Communications of the ACM

Communications of the ACM

Technology in the Indian Retail Supply Chain

By R. Krishnan
Communications of the ACM, June 2001, Vol. 44 No. 6, Pages 83-87
10.1145/376134.376176
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Supply chain management for consumer goods in India is extremely challenging, due to complex taxation structures, large geographic distances, and high fragmentation of the consumer base. This article provides an insight into the Indian retail supply chain and describes a multistaged, IT-based approach to improve supply chain efficiencies.

India is divided on geographic and cultural lines into more that 25 states, each with its own governing authority and freedom to set taxation standards. This leads to complicated situations for interstate sales, with buyers required to pay taxes in both the states, a major expense since the taxes in India for consumer goods are substantial (ranging from 4% to as high as 16%); and this becomes a major cost that has to be borne by the company. In India it is also legally required to use standard prices (including taxes) to consumers across the country, which must be printed on the label. This practice of printed standardized pricing makes it difficult to have a cost-plus-tax pricing in individual states. India is a huge country geographically, where goods must be transported over vast distances, and this situation, combined with the variable levels of transportation infrastructure available at different parts of the country, results in transportation lead times tending to fluctuate (as high as 400% in adverse areas).

The customer base in India, the second largest populated country in the world, is extremely fragmented. India's more than one billion residents are dispersed across 4,000 urban towns and 625,000 rural towns, with the rural towns contributing a considerable share of sales volumes (varying from 20% to as high as 80% for individual categories). The media reach is also high, reaching even remote rural areas, and creates demand for products. Small retail outlets have traditionally serviced the rural areas efficiently, making consumers accustomed to getting the products within easy reach. These small retail outlets are made viable by the low cost of infrastructure and operations in India. There are in excess of two million outlets in urban areas and approximately four million outlets in rural areas. Retail chains are nonexistent in India and supermarkets are limited, forcing suppliers to service the large population of small retail outlets.

Many companies have understood this reality and determined that the critical success factor in achieving sales growth in India involves ensuring availability of products within easy reach of consumers and merchandizing the products at the large number of small outlets. These impediments have spawned a distribution arrangement in India that is radically different from those present in most other countries. Many international companies such as Unilever, Gillette, and Smithkline Beecham have responded to the challenges in India and arrived at efficient distribution models.

A typical distribution arrangement in India is highlighted in Figure 1. Because of India's geographically dispersed transportation infrastructure and taxation pricing structure, many organizations maintain a large number of warehouses spread across the country. Outsourcing operations of these warehouses to third parties has been found to be more efficient and cost effective. These third parties manage the inventory and billing operations in the warehouse for a service fee, but do not take part in the sales and collection activities. Some companies maintain more than 50 warehouses spread across the country.

Fragmentation of the customer base has necessitated the presence of intermediaries (called distribution stockists) in the distribution chain, who assist in the sales and distribution of the products through their own sales representatives, and protect companies from the financial risks involved with collecting money from millions of retailers. A distributor prefers to operate in a specific geography and with a well-identified list of retailers that are serviced on a pre-fixed periodic basis using the sales representatives. Most distributors service multiple companies, though usually non-competitive in nature, and must be constantly monitored for their sales performance. The company assists the distributor in sales initiatives through promotions directed at the retailers and consumers, and by training the sales representative.

The efficient distribution of products at low costs makes low margins possible. A typical retailer works with a margin of 10%–15% and a distributor works with a margin of 6%–8%. Such margins, which are lower than international standards for product distribution, are considered to be the reasons why chain stores are not becoming popular in India (it is estimated that to cover infrastructure costs, chain stores would need to have margins in excess of 40%).

Since the critical success factor in achieving sales volumes in India is the distribution and display of products at outlets that are easily accessible to customers, the sales process of the distributor (also called the in-market sales process) is crucial to ensure top-line achievements for the company. Most organization track the in-market sales process and use it as an input for sales and supply chain planning. Inventory at each entity in the supply chain is analyzed to improve throughput and ensure the stock—though paid for—is not piling up at an intermediary. Companies track a few key parameters that are crucial to ensure an efficient in-market sales process and a smooth supply chain:

• Inventory at the distributors;
• In-market sales (brand level total movement of material from the distributor end);
• Number of distributor sales representatives;
• Person-days worked by the distributors representatives;
• Number of sales calls made by the distributor representative per day;
• Productivity (overall and by brand): the number of calls where the representative has made a sale; and
• Distribution (brand): the number of outlets where a particular brand is available.

Most companies manually collect this data at a distributor level and collate it manually at various levels of sales hierarchy. Such manual collection and collation hampers the timeliness and accuracy of the information, leaving decision-makers unable to slice-and-dice the data to make meaningful observations and understand trends. If this information is available for analysis, then the supply chain can be managed more efficiently, with radically improved sales and customer service levels. Currently there is limited IT usage in the collection and collation of the data.

Future outlook on retail. Retail chains are beginning to enter India, lured by the huge potential market for consumer goods. They are likely to find it extremely difficult to compete with the current distribution system, which works on wafer-thin margins. The chains are likely to make headway in the urban towns because of the shopping experience they provide, rather than their ability to offer better prices. Rural towns are expected to continue with the current fragmented distribution arrangement. This market cannot be neglected, however, since in many categories it contributes sales volume shares as high as 80%.

India had lagged substantially behind the Western world in terms of telecom infrastructure, although since liberalization in 1991, there have been substantial improvements. With the advent of the Internet, the development in telecommunications has switched gears and has started growing rapidly. Internet bandwidth for connectivity, both within India and to the international network through gateways, is being increased by multiples. Information technology is being looked at seriously for its potential to improve the efficiency of the retail supply chain, leveraging the power of the Internet.

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Proposed Solution Framework

The solution architecture must help collect information from the distributor and disseminate information back to the sales representative for sales performance analysis purposes. Several other critical factors need to be evaluated prior to developing the solution architecture for retail in India. Some of these factors include:

• The low IT maturity of the distributor and the distributor sales representatives. The user-friendliness of the solution has to be extremely high. Training must be prioritized to ensure a successful implementation of the solution.
• The complexity in supporting a system at geographically dispersed locations. Even considering just the top distributors for most categories, they are located across more than 100 towns and supporting the software at these locations can become an arduous task.
• The reliability of the telecom and Internet infrastructures in India. The telecommunications infrastructure in India has grown by leaps and bounds over the last 10 years and in specific geographic areas, it has become extremely reliable. In spite of this, when you look at a pan-India scenario, the reliability of the infrastructure needs considerable improvement. However the situation is expected to improve rapidly with privatization of Internet service providers.

Solution architecture. A solution that addresses the limitations mentioned earlier and leverages the power of technology to enhance business performance has been developed, resulting in a staged approach to implementation starting with a simple solution scaleable to multiple levels of complexity. The multiple levels of the solution are detailed in Figure 2. The collection of information varies among the three levels. In all three levels the dissemination of information to the company sales representatives, the distributor, and the distributor sales representatives is through dynamic Web-based reports published through a Web server. As shown in Figure 3, the Level 1 solution does not affect the collection of data. However, it improves the collation performance of in-market sales data processing by reducing the effort and improving the timeliness. The Level 2 solution affects both the collection and processing of data, although there is still some duplication in the data entry effort. The Level 3 solution affects both the collection and processing of data in a major manner and avoids duplication in the data entry effort. It radically increases the granularity and availability of data and allows the company to have enhanced control over the promotional activities.

The proposed stage-based solution takes into account the constraints of low IT maturity of distributors and the distributor sales representatives, the difficulty in supporting a geographically dispersed IT deployment, and the telecommunications constraints in India. It also anticipates the scalability requirements of more complex technologies and is built using a modularized approach that allows for easy migration by reusability of the developed components. The three solutions may also coexist at the same time, based on the company priorities: Level 3 solution for the high priority areas and a Level 1 solution for the low-priority areas. There is also potential for a third-party player to take an active role in setting up the infrastructure required for implementing this stage-based solution—as they will be able to bring economies of scale into play, whereby sharing the high costs estimated for supporting the geographically dispersed customers and radically reducing the Total Cost of Ownership. The third party will also be able to address the requirements of intermediaries, who cater to multiple companies.

Summation of benefits. An analysis of the benefits for retail companies with various levels of implementation was performed, structured around the Cost-Delivery-Quality model for assessment of process performance. In this model: Cost describes the cost of resources consumed in doing the process; Delivery describes the lead-time for completing the process; and Quality describes the quality of output of the process. A summary of the findings is given in Figure 4.

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Conclusion

Information technology can and will play a major role in improving the efficiencies of the retail supply chain in India. Organizations have become aware of the importance of technology to improve efficiencies and are taking definitive steps toward leveraging IT in improving the efficiencies of the supply chain.

Considering some of the constraints to IT implementation such as the low IT maturity of the participants, difficulty in providing support to a geographically dispersed set of distributors, and the unique circumstances of the telecommunications infrastructure on a pan-India basis, a multiple-stage based solution that starts with least complexity and moves to higher degrees of complexity is proposed. There is very high potential for outsourcing IT management of this solution, as the solution provider will be able to reduce the Total Cost of Ownership, by leveraging economies of scale in the high-cost support function.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2001 ACM, Inc.

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