Indian
organized retail is still developing and currently does not contribute to
significant revenue shares of consumer goods companies. The result of this is
vendor shortfalls. While most of the optimization software builds its logic on
firm vendor commitments, in India such commitments are seldom firm. This poses
issues to most supply chain optimization software. The key to utilizing
optimization software in such environment lies in using sourcing strategies for
reducing shortfills and in using correctional algorithms on top of the
optimization software.
The next step in the roadmap is an
unconventional step. It is about managing vendor short falls by using
forecasting software to predict short-fills and late-deliveries. These
predications could be later used to alter purchase orders. Though humans can do
this too, systems can calculate to a precise level not just across key items
but across all sub-items considering the various factors that might affect the
consumer goods company – high-sales season, patterns in scheduled and
unscheduled maintenance, new product introductions, etc. This step will help
handle short-fills from the top-brand services companies too.
Indian retail industry contributes to almost 1/3rd
of the country’s GDP. However, this industry is dominated by single-store
businesses. Some such businesses occupy as little space as 10 sq. ft (your
local PAN DABBA!). These businesses are widely spread and usually serviced by
wholesale distributors. The wholesale distributors in turn purchase in bulk
from branded consumer goods companies. This arrangements essentially dilutes
the power of the ‘last mile’ (‘last mile’ is a term more often used in the
telecom industry. It basically means the closest value chain to the consumer).
The power of the ‘last mile’ lies in consolidating the bargaining power; the
dispersed single-store businesses don’t efficiently consolidate this. However,
in recent decades, the emergence of organized multi-store businesses is
challenging this status-quo. These organized retailers (multi-store businesses)
hold the absolute power of the last mile in most developed retail markets like
US and Europe. This power translates into heavier pressure on costs, driving
down the overall prices to the consumer, and into higher service levels,
driving up availability of products for the consumer. This is not happening in
India, as yet, mainly because organized retail is not a large part of the
Indian retail industry. We still have a seller’s market of sorts. Brands are
the main driver of sales. All this creates an environment where short filling
on a retailer’s order becomes ‘chalta hai’
(‘short filling’ means providing lesser than the quantity request on an order).
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Plausible revenue shares |
The
key reason for this short-filling phenomenon appears to be the relative low
contribution to revenue (revenue share) from any single organized retailer to
the revenues of a top-brand consumer goods company (see diagram above).
However, there are contract manufacturers who enjoy economies of scale (given
today’s more efficient production technology). Some retailer’s source private
brands (goods which are branded by retailer) from such contract manufacturers.
There are chances that a retailer could, in the best case scenario, end up with
a significant revenue share of the contract manufacturer. This significant
share ensures service discipline (viz. lesser short-fills). However, the path
to resolving short-fills is not just hiring a contract manufacturer. It is a
path that is part of a roadmap introduced in the 1st article of this
series (see diagram below).
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Retail Value Chain and Roadmap |
The path to lower vendor short-fills is given in steps five
thru seven above. It starts from building a base on contract manufacturers.
This base would not give immediate benefits but as the relation matures over
time and as consumers become familiar with the quality overtime, the retailer
might have enough volumes to launch private brands across various products
lines and across larger store space. Assuring greater service discipline.
Some retailers in India, even today, handle most of their
logistics through a manual or an automated system. Optimization technologies,
if configured suitably, can help recommend more optimal solutions than a human
can ever produce. These technologies don’t necessarily replace humans. They
simply let human’s do more high-end tasks. These technologies, apart from
enhancing the process maturity, help build a base infrastructure for the next
step in the roadmap.
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