Technopak - 3

retail Supply chain challenges in the Indian retail sector a q u a r t e r l y r e p o r t b y t e c h n o p a k JANUARY’ 08 /VOLUME 2c o n t e n t s retail © Technopak Advisors Pvt. Ltd. ‘Retail Outlook', a quarterly feature is an effort by the Technopak retail team to explore the dynamic changes that are occurring in the industry in India today. We at Technopak understand the need for continuous and intensive assessment of the world's largest service sector industry. With this report we have attempted to provide insight of the trends and the opportunities in the retail market. During the course of this year we will be publishing reports on various aspects of the industry with a specific focus on the diverse opportunities for investment Devising Supply Chain Strategy and Partnering Implementation for a F&V Focused Supermarket Chain Background 02 1. Overview of Retail SCM in India 1.1 Current Market Size and Future Estimations 1.2 Comparison and Benchmarking with International Retail Supply Chains 1.3 Factors Affecting Organized Retail SCM in India 1.3.1 Retail – SCM Perception & Outlook 1.3.2 Infrastructure & Processes Hurdles 1.3.3 VAT Implementation 1.3.4 3 PL Usage 1.3.5 Supply Base 05 05 06 06 06 03 04 2. Pain Areas 3. Illustrative Case Study 4. About Technopak 2.1 Retail SCM Improvement Framework 2.2 Symptoms & Pain Areas 2.3 Strategic SCM Areas 2.4 Improvement Projects for Indian Retailers Sample Steps for DC Design 2.3.1 Supply Chain Network Design & Optimization 2.3.2 Transportation Optimization 2.3.3 Supply & Demand Planning 2.3.4 Replenishment Policy & Inventory Optimization 2.3.5 Retail Merchandising 2.3.6 Warehouse Design & Operations 2.3.7 Procurement Processes 2.3.8 Logistics & IT Outsourcing 10 08 09 15 11 12 13Emergence of organized retail in India is bringing a landscape change in the way retailing has been traditionally perceived and executed. However, it is not just the front end that is witnessing this frenzy, but the entire supply chain is going through a dramatic development. Effective supply chain management is the backbone of retail industry and therefore, is crucial to its performance. From a mere operational obligation, supply chain management is going to become the key competitive tool for winning the consumer. Globally, effective supply chain management has created retail giants; Wal-Mart being the best example for this. Today, Indian retail stands at the crossroads of making key decisions regarding not only the front end but for the entire supply chain, that could dramatically affect retail performance in the long run. Huge investments, government policies, third party intermediation, fast changing consumer preferences are all going to characterize this back end revolution. This document brings out, through several facts, figures and past experiences, the issues being faced by the Indian retailers in the development of a solid back end and hence, important areas for them to focus on in the near future. background 02Overview of Retail SCM in India 1.1 The Indian economy has been showing one of the fastest growths amongst the developing economies in the world, at 9% of the GDP (real growth rate) for the fiscal year 2006-2007, at an estimated level of INR 38,000 bn. The retail phenomenon is, and is projected to be a major driver for this growth in the near future. Retail is estimated to be contributing 37% to the overall GDP, and is also projected to grow at 9% year on year, for the next 5 years. The share of organized retail, currently only 4% (INR 500 bn) is projected to grow at 45% CAGR for the next 5 years to 15% (INR 3100 bn) of the overall retail bandwidth by the year 2012, with investments to the tune of INR 1,360 bn in the retail front end during the same period. With such high growth rates and market sizes, investment in supply chain and logistics, the retail backbone, has become imperative. The major investment areas in retail supply chains lie in the area of sourcing, distribution centers (warehouse, cold storage), transportation networks, inventory (both store level and warehouse), supply chain information systems such as warehouse management systems, planning, forecasting, inventory management, etc. Retail chains can choose to own or outsource one or more areas in the back end starting from inbound transportation, distribution centers, or even further upstream, value adding operations. Currently, some of the retail chains like Subhiksha have outsourced most of their back end, while some, such as Reliance, are investing heavily in the supply chain network. Others are positioned in between owning part of the activities in the back end. Outsourcing is done mostly in inbound transportation to independent trucking companies, or to 3PLs, who may also provide other services as warehousing. The contribution of Indian retail sector to 3 PL is a mere 4% approximately (3PL retail revenues as a % of total 3PL revenues) but growing at a CAGR of 16%. This shows that the 3PL services in Indian retail is still at a nascent stage. 3PL usage in other sectors is also very low at 5% (3PL revenues to outsourced logistics revenue), but is predicted to grow at a higher rate of 22% in the next 3-5 years. The following figure represents graphically, the GDP, overall logistics market, the outsourced logistics market, 3PL market and the 3PL revenues for the retail industry. Figure 1 -Market sizes of overall logistics, outsourced logistics, 3PL revenues and its contribution to the India retail sector (2006; all values in INR bn) Source: Strategic Analysis of 3PL Markets in the Indian Retail Sector (Frost & Sullivan, 2006) & Technopak analysis (INR bn) 32,856 86%Breakup of GDP (2006) Non Logistics GDP Logistics Revenue Non Outsourced Logistics Revenue Outsourced Logistics Revenue Non 3 PL Revenue 3 PL Revenue Non Retail 3 PL Revenue Retail 3 PL Revenue Breakup of Logistics Market (2006) Breakup of outsourced Logistics Market (2006) Breakup of 3 PL Market (2006) 4,197 78% 1,151 22% 1,093 95% 58 5% 56 96% 3 4% 5,349 14% Current Market Size and Future EstimationRetailing inherently is a difficult business. Forecasting is merely 65% accurate, up to 20% of the orders are filled imperfectly, 30% of the merchandise is sold on markdowns, 75% of the new products fail to meet expectations, net margins are low (2-3%) and inventory is high. However, even beyond that, the Indian retail scenario has a number of deficiencies. Supply chain and logistics costs currently in some cases go up to 10% of the organized retail sales, to the tune of INR 50 bn, while it is less than 5% in mature retail markets such as US. Thus, there is a current improvement opportunity of up to INR 25 bn. In the next 10 years, this gap of INR 25 bn could go up to INR 300 bn., and hence a lot more investment and effort would have to be put in to reduce this. On other measures of supply chain effectiveness also, Indian retailers lag behind that of mature markets. Indian retail chains turn their inventory much slower, and stock out levels are also higher. Even the more established retail chains are able to turn their inventory only half as fast as retail chains in US or Western Europe, and stock out levels are also twice or thrice as much. On the other hand, shrinkage levels are in tandem with international benchmarks. However, since many retailers have still not invested in the back end and the average length of the retail supply chains in India is comparatively smaller than their counterparts in other mature markets, this figure might not have been accurately captured. Wal-Mart, the world’s biggest retailer, has invested heavily in its supply chain and uses a number of supply chain practices to leverage its “every day low prices” (EDLP) strategy (overall lower & stable prices as compared to other retailers). Wal-Mart turns its inventory 10 times a year on an average (sales/inventory); this compensates for its relatively overall lower prices, and hence lower gross profit (gross margin/sales). GMROI (Gross Margin Return On Inventory, defined as Gross Profit*Inventory turns) for Wal-Mart, a popular measure for measuring retail performance, is thus a healthy 2 to 2.5. Besides employing popular practices such as cross docking, some other supply chain practices employed by Wal-Mart as EDLP enablers are: Pick to pallet replenishment process – picking of products at the DCs (supplying to a particular set of outlets) specific for an outlet aisle, so that each pallet that is delivered to an outlet, is moved directly to the appropriate aisle to be replenished. This process allows Wal-Mart to decrease replenishment costs at the store level by increasing restocking efficiencies. Post receipt allocation for the outbound distribution process – product order is made to the vendor at an aggregated level; however, the aggregated order is not sorted for each store until it is received at the DC. This makes the supply chain more flexible and allows Walmart to respond to fluctuating demands more readily. Changing the flow of replenishment based on product characteristic – the replenishment strategy is based on 3 characteristics: volume, supply & demand variability. Products with low supply & demand variability are cross docked, and lower overall inventory is maintained; products with high supply & demand variability and high volume have a higher inventory in the warehouse, and so on. This helps Wal-Mart maintain overall lower inventory. Source: An Analysis of Current Supply Chain Best Practices in the Retail Industry with Case Studies of Wal-Mart and Amazon.com (Colby Ronald Chiles and Marguarette Thi Dau, June 2005) 1. 2. 3. 1.2 Comparison and Benchmarking with International Retail Supply Chains 041. Retail – SCM Perception and Outlook The previous section, through several facts and figures, focused on the fast-paced growth that the Indian retail and retail SCM are expected to witness in the coming years. The growth is not just going to be in the investments and size of operations, but also in terms of maturity and excellence in SCM. Currently the retail industry is channelising most of its energy into the front-end of the retail business, which is still developing, and the back-end supply chain is not of core concern for a number of players. This is compounded by the fact that there are few SCM professionals in the country and even fewer who have an experience in the retail sector. Even amongst them, the level of process expertise and best practice skills are low. However, with the growth of organized retail and with the mushrooming of academic courses and training programs in supply chain management and retail, a number of SCM professionals are gradually focusing more towards a scientific methodology in dealing with the back end supply chain. Therefore for the next 2-3 years, the front end will continue to witness the expansion frenzy, with consolidation coming in as the next wave, and so in the near future, the focus will begin to shift towards evolving a world-class “Close-Knit” supply chain. Indian retailers will get a fraction of time to reach the top-level of SCM performance and capability as compared to Wal-Mart (U.S.) and other such benchmark retail-SCM organizations. Following gives an illustration of the evolution of Retail SCM: 2. Infrastructure Hurdles In India the logistics costs are around 14% of GDP, compared with 8% in the U.S. This is not a tribute to the size of the logistics sector in India, but a symptom of the inefficiencies resulting, from poor infrastructure. For example, losses form 14% of the total logistics expense. Also, investment in infrastructure is less than 4% of the GDP, compared to 9% in China. At present there is very little unused capacity in the country’s warehouses. Most of the warehouses are poorly designed and operated and certainly not fit for supporting world-class retailing. Compounding the problems are ever rising costs of energy and real-estate which make logistics investments and running costs high. Following gives a snapshot of where India stands in terms of logistics infrastructure, amongst other countries in the world: As evident from the above figures, there is a great scope of improvement for India with respect to other countries in the world. Till the time logistics infrastructure catches up with retail expansion, Indian retailers will have to find innovative ways of overcoming the bottlenecks. For e.g. Inland waterways offer one of the most fuel-efficient and eco-friendly modes of transport and there are already 3 national waterways in operation. Two of them are in the Eastern part of the country where the road infrastructure is poorest. Emergence of organized retail has fueled not only front end activities, but is also making an impact on the development of effective supply chain management, the back bone of retail industry. This section outlines the 5 most important factors that organized retail is making an effect on, with respect to supply chain development. 1.3 Factors Affecting Organized Retail SCM in India Source: Technopak analysis Organisational Orientation Exterral Integration Unorganised Indian Retailers Organised Indian Retailers Organised Retailers in Developed Countries Figure 2 – Retail SCM evolution model Figure 3 – Comparative standing of India on the Logistics performance indices (2007) Source: Connecting to compete: Trade Logistics in the global economy. The Logistics performance Index and its indicators (2007) 100% 80% 60% 40% 20% 0% % of total countries 69% 31% 73% 27% 74% 26% 80% 20% 73% 27% Customs Infrastructure International shipments Logistics competence Tracking & tracing Domestic logistics cost 70% 30% 69% 31% 75% 25% Timeliness Overall % countries below India % countries above India “Processes. practices and IT systems are well-defined, streamlined and integrated with suppliers. Supply chain information is captured and used extensively for decision making and planning. SCM is treated as a key strategic function. Supply Chain is flexible and pro-active in meeting dynamic consumer needs. Effective SCM performance measurement systems exist. Practices and processes are well-intergrated throughout the supply chain right from source to retail stores. There is seamless flow of SCM information throughout the chain. The entire chain operates like a single organism and can quickly react to market dynamics; forecasting, planning and coordination are activities encompassing the entire change. SCM is key source of competitive advantage. Common and integrated SCM processes and practices throughout the organization. SCM becomes a recognized strategic variable. Basic level of enterprise-wide information management exits, supply planning is well-coordinated across functions but Supply Chains are still not very flexible and robust within planning cycles. Systematic planning and optimised processes only within divisional /functional silos, Involvement in SCM is purely operational. Use of IT is limited and transaction oriented and is within the functional boundaries. No set rules for SCM planning & processes. Activities such as ordering, fixing inventoty levels, etc is all on adhoc basis. Reactive Operations Functional Orientation Close-Knit Supply ChainGovernment or corporates, and sometimes both together, through public-private partnerships are increasing the investment in infrastructure. At present, 40% of our fresh fruits and vegetables get wasted, but cold chain development may not be viable unless incentivised by the government. FICCI has already approached for tax sops on investments in cold storage; intensive lobbying from the retail industry is needed to ensure that such initiatives result in positive steps from the government. However a lot more investment and efficient execution of infrastructure projects is needed for logistics infrastructure to keep pace with demand of growth in retail. Use of information technology, cutting-edge warehouse & transport technologies and hardware are some of the tools to cover the infrastructure gaps. 3. 3PL Usage The 3PL industry in India is growing at over 20% annually, but organized retail accounts form only 4% of the business, and organized retail is growing at a much faster clip (over 45% CAGR for the next 5 years). The level of outsourcing amongst the organized retail supply chains is 26% and the current penetration level of 3PL in the outsourced logistics functions of organized retail chains is 30%; thus there is a clear scope both in terms of expanding this market share as well as increasing the overall pie by attracting the retail chains to start outsourcing their supply chain functions. Most retailers would ideally want to outsource their logistics to 3PLs if they can provide the required quality and reliability of service at competitive rates. However, an internal Technopak study has revealed that there is a clear gap between the expectations and the actual level of services provided, and prices charged by the 3PLs; furthermore, absence of a mature 3PL industry which can provide high service levels at competitive rates does not help the reluctance of some retailers to part with the control of their logistics function. Thus, most of the logistics service providers have an opportunity and a challenge to scale up their services to the retail sector. Retail sector has specific requirements in terms of high service levels, more frequent replenishments, control over stock losses, robust supply chain information systems, reverse logistics, complexity due to large no of SKUs, ability to handle a wide assortment of goods, value additions such as packing, bar-coding etc. 4. Impact of VAT The move from varying tax structures across different states and across different industries to a uniform tax structure as envisaged ultimately through central and state level Goods and Sales Tax (GST) is fraught with a number of stages of implementation, which will impact short to medium term planning and long term planning of distribution networks and sourcing decisions differently. The impact may or may not be direct on the retailers, but the implications will be for the entire supply chain, and hence will indirectly affect their decision making. The Goods & Services Tax (GST) was being eagerly awaited to bring uniformity and simplicity to the plethora of indirect taxes including VAT, in force across goods and services. The recent agreement by the Empowered Committee of State Finance Ministers to propose a dual Goods & Service Tax (GST) structure from 2010 is a set-back to those expecting a Unified GST regime across the centre and states. However the proposals do subsume entry tax, Octroi, luxury tax, Entertainment tax, and other cess on goods into the State GST and simplify the tax structure to some level. The VAT system currently prevalent in India encourages sourcing within the state as much as possible for retail sales and vice versa. It also encourages locating D.C.s in the state of sale if the procurement is from a different state. However, if it ever happens, the eventual reduction of Central Sales Tax to 0% will eliminate the necessity to have a warehouse in every state for tax reasons. Further more if and when VAT input credit would be allowable across states, it would also eliminate the incentive to source and sell in the same state. There is a common belief that 0% CST will usher an era where a single national distribution center or four regional distribution centers will be able to serve the entire business. This may become possible for many businesses, but for retail there might still be requirements for a large number of warehouses to maintain high levels of service and replenishment frequencies. It should be kept in mind here that sales tax is a state subject; the individual interest of every state and political considerations lend uncertainty to when the VAT/GST roadmap will actually be implemented and to what extent. Retail Chains need to cleverly design their networks for the present as well as future to master these nuances. 5. Supply Base Besides dealing with large number of SKUs and categories, Indian retailers have to deal with a fragmented supply base and a number of intermediaries (especially non branded products), leading to low margins and fluctuation in price and availability. Also, due to the presence of big manufacturers, traditionally the power equation had been resting with the supplier, rather than the retailer in most cases. 06Both these factors are changing due to the emergence of organized retail and hence, big retail chains with pan India presence are all set to change the traditional sourcing structure and strategies An illustrative example regarding fresh fruits supply chain, as well as wastage in the value chain for some fruits and vegetables is presented in the following figure: The fresh fruits supply chain like most food supply chains in India is congested with numerous intermediaries that add little economic value. Also, poor handling and storage causes huge wastage. Supply fluctuations sometimes due to the intermediaries create price uncertainties that hurt the farmer and consumers. The opportunity for Indian retailers is to buy from the right source at the right time and in the right condition so as to get the best prices for themselves and the consumers and also to minimize supply uncertainties. Figure 4 -Scope for Disintermediation: case of Apples Source: Industry Estimates, Technopak analysis Source: Survey of exporters, commission agents and growers (as taken from “en route” – in house magazine of group TCI, July Sep 2007, pg 3) Figure 5 – Wastage at various sources of the value chain (% total production in India) Disintermediation could give retailer potential control over 18 -22 % of margins currently controlled by intermediaries 20-25% 10-12% 8-10% Farmer 1.5%-2.5 as mandi tax & weighting charges Commission Agent Wholesaler Retailer 25 20 15 1050 2261 2342 1281 2182 3493 22 142 % of wastage Onion Potato Average Farm product Okra Banana Tomato Wastage outside the state Wastage within the state Wastage within the district From the farm gate to the local mandiThe previous section analyzed the current scenario of supply chains in Indian retail, its comparison with international retail supply chains and the factors affecting its future. This section focuses on typical pain areas for Indian retailers in the execution of an efficient supply chain. The following framework represents how the starting point (symptoms of inefficiencies) and end goals (SC objectives) are linked together. The symptoms are the effects (related to higher costs and/or lower service levels), caused by inefficient processes (pain areas). Solution to these pain areas require professional expertise in some strategic SCM area(s), the effect of which is finally linked back to the SC objectives (lower costs and/or higher service levels). An efficient supply chain strategy has two tradeoffs to make: • To reduce cost; this is nothing but cost of goods sold and selling expenses. • To improve service levels; this is ultimately linked to increasing revenues by increasing customer satisfaction. Together they contribute directly or indirectly to the bottom line, hence increasing shareholder value. However, no supply chain is totally efficient; there is always scope to improve upon the current performance, even though there might not be clear symptoms of non performance. An inefficient supply chain, on the other hand, shows clear symptoms of non performance in the above two areas. Also in some cases, the impact of improvement is directly visible on the bottom-line, in others, it affects indirectly. In either case, there is tremendous opportunity to reduce costs and improve service levels. The Indian retail scenario is either yet to invest in the supply chain, or if it has, is observing inefficiencies at virtually every point, as discussed in Section 1.3, under the Retail SCM evolution model. The next section takes a look at these inefficiencies (symptoms or effects) and possible reasons (causes or pain areas) behind them. Source: Technopak analysis Figure 6 – Retail SCM improvement framework Pain Areas 2.1 SC Objectives Symptom identification trigger result implementation analysis analysis EFFECT PARAMETERS Cost Service Level EFFECT CAUSE SOLUTION Pain Area SC Objectives Low High High Low Improvement Project PROFESSIONAL EXPERTISE Strategic SCM Area 082.2 Symptoms & Pain Areas The Indian retail phenomenon is fairly recent; hence, as pointed out earlier, the industry is still at its nascent stages, leading to inadequate investment in a solid back end. Poor infrastructure, fragmented supply base and the absence of a mature 3PL industry are some of the reasons which compound this problem. The end result is an inefficient supply chain, which shows a number of symptoms of inadequate processes. Since the two main objectives of an efficient supply chain are to reduce costs and increase service levels, symptoms of the typical pain areas relate to them. Some of these symptoms are high material costs, high transportation costs, high warehousing costs, high wastage costs, frequent stock-outs, huge mark-downs, high rate of return/quality dissatisfaction, low inventory turns, etc. These symptoms are the trigger points to often larger issues such as an un-optimized distribution network, in-efficient transporters, poor infrastructure, poor design and layout of DCs, absence of an inventory policy, etc. Attacking these issues may require internal change in strategy or initiating a change in the external environment, or both. As an example, the transportation industry in India is fraught with small truckers, who add to the problem of poor infrastructure. As an estimate, approximately 2/3rds of the trucking companies generating 80% of the revenues have a fleet of less than 5 trucks, and the average speed on Indian roads is 20 mph as compared to 60 mph in the west, even though India has the 2nd largest road network in the world. As a result, it is but natural that lead times are high, long term relationships are absent, and retailers hardly have any visibility of the goods being transported. Add to this, an un-optimized distribution network and rising fuel prices and so transportation costs go high as well. In terms of sourcing, as mentioned earlier, a fragmented supply base and large number of intermediaries lead to a swelling up of product costs by the time it reaches the retail point. Due to the pressure of keeping prices low, the margins are often squeezed out, leaving very little for retailers, while affecting product quality and availability. The DCs are mostly viewed only as storage spaces and have till date been built keeping in mind the local tax structure. On the other hand, in a number of cases, processes within the DCs are highly inefficient; the handling and movement of material is poor; equipment and machines are old, hence are both risky and costly; IT implementation is low, e.g. Warehouse Management Systems; and the human resource is poorly trained to carry out the processes efficiently and safely. All these add up to high warehousing costs, which is further fueled by rising real estate prices. At the retail level, inventory is the biggest issue. Forecasting accuracy itself is a big problem in retail industry; historical data is not readily available since retail chains are still being set up. On top of this, inventory levels are not properly set, trigger points are not well defined, and due to problems in the distribution network or at the supply level, replenishment is uncertain. This results in higher stock outs, higher mark downs, low inventory turns and high pilferage. The end result is low service levels, and high costs. Expertise in several strategic SCM areas is required to cover the issues outlined in the previous section. Proper execution of these in the Indian context, however, is not straight forward because of the absence of historical data and good infrastructure. Indian retailers, therefore, will have to find creative ways to overcome these short comings. The following table outlines some of the key success factors and the impact of strategic SCM areas: 2.3 Strategic SCM Areas Network Design & Optimization • Stock-outs, • All logistics costs, • High inventory, • Quality deterioration • Warehousing costs, • Product quality deterioration, • Wastage costs, • Right balance of labor and automation • Designing for scalability and flexibility • Extensive use of personnel training and process improvement • Lease and CFA agreement should be for long-term yet allowing smooth and easy exits allowing stability, flexibility and protection from rental variations at the same time • Nurturing the right 3PL relationships is of utmost importance Warehouse Design & Operations • In-store stock-outs, • Store inventory levels, • Product quality deterioration, • Mark-downs • Assortment planning should be done in close co-ordination with the back-end chain • Inventory and replenishment policies should be synchronized with rest of the supply chain Retail Merchandising • Indirect impact on overall logistics costs and services • Integration of systems to gain synergies and provide information more useful for decision making • Selection and up-gradation of systems for changing needs • Good execution and project management skills in the team for meeting deadlines and expectations • Ability to quantify savings to secure funding and support in the organization SCM – IT • High material costs, • Product quality, • Extensive market and material research documented into a knowledge base • Expert negotiation skills • Disintermediation • Development of trusted suppliers over the long term Procurement • Accurate data and business plans should be used • Socio-economic factors should also be considered before selecting a network • Network planning and refinement should be done periodically and systematically • Use of quantitative techniques such as Mixed Integer Linear Programming constructs lends more accuracy to the exercise • Inventory levels, • Stock-outs, • Warehousing costs • Continuous monitoring of inventory levels and throughputs of SKUs to adjust replenishment policy • Simulation modeling and good use of historical demand data for arriving at optimum inventory levels, especially safety stock levels • Supply Chain team should work closely with merchandising to be aware in advance of changes in assortment Replenishment Policy and Inventory Optimization • Product quality deterioration, • High in-transit inventory, • Stock-outs, •Transportation costs • Effective Transport vendor management • Use of technology and tools such as vehicle tracking, Transport Management Systems etc • The freight strategy should have alternatives in place to counter poor availability of transport and transport infrastructure Transport Optimization • Stock-outs, • High inventory level • Use of expert validation to system generated forecasts especially for new products and promotional products • Good data management systems to make use of historical data for planning activities • Close integration and co-ordination between forecasting and planning processes and people • Continuous measurement and improvement of forecast and planning accuracies • Use of IT tools for planning and forecasting only after thorough testing and training of personnel Supply & Demand Planning Table 1 – Strategic SCM areas Source: Technopak analysis 102.4 A typical value chain with the end point as retail consists of a complex mix of a number of players in between, from distribution network to several intermediaries, supplier and supplier’s suppliers. A simplified view of the value chain framework is shown in Figure7. The retail firm boundaries may extend anywhere from the sales point (stores, typically for Indian retailers today) and backwards up-to the source, encompassing the distribution network, intermediaries and the final supplier. The linkages in between these entities (transportation network) may be owned by either of the parties. In addition, parts of the value chain may be outsourced to a 3PL. Finally, to ensure proper planning and visibility, IT systems may need to be deployed at various points of the value chain, often connecting one entity to the other. A number of opportunities exist for Indian retailers today in terms of reducing cost and improving service levels in the existing supply chains. For most retail chains today, simply setting up the entire network is a big challenge at the moment, since decisions today will affect the performance of their stores (or any other mode of sales) in the coming years. Investment required will be huge and a number of challenges will have to be overcome, as described in the previous sections. Network design, DC design & engineering, Supply chain IT systems implementation, decisions to outsource part of the network are some of the typical projects Indian retailers are taking up at the moment, and would be taking up in the near future. However, going forward, there will be tremendous scope to further improve upon the supply chains and even more important, to use supply chain innovation for gaining competitive advantage. As mentioned before, Supply chain best practices in global retail have created giants like Walmart, Amazon, Target, Tesco, Metro, to name a few. Hence, a number of projects, including process improvement at the DC level or the store level, improving forecasting accuracy, reducing out of stock, increasing sourcing efficiency, increasing product movement visibility, reducing lead time (sourcing, distribution), optimizing transportation etc. should be on the radar of the Indian retailers for the short to medium term time horizon. On a long term basis, supply chains would need to be built flexible, in order to respond to changes, drastic or slow, in demand, supply and technology. Further, flexible supply chains would allow retailers to tackle any dramatic events like natural calamities, terrorism, etc. Aligning the supply chain strategy to the business strategy would be of paramount importance in order to make strategic decisions more effectively, like entering new markets, new product introductions, new mode of sales, etc. Anticipating the future, and building a supply chain around it, is another way of looking at what the customer behavior would be in the long term. Figure 7 – Retail value chain framework Source: Technopak analysis • Supply chain systems implementation • Increase product movement visibility • Reduce lead time • Network design/redesign • Outsourcing decisions • Optimize transportation • Increase sourcing efficiency • DC engineering & design • DC process improvement • WMS implementation • Farmer • Manufacturer • Supplier • Value addition • Commission agents • Traders • Wholesalers • Central DCs • Local DCs • Trans shipment points • Brick & mortar • Online • Home delivery • Consumer • Reduce OOS • Reduce mark downs • Improve forecasting • Reduce wastage/shrinkage Backward integration Inbound transportation Sales point Outbound transportation SOURCE INTERMEDIARIES DISTRIBUTOR RETAILER CUSTOMER Improvement Projects for Indian RetailersDC design is a very important area for Indian retail today. As much as expansion of store space in the front end, requirements for back end warehousing space have been increasing. Inefficient DC processes often lead to low availability and higher stock outs or higher than required inventories in the retail store. Therefore designing the layout, defining the processes, implementing WMS and other systems becomes critical for front end performance. Steps required for DC design and the graphic for the sample of a DC process is shown below: • The network modelling delivers the basic input and output flows for all the facilities. This now has to be translated into internal flows and design data specifying for each function in the DC’s dynamic and static capacities • Basic handling steps have to be outlined within a conceptual process design. This design becomes the base for the DC layout and the operating cost budgets • In designing the warehouse processes and selecting the supporting technology, traditional sources of errors have to be eliminated and the principles of zero defect operations have to be adhered to • For each functional area in a DC, technical alternatives have to be developed to such a degree that an evaluation based on investment, operating cost and a number of agreed qualitative criterions can be made • The selection process also has to consider the criteria of “scalability”. This term describes the ability to enhance the installed solution with further technology or equipment to increase capacity without having to replace the previous investment • The selected individual solutions have to be combined to an overall solution in the next step • Always a minimum investment alternative should be carried forward, which serves as benchmark to allow justification of investment into a more advanced level of handling technology Sample Steps for DC Design 12Technopak developed the business model, strategy and business plan for the client. It was also part of the complete initial 15 store rollout. A supply chain for Fresh as well as FMCG products was configured and implemented. Technopak is also assisting the client in the next phase of expansion and to implement Home delivery and Rural Delivery services. The first store has been launched in late 2006. A South India based private sector milk and milk products company wanted to make a green field foray in to retailing space and wanted Technopak to not only suggest a strategy but also be a complete implementation partner during the rollout phases. Devising Supply chain strategy and partnering implementation for a Fruits & Vegetable focused supermarket chain Background • Devising the Supply Chain Structure keeping in mind the complete rollout of the organization as well devising tactics to ensure the rapid implementation planned by the client • Hand holding of the client in identification of collaboration partners and setting up smooth KPI based relations with them. • Designing the key warehousing and replenishment processes. • Backend IT process design and setup a complete implementation partner during the rollout phases. Requirements • As part of the business strategy to focus on Fresh (Fruits & Vegetables) as a core offering, Technopak was to devise an integrated Supply Chain Strategy to support a farm to fork vision. • The company wanted to plan a foray in to rural retail, which is a first of its kind unique venture in Indian retail • Setting up a complete Home delivery model with a strategic focus on looking at Home Delivery as revenue based service at maturity. Challenges • Network designs consisting of a mix of Hub and other categories. • Design of mother warehouses for individual cities handling 5000 SKU in FMCG, general grocery and beverages category • Integrating a single location pack house with flow through of products at individual state warehouses • Deciding upon replenishment and inventory parameters for Key categories/products. • Inventory holding characteristics for supplying Rural markets and identifying packaging and material handling processes for sensitive products • Identification and evaluation of vendors and partners for tie ups in various outsourcing options. • Identification and evaluation of Material Handling Equipment and proposed procurement plan as per growing requirements. Key Deliverables 3 Illustrative Case Study Source: Technopak analysis • Detail design of warehouse depending upon sales and stock holding profile: -Cross docking system for handling twice a day replenishment of Fruits & Vegetables categories. -Storage equipment setup in terms of 25 ft high pallet racking with pick and reserve storage processes. -Inclusion of Long span as well as block stocking to handle fast moving items with varying physical and handling characteristics. • Lean Warehouse processes were implemented -Slotting of products in order to minimize pick paths and ensure optimal time and effort utilization. -Wave picking and consolidation for a daily replenishment to nearly 28 stores across the city. • Phased and managed vendor receiving processes in a collaborative manner. • Use of simple equipment like pick ladders and cages which dramatically improve the picking speeds. • Use of fork lifts trucks and palletized material movement to decrease labor involvement, decrease product touch points and increase material movement speeds. • Rationalization of route wise load calculation to ensure twice a day stock fills • Design of Home delivery process and arriving at the no. of vehicles to service projected channel sales • Substantial training to managers and staff in floor level processes as well as understanding of IT flexibility helped scale up with a minimal increase in manpower requirement. Figure 8 -Methodology for capacity & network planning Key outputs Figure 9 – Network representation Source: Technopak analysis Source: Technopak analysis Store format & city wise sales plan City wise Store Rollout plan & supply Source Inventory map Characteristi cs & Material Flow CAPACITY PLANNING & NETWORK PROFILE Outline Map of India NLocal Warehouse Total Area 70,000 sft F&V Mother Warehouse 14Technopak is a unique services organization offering advisory services and implementation support to leading Indian and International companies – in India and outside India – operating in Consumer Products & Fashion industries and in Retail & Healthcare sectors. Technopak’s Supply Chain Management practice provides advisory services and implementation support in a wide range of areas in the Retail sector and across Consumer product industries. Harminder Sahni Managing Director 4th Floor, Tower A DLF Building 8 DLF Cyber City, Phase II Gurgaon 122 002 (National Capital Region of Delhi) India Harminder.sahni@technopak.com Phone : +91.124.454 1111 Fax : +91.124.454 1199 Asitava Sen Vice President 4th Floor, Tower A DLF Building 8 DLF Cyber City, Phase II Gurgaon 122 002 (National Capital Region of Delhi)India Asitava.sen@technopak.com Phone : +91.124.454 1111 Fax : +91.124.454 1199 Anil Rajpal Associate Vice President 4th Floor, Tower A DLF Building 8 DLF Cyber City, Phase II Gurgaon 122 002 (National Capital Region of Delhi) India anil.rajpal@technopak.com Phone : +91.124.454 1111 Fax : +91.124.454 1199 • SC strategy • SC Network Design & optimization • Transportation optimization & route planning • Inventory Optimization & replenishment policies • Supply & Demand planning • Retail merchandising • Retail order management & key account management • Warehouse Design & Operations • Strategic sourcing & collaborative planning • WMS/TMS selection & configuration support • Process reengineering • Performance improvement & cost rationalization • KPIs & benchmarking • Outsourcing strategies • Morden trade strategies for consumer goods category Key service offering in SCM: Please contact: About Technopakretail Head Office 4th Floor, Tower A, Building 8, DLF Cyber City, Phase II, Gurgaon 122 002, (National Capital Region of Delhi) T: +91-124-454 1111, F: +91-124-454 1199 Bangalore 11A, 11th Floor, Canberra Block, U B City 24, Vittal Mallya Road, Bangalore 560 001 T: +91-80-4034 8600, F: +91-80-4034 8699 Mumbai 101-105, 2nd Floor, Sunjana Tower, Sun Magnetica Service Road, Luis Wadi, Thane West, Mumbai 400 602 T: +91-22-2583 2222, F: +91-22-2583 8408 Retail Practice Asitava Sen, Vice President asitava.sen@technopak.com Anil Rajpal, Associate Vice President anil.rajpal@technopak.com T: +91 124 4541111 F: +91 124 4511198-99 E: retail@technopak.com www.technopak.com