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Rising Elephant Creates Euphoria: India's Growing Markets Are a Boon for SCM Vendors

Written By: Ashfaque Ahmed
Published On: July 27 2009

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Originally Published - April 13, 2007

In the past two decades, India has earned a reputation worldwide for its strength in information technology (IT), information technology enterprise solutions (ITES), and software-related products and services. Now that the Indian government is liberalizing and opening up the economy, India is becoming a "hot spot" (business center) for manufacturers in the auto, textiles, medicine, and antibiotics sectors, as well as many others. The country is also emerging as a leader in engineering and research and development (R&D) in many fields.

But the most exciting field that is getting attention is the retail segment of the organized sector. Not only is the share of organized retail increasing rapidly, but the retail sector itself is growing at a healthy 5–10 percent yearly. Effectively, the yearly rate of growth of organized retail is more than 20 percent.

The growth in this area has created numerous opportunities for software vendors and implementation service providers that specialize in retail management software.

Background of Retailing in India

Because of myopic government regulations in the past, the Indian retail sector was once closed to multinational retailers. The government did not even permit homegrown retail chains to exist. Because of this, the whole retailing sector in India remained unorganized. Retailing was characterized by small, family-owned shops. Goods from manufacturers were passed through a myriad of hands consisting of layer after layer of distributors, wholesalers, and brokers before the merchandise reached the small shop.

This system would create a shortage of goods in some parts of India, and an oversupply in other parts of the country. Furthermore, a lack of adequate cold storage facilities would result in food items, such as fresh vegetables and fruits, to spoil and therefore be wasted—sometimes up to 40 percent. Since the supply chain had many layers, the consumer ended up paying more for these products and services. The government would also levy various taxes at different stages of the supply chain. Because of these inefficiencies, farmers, manufacturers, and consumers would suffer.

This is all changing, thanks to the Indian government's drive to liberalize and open its economy to the retail sector.

Growth Factors for Retailing in India

India is home to more than one billion people. The middle class is comprised of more than 300 million people who have good purchasing power; 20 million people make up the upper class. All of these people are hungry for world-class products and services. But even today, only 2 percent of retailing is in the organized sector. Some 100-odd midsize retailers own and operate more than 100 retail outlets each. This is a huge scope for the expansion of organized retailing.

It is expected that by 2010, 10 percent of the retail sector in India will come under organized retailing. India is home to the youngest population in the world. More than 50 percent of the population is less than 25 years of age. These young people are suitable targets for lifestyle products and services. The Indian economy itself has been growing more than 8 percent yearly for the last 6 years, and it is expected to maintain or surpass this rate in the years to come. According to a World Bank survey, India ranks fourth in terms of purchasing power parity (PPP), next only to the US, China, and Japan.

Characteristics of Organized Retailing

Organized retail is all about many huge stores (each with more than 6,000 square feet of selling space) owned by one management and located in many regions or countries. These stores carry a large variety of goods (stock keeping units [SKUs] totaling 50,000 or more), and have high volumes of sales, thin margins, smart marketing tactics, cutthroat competition, and so forth.

Sourcing of goods is done globally. Buying and merchandising activities are crucial for organized retail. Economies of scale are required for buying and merchandising activities. Obviously, sales figures are driven by the stores, but often profit margins are determined by the buying and merchandising activities. An efficient supply chain framework ensures that these high sales figures are achieved, and that money is saved by reducing stock levels and transportation costs.

In between buying and store activities, the supply chain plays the most crucial role in determining the success or failure of a retailer. The stores need supplies from the retailer distribution centers (DCs) on demand and on time. The retailer DCs, in turn, need supplies from vendor DCs. Frequency of these supplies (that is, the regularity with which these supplies are delivered) is based on short-term replenishment requirements as well as on long-term agreements with the vendor. How often these supplies are delivered will depend on the demand for them from retailer DCs, as well as the costs associated with transportation of these supplies (less-than-truckload [LTL] factors). The retailer may fail and need to close down if the following factors are not managed well: store shelf and storage space; DC space; transportation of goods between retailer DCs and stores; and transportation of goods between vendor DCs and retailer DCs.

If even one of these supply chain links fails, even for a day, it creates mammoth-size problems for every other link in the chain, especially the retailer. That is why retailers often have agreements with vendors. If, for example, a truck is delayed by even an hour, the vendor is liable for the loss incurred by the retailer.

Supply chain management's (SCM's) role in organized retail aims at increasing efficiency, reliability, economy, and visibility, and at reducing lead times.

The role of IT in SCM includes the following:

  • Providing visibility across the supply chain network
  • Providing planning and execution ability for transportation at the network level for long-term (that is, weekly, biweekly, monthly, quarterly, or semiyearly), bulk order agreements
  • Providing planning and execution ability for transportation at the network level for short-term (hourly, shift-wise, daily) replenishment of out of stock goods
  • Achieving efficiency in DC—store space management
  • Achieving efficiency in distribution of goods across the network
  • Achieving reliability of shipment of goods within established time constraints
  • Achieving economies of scale in shipment of goods
  • Reducing safety stock levels at DCs and stores by providing a reliable and visible supply chain
  • Reducing lead times through efficient transport planning and execution

On the one hand, an efficient supply chain framework is crucial for the retailer's success. On the other hand, an economical supply chain network ensures that the retailer's bottom line is healthy by saving money in the transportation and storage of goods.

Opportunities for Software Vendors and Service Providers

The size, complexity, and number of retail chains in India are expected to grow. This growth will lead to the need for retailers to have enterprise software systems to manage stores, DCs, suppliers, transportation, goods, and supporting services. As the size and number of retailers grow as well, so will their requirements for sophisticated enterprise software systems. It can be safely estimated that the need for enterprise retail management software can grow more than 25 percent yearly for at least the next 20 years or so. The early entrants in this market can take the lead, and later consolidate their positions.

Some of the business houses in India that are very bullish (optimistic) about retailing and that are opening new stores include Reliance Industries, Pantaloon (with its chains named Big Bazaar and Food Bazaar), Bharti group, Ozone, Pyramid, Mega Mart, and Vishal Mega Mart. Most of these retailers are presently using customized software of a sort, which may become obsolete as the retailers grow. This may present profitable opportunities for retail software vendors and service providers. For these retailers, bringing efficiencies into the supply chain management will also require software systems to manage supply chains efficiently.

Challenges for Software Vendors

The most daunting challenges for any software system managing organized retailing in India include the following:

  • Various kinds of taxes and levies applied on different types of goods by different cities, districts, states, and national-level government agencies. The software must be able to handle all these taxes and levies on goods.

  • Varied subcultures, ethnic groups, languages, and income disparities among people from one region to another, from city to village, etc. The software should be able to handle variances in regional languages, food preferences, clothing, lifestyle goods, etc.

  • Multimodal, fragmented, small, and local-level transportation and third-party players. The software should be able to handle the many variances in the modes of transportation of goods, such as railways, roads, small trucks, trailers, etc.

  • Dispersed and heterogeneous markets. Small and far-flung (remote) villages require small stores with limited numbers of SKUs, located at nodes that can service a group of contiguous villages. Frequency of transportation to these stores will be less, and more stock can be loaded onto to transportation vehicles, as storage costs will be far less. Consumers residing in different regions of the country have very different lifestyles, and need different kinds of goods. So, for example, one retailer serving many regions may have to develop different SCM strategies for each of these regions. Software systems should allow the retailer to do this.

  • Lack of dry and cold storage. Fresh fruits and vegetables need to be transported in short distances instead of long distances. The software must be able to allow for this variance.

  • Many layers in the supply chain. Due to the presence of many layers in the supply chain (that is, from manufacturer to national distributor, to regional distributor, to local wholesaler, and then to retailer), transportation and distribution functions become very complex. The software should be able to manage this aspect. Also, the need for inbound shipping may arise, which is the transportation of goods between stores instead of between DCs and stores, and the software must be able to plan for this.

Since transportation and storage costs are high (compared to these costs in developed countries), SCM software should allow for adequate supply chain planning to keep these costs at an optimum. Whereas sourcing of goods should be done at national or international levels, supply of many goods should be carried out at regional levels because of different cultures, ethnic groups, food habits, and clothing needs. In many cases, costs of goods may be low compared to other costs. In these cases, goods can be stored in more quantity at some nodes instead of being transported frequently in smaller quantities.

Recommendations for Software Vendors

While entering the Indian market presents many challenges for software vendors, prospects for good returns exist in view of the huge growth potential of organized retailing in India. Certainly, early entrants can reap the benefits of tapping into this new market. These software vendors can also be assured of high returns in the future too, as the Indian organized retailing market will continue to grow at a rapid rate in the foreseeable future. This market growth will ensure software vendors continue to have a consistent string of new clients.

Recommendations for Retailers

Many software vendors and software service providers may have experience in making and implementing software systems in developed countries like the US, Japan, Australia, and European countries. But this experience may not be enough when entering the Indian organized retail market, which has many factors that make it unique. Some of these distinguishing factors include the country's tax systems, variations in regions and languages, lack of storage and good roads, and transportation challenges. Since these software companies may not have firsthand experience with the Indian organized retail market, a retailer should make sure that a software vendor or implementer is aware of the difficulties ahead.

Once these retailers are equipped with the right software, they can reap the benefits in both the short term as well as in the long run. Well-designed, reliable software will allow retailers to first optimize their operations, and later on, the software will help those retailers to expand and grow more quickly.

About the Author

Ashfaque Ahmed is a seasoned consultant and business analyst in the areas of advance planning and scheduling in supply chain management (SCM). He has worked with many large and medium size clients in the retail, distribution, and manufacturing industries. Some of these industries include the automotive, consumer packaged goods (CPG), pharmaceutical, food, textile, steel, and packaging materials sectors. Ahmed holds a BA in engineering and an MBA in information systems. He can be reached at ahmedashfaque2007@yahoo.com.

 
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