.350
    -0.6%
  • OTLT.USA
    2.743
    0.001
    0%
  • OTRI.USA
    20.820
    0.290
    1.4%
  • OTVI.USA
    15,350.040
    -89.040
    -0.6%
  • TSTOPVRPM.ATLPHL
    3.280
    -0.020
    -0.6%
  • TSTOPVRPM.CHIATL
    3.190
    0.050
    1.6%
  • TSTOPVRPM.DALLAX
    1.560
    -0.030
    -1.9%
  • TSTOPVRPM.LAXDAL
    3.420
    0.090
    2.7%
  • TSTOPVRPM.PHLCHI
    2.220
    0.050
    2.3%
  • TSTOPVRPM.LAXSEA
    4.080
    0.000
    0%
  • WAIT.USA
    126.000
    1.000
    0.8%
American ShipperWarehouse

‘Flowing like a river’

‘Flowing like a river’

Shippers in India seek different routes to supply

chain satisfaction in a confusing market.



By Eric Johnson

   For Nokia, you might say India is a work in progress as far as supply chain is concerned.

   The Finnish mobile phone giant has a huge and growing customer base in the Subcontinent, but that doesn't mean it has its distribution strategy completely worked out yet.

   India has 423 towns with more than 100,000 people, 520 towns with less than 100,000 people and 6,000 villages, said Sachin Saxena, director of India operations for Nokia, at the SCMLogistics World 2008 conference in Singapore in October.

   To reach that tantalizing market, Nokia has tried a number of different distribution strategies in India, none of which has yet emerged as the clear choice.

   First, it distributed out of four regional warehouses in Delhi, Calcutta, Mumbai and Chennai to 19 state warehouses. This model allowed Nokia to deliver in small batches, reach remote rural areas and meet 100 percent of its sales demand. But the major disadvantage was a huge inventory.

      'It was 30 days, and in the mobile phone business, that's just not acceptable,' Saxena said.

   Nokia also lost out on price correction through its various channels – as the inventory backed up, prices on older phones dropped when newer phones came in.

   The second model saw Nokia ship direct from factory to the 19 state warehouses. The benefits and drawbacks were the same as the first model, except that it had the added negative of requiring each individual state warehouse to do elaborate planning that they were not equipped to do, Saxena said.

   A third model saw Nokia distribute partially out of its Chennai regional warehouse and partially from state warehouses. The inventory reduced, but interstate taxation became costly and problematic.

   Finally, a fourth model was used where product was distributed directly from the four regional warehouses. This significantly reduced inventory and lowered distribution costs, but it decreased the company's reach into rural areas because distributors focused on urban areas. Sales were lost because of that lack of coverage and because small batches were not possible. Lastly, the company was still encountering high costs due to interstate taxes.

   To understand the importance of inventory levels in India, consider that one week of Nokia's 15-day inventory is typically taken up by road transport, from the Chennai factory to Delhi, for instance.

   Saxena said Nokia is still trying to figure out which model, or mix of models, will ultimately work best for India.

      'There's tremendous pressure from the unorganized sector in India,' he said. 'With mobile phones, prices drop month after month and retailers aren't comfortable with a big inventory. But the organized retailers have the power to lower prices because they have huge margins. They'll drop the price to get rid of stock so they're not sitting on it. Unorganized retailers can't last under that scenario.'

   The Indian government is expected to lower the central sales tax to 0 percent in 2010, a move that would make moot the issue of interstate taxes. But Saxena isn't convinced yet.

      'I've been hearing that the (central sales tax) will go to 0 percent by 2010, but I have doubts given the current economy,' he said. 'The government has huge needs and fuel deficits. If CST becomes 0 percent, our fourth model would work in a big way.'

   Another speaker at the conference said the balance of the retail sector would change, but that organized retail will not be able to completely take over.


'You spend so much on layers and intermediaries. You need to decide how many layers your route to market has and how much your business can support.'
Manish Shakalya
supply chain services
manager,
Cadbury India

      'FMCG companies have to be careful and understand the different needs in different parts of the country,' said Manish Shakalya, supply services manager for Cadbury India. 'You can't get rid of neighborhood shops, though organized retail will grow in certain categories.'

   He said the major problem today in India is that manufacturers can't align directly with retailers.

      'Currently, it is an extremely layered route to market,' Shakalya said. 'You spend so much on layers and intermediaries. You need to decide how many layers your route to market has and how much your business can support.'

   He said Cadbury simply asks everyone in its chain to focus forward.

      'We set up our chain where we only look forward,' Shakalya said. 'Procurement looks at the factory, the factory looks at the 3PL. The 3PL only looks at the distributors. The distributors only look at the retailers and the retailers only look at the consumers. If you look back you get defensive. So if the consumer's primary want is a range of chocolates, everyone in the chain has to look at making sure there is range in front of the customer. It should be flowing like a river.'

   India's retail sector is worth an estimated $330 billion, said Dharmendra Gangrade, assistant general manager of logistics operations for Reliance Retail. There are 12 million mom-and-pop stores, while organized retail accounts for less than 5 percent of sales. But KPMG estimates that organized retail will grow to $60 billion by 2015, roughly four times what it is today.

      'The food and grocery segment is growing the fastest,' Gangrade said. 'No other industry gives you as much growth opportunity.'

   Reliance, one of India's biggest conglomerates, is establishing networks of grocery stores and hypermarkets throughout the country.

   Gangrade said 60 percent of retail logistics costs comes from transportation, 24 percent from processing, 6 percent from inventory and 10 percent from IT and other functions. Average truck operating costs are 15 rupees per kilometer, which works out to nearly 50 cents per mile, while '40 percent of national roads are unpassable during (the three primary months) of monsoon season,' he said. 'The trouble is, these roads lead to where the farmers are. In India, the biggest challenge is from the farm to the processing center, not from the processing center to store because that's in your control.'

   As Shakalya noted, a major issue for manufacturers and retailers are the legacy distributors who add little value to the chain as a whole.

      'The traditional fruit and vegetable chain goes through eight layers,' he said. 'Fifteen to 20 percent of total costs is the actual product. The rest is transportation, distribution margin, goods lost in transit. None of these costs add value and that's a problem.'

   Gangrade said that setting up shop in India requires the right mindset.

      'Most companies come to India with the idea that vehicles are containerized, but you have to take into account the ground realities when setting up standard operating procedures,' he said. 'Route planning and scheduling ahead of time are key. You have to set rigid service provider qualifications. You'll pay higher freight costs but get better quality and accountability. Have a contract and make it longer than one year.'

   Someone with an outside view of India is Alberto Tureikis, South and South East Asia supply chain director for TetraPak.

   The company has manufacturing facilities in Singapore, Brazil, Saudi Arabia and India. He said while India has cost advantages over Singapore as a place from which to distribute to Southeast Asia, much of that is lost in other areas.

      'Pune (in India) is a different situation to Singapore,' Tureikis said. 'The frequency of vessels, the reliability of the ports is quite bad. Transport from Pune to Mumbai is problematic. And every time I export from India to Thailand, there are export duties. There's a 25 percent import tax on raw materials and a 10 percent export duty. There's a 25-day transit time from India instead of three from Singapore, and that's if everything goes right. So it has to cost 30 percent less to produce just to beat Singapore.'

   Perhaps the best example of patience in India is McDonald's, which operates 150 restaurants in 30 cities in the country.

      'We spent six years in India before we opened our first restaurant in 1996,' said Abhijit Upadhye, director of supply chain, menu management and new business channels for McDonald's India. 'India didn't have the supply chain and cold chain infrastructure we needed.'

   McDonald's represents a unique case as it seemingly imposed its supply chain will on the country,

   Upadhye said that most of the goods McDonald's moves need temperature control, with shelf life varying between five and 270 days.

      'We have had to design warehouses in India to meet our needs,' he said. 'And all our products are proprietary. That means I can't pick up product off a shelf.'

   There have been some local adaptations, of course. For instance, lettuce.

      'Iceberg lettuce wasn't grown in India before McDonald's came,' Upadhye said.

   In fact, the restaurant chain stopped serving its three most popular burgers in India for a few days in May 2007 when high temperatures wrecked the iceberg lettuce crop of McDonald's only supplier. Rather than leave out the lettuce, or search for a new supplier, McDonald's waited until a stable imported supply could be brought in to fill the gap until its Indian supplier righted its lettuce shipments.

      'In India we have a one supplier-one product relationship,' he said. 'That's a huge back-end risk, but India is not developed enough for multiple suppliers. Longtime partners with McDonald's have grown with the company. We've not changed suppliers on account of cost reasons. We have an open book cost protocol. I'm aware of the costs my supplier is incurring and we'll pay our share for costs that impact both of us. We can't expect our suppliers to absorb all the new costs.'

   McDonald's overarching supply chain ambition in India serves as a lesson to others pondering to enter the country.

      'Anytime a store manager spends dealing with a back-end issue, he's not focusing on customers,' Upadhye said. 'Our job in supply chain is to simplify things for the manager.'

We are glad you’re enjoying the content

Sign up for a free FreightWaves account today for unlimited access to all of our latest content

By signing in for the first time, I give consent for FreightWaves to send me event updates and news. I can unsubscribe from these emails at any time. For more information please see our Privacy Policy.