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supply chain

  1. 1. SUPPLY CHAIN MANAGEMENTA supply chain is a network of facilities and distribution options that performs the functionsof procurement of materials, transformation of these materials into intermediate and finishedproducts, and the distribution of these finished products to customers. Supply chains exist inboth service and manufacturing organizations, although the complexity of the chain may varygreatly from industry to industry and firm to firm.Traditionally, marketing, distribution, planning, manufacturing, and the purchasingorganizations along the supply chain operated independently. These organizations have theirown objectives and these are often conflicting. Marketings objective of high customerservice and maximum sales dollars conflict with manufacturing and distribution goals. Manymanufacturing operations are designed to maximize throughput and lower costs with littleconsideration for the impact on inventory levels and distribution capabilities. Purchasingcontracts are often negotiated with very little information beyond historical buying patterns.The result of these factors is that there is not a single, integrated plan for the organization---there were as many plans as businesses. Clearly, there is a need for a mechanism throughwhich these different functions can be integrated together. Supply chain management is astrategy through which such an integration can be achieved.Supply chain management is typically viewed to lie between fully vertically integrated firms,where the entire material flow is owned by a single firm, and those where each channelmember operates independently. Therefore coordination between the various players in thechain is key in its effective management. Cooper and Ellram [1993] compare supply chainmanagement to a well-balanced and well-practiced relay team. Such a team is morecompetitive when each player knows how to be positioned for the hand-off. The relationshipsare the strongest between players who directly pass the baton, but the entire team needs tomake a coordinated effort to win the race.Supply Chain DecisionsWe classify the decisions for supply chain management into two broad categories -- strategicand operational. As the term implies, strategic decisions are made typically over a longer timehorizon. These are closely linked to the corporate strategy (they sometimes {it are} thecorporate strategy), and guide supply chain policies from a design perspective. On the otherhand, operational decisions are short term, and focus on activities over a day-to-day basis.The effort in these type of decisions is to effectively and efficiently manage the product flowin the "strategically" planned supply chain.There are four major decision areas in supply chain management: 1) location, 2) production,3) inventory, and 4) transportation (distribution), and there are both strategic and operationalelements in each of these decision areas.Location DecisionsThe geographic placement of production facilities, stocking points, and sourcing points is thenatural first step in creating a supply chain. The location of facilities involves a commitmentof resources to a long-term plan. Once the size, number, and location of these are determined,NIFT, HYDERABAD Page 1
  2. 2. so are the possible paths by which the product flows through to the final customer. Thesedecisions are of great significance to a firm since they represent the basic strategy foraccessing customer markets, and will have a considerable impact on revenue, cost, and levelof service. These decisions should be determined by an optimization routine that considersproduction costs, taxes, duties and duty drawback, tariffs, local content, distribution costs,production limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thoroughdiscussion of these aspects.) Although location decisions are primarily strategic, they alsohave implications on an operational level.Production DecisionsThe strategic decisions include what products to produce, and which plants to produce themin, allocation of suppliers to plants, plants to DCs, and DCs to customer markets. As before,these decisions have a big impact on the revenues, costs and customer service levels of thefirm. These decisions assume the existence of the facilities, but determine the exact path(s)through which a product flows to and from these facilities. Another critical issue is thecapacity of the manufacturing facilities--and this largely depends the degree of verticalintegration within the firm. Operational decisions focus on detailed production scheduling.These decisions include the construction of the master production schedules, schedulingproduction on machines, and equipment maintenance. Other considerations include workloadbalancing, and quality control measures at a production facility.Inventory DecisionsThese refer to means by which inventories are managed. Inventories exist at every stage ofthe supply chain as either raw materials, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that mightexist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40percent of their value, their efficient management is critical in supply chain operations. It isstrategic in the sense that top management sets goals. However, most researchers haveapproached the management of inventory from an operational perspective. These includedeployment strategies (push versus pull), control policies --- the determination of the optimallevels of order quantities and reorder points, and setting safety stock levels, at each stockinglocation. These levels are critical, since they are primary determinants of customer servicelevels.Transportation DecisionsThe mode choice aspect of these decisions are the more strategic ones. These are closelylinked to the inventory decisions, since the best choice of mode is often found by trading-offthe cost of using the particular mode of transport with the indirect cost of inventoryassociated with that mode. While air shipments may be fast, reliable, and warrant lessersafety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper,but they necessitate holding relatively large amounts of inventory to buffer against theinherent uncertainty associated with them. Therefore customer service levels, and geographiclocation play vital roles in such decisions. Since transportation is more than 30 percent of thelogistics costs, operating efficiently makes good economic sense. Shipment sizesNIFT, HYDERABAD Page 2
  3. 3. (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment arekey in effective management of the firms transport strategy.Supply Chain Modeling ApproachesClearly, each of the above two levels of decisions require a different perspective. Thestrategic decisions are, for the most part, global or "all encompassing" in that they try tointegrate various aspects of the supply chain. Consequently, the models that describe thesedecisions are huge, and require a considerable amount of data. Often due to the enormity ofdata requirements, and the broad scope of decisions, these models provide approximatesolutions to the decisions they describe. The operational decisions, meanwhile, address theday to day operation of the supply chain. Therefore the models that describe them are oftenvery specific in nature. Due to their narrow perspective, these models often consider greatdetail and provide very good, if not optimal, solutions to the operational decisions.To facilitate a concise review of the literature, and at the same time attempting toaccommodate the above polarity in modelling, we divide the modelling approaches into threeareas --- Network Design, ``Rough Cut" methods, and simulation based methods. Thenetwork design methods, for the most part, provide normative models for the more strategicdecisions. These models typically cover the four major decision areas described earlier, andfocus more on the design aspect of the supply chain; the establishment of the network and theassociated flows on them. "Rough cut" methods, on the other hand, give guiding policies forthe operational decisions. These models typically assume a "single site" (i.e., ignore thenetwork) and add supply chain characteristics to it, such as explicitly considering the sitesrelation to the others in the network. Simulation methods is a method by which acomprehensive supply chain model can be analyzed, considering both strategic andoperational elements. However, as with all simulation models, one can only evaluate theeffectiveness of a pre-specified policy rather than develop new ones. It is the traditionalquestion of "What If?" versus "Whats Best?"INTEGRATION OF FOOD INDUSTRY – THE KEY DRIVER OF FOOD RETAIL ININDIAIndia is world’s second largest grower of fruits and vegetables after Brazil and China. Whilethe agriculture sector has witnessed several leaps of innovation and technologicaladvancements, the processing sector is still in its infancy. Even with less than 4% processingof fruits and vegetables, the Food Processing Industry sector in India is one of the largest interms of production, consumption within India, export and growth prospects. The governmenthas accorded it a high priority, with a number of fiscal reliefs and incentives, to encouragecommercialisation and value addition to agricultural produce; for minimising pre/post harvestwastage, generating employment and export growth. As a result of several policy initiativesundertaken since liberalisation in early 90’s, the industry has witnessed fast growth in most ofthe segments. In the following few paragraphs, it can be noted that the processed food marketfor India is vast and the amount of scope that retail chains would be exposed to isphenomenal taking into consideration the demographics and raise in standards of living.Retailers could throng the market with all these processed and packaged foods with theirprivate labels.NIFT, HYDERABAD Page 3
  4. 4. EVOLUTION OF ORGANIZED RETAILINGRetailing, one of the largest sectors in the global economy, is going through a transition phasein India. For a long time, the corner grocery store was the only choice available to theconsumer, especially in the urban areas. This is slowly giving way to international formats ofretailing. The traditional food and grocery segment has seen the emergence ofsupermarkets/grocery chains, convenience stores and fast-food chains.The traditional grocers, by introducing self-service formats as well as value-added servicessuch as credit and home delivery, have tried to redefine themselves. However, the boom inretailing has been confined primarily to the urban markets in the country. Even there, largechunks are yet to feel the impact of organized retailing. There are two primary reasons forthis. First, the modern retailer is yet to feel the saturation effect in the urban market and has,therefore, probably not looked at the other markets as seriously. Second, the modern retailingtrend, despite its cost-effectiveness, has come to be identified with lifestyles.Impact of Organized RetailOrganized retailing is spreading and making its presence felt in different parts of the country.The trend in grocery retailing, however, has been slightly different with a growthconcentration in the South. Though there were traditional family owned retail chains in SouthIndia such as Nilgiri’s as early as 1905, the retail revolution happened with the RPG groupstarting the Foodworld chain of food retail outlets in South India with focus on Chennai,Hyderabad and Bangalore markets, preliminarily. The experiment has reaped rich dividendsand the group is now foraying into other territories as well. Owing to the success ofFoodworld model of RPG group, several new models such as Trinethra, Subhiksha, MarginFree and others have made their foray into this sector albeit at regional levels. Today the foodretail sector in India is about Rupees Ten Lakh Crores (USD 200 billions) of which theorganised food retail segment is about 1 per cent and increasing at a pace of over 20% y-o-y.In the organized retail industry, the gestation periods are long, institutional funding isdifficult, and there is none or little Government support. But the belief among top retailerchains in the country is that the industry will see large investments coming once the currentban on foreign direct investment is lifted. But that could be two-three years away. Food andgrocery retailing is a tough business in India with margins being very low, and consumers notdissatisfied with existing shops where they buy. For example, the next-door groceryshopkeeper is smart and delivers good customer service, though not value.Pantaloon Retail (India) Ltd, which operates two types of retail formats, made its maidenforay in food and grocery retailing in North India in mid-2003. Big Bazaar, Pantaloon groupsdiscount store chain, has taken off to a roaring start in Delhi. The Pantaloon Big Bazaar inDelhi is the sixth for the group, and the first in North India. It has been found that existingBig Bazaar stores in cities such as Hyderabad, Bangalore and Mumbai attract averagefootfalls of 20,000 to 25,000 per day, more so during weekends. While Big Bazaar isessentially a discount store retailing product categories ranging from food and grocery toapparel to footwear to home and interior products, food and grocery retailing forms asignificant part of the chains business. Typically, while food and grocery retailing does wellat the beginning of the month, the apparel sector sees maximum off take during festivals.NIFT, HYDERABAD Page 4
  5. 5. Likely Transformation of the Supply Chain:To counter the unbeatable advantages of convenience of a hop, skip and a jump access andhome delivery, organized retailers seem to have just one option - offer attractive prices to theconsumer. A successful retailers winning edge will therefore come from sourcing - how bestit can leverage its scale to drive merchandise costs down, increase stock turns and get bettercredit terms from its vendors. There are obvious and hidden areas where costs can be prunedand the benefits of this lower cost of retailing can be passed on to customers as lower prices,which in turn should fuel demand. One way of trimming costs is if the pressure points in thelong, often unnecessary, supply chain for produce and staples can be identified and suitablydealt with. The food supply chain in India is full of inefficiencies - a result of inadequateinfrastructure, too many middlemen, complicated laws and an indifferent attitude.Corporate and NGO interventions at the farm end in the form of Farm Management Servicesare emerging to ensure quality and timely supply of produce for the operations. The Farmer-Corporate relationship has helped both the farmers and the corporates in bringing the highquality low cost product to the retail shelf. To ease the burden of the corporate in setting upfarm management services, several leading NGO bodies have taken up this activityessentially due to the fact that their operations are mostly at the farm end.We feel that these farmer-corporate models would be replicated and extended to all the farmend products. With the emergence of Private Label, we would soon find even the retail chainsto work with the farm community in developing a efficient supply chain and to leverage onthe cost advantage at both ends.BIG BAZAARBig Bazaar is consumer goods retail chain of Future Group Pvt Ltd. Future Group also runsPantaloons, Lifestyle, EZone, Book Depot, Future Bazaar, Food Bazaar, Home Town, FairPrice, Brand Factory and Central Hypermarket. Future group is a subsidiary of PantaloonRetail India Limited which is listed in NSE and BSE the most established Stock Markets inIndia. Mr. Kishore Biyani is the person behind Big Bazaar. He is CEO and MD of PantaloonRetail India Limited. Big Bazaar is based on the concept of Hypermarket or Mega stores. Inthis kind of Hypermarket consumer get all the daily routine products under single roof. Bigbazaar is having more than 215 stores in more than 95 cities and towns.Big Bazaar launched in India with a bang by opening its 4 stores in 4 major cities Bengaluru,Indore, Hyderabad and Kolkata within a time span of just 22 days. Big Bazaar was started inIndia in September 2001. It is now 10 years when big bazaar was started and has a huge number of stores all overIndia.Big Bazaar was started as a fashion hypermarket which had Apparels, Accessories,Cosmetics and General Merchandise on sale. Later on a huge range of other products wasadded to the list. This list includes FMCG products, Electronics, furniture, Stationery, etc.These stores are established on big areas having huge displays and providing cool andNIFT, HYDERABAD Page 5
  6. 6. comfortable shopping experience to consumers. These stores are based on the concept ofWalmart USA.The starting Tag Line of Big Bazaar was ‘Isse Sasta Aur Accha Kahin Nahin’. Aftercompletion of its 10 years in Retail market the company has given a new tag line ‘Naye IndiaKa Bazaar’. In these 10 years Big Bazaar has become favorites among housewives and othergroup of consumers too. In overall it has become the favorite retail store of every Indianfamily.Most of outlets of Big Bazaar are on an area of minimum 50,000 square feet. In biggermetropolis there are some huge stores on an area of 160,000 square feet. Big Bazaar expressstores in small towns are also on 30,000 square feet area only. Big Bazaar also has its ownhouse brand also which it promote in its stores. The most famous of them are Clean Mate,Tasty treat, Sensei etc. Big bazaar has some great promotional schemes too. It offers Buy 1Get 1 Free on many products. There are huge discounts on MRP of many products.Big Bazaar also has special schemes on weekends and weekdays. They keep on promotingproducts by having special display of products. Sampling and testing of many products isavailable in store. Many small companies even launch their products through Big bazaar.There are many schemes by various companies which are available in Big Bazaar only. Bigbazaar also provides consumer durables on Low EMI and interest free installments alsoBig Bazaar operates at 3 levels Super market, Hyper market and Express stores. Expressstores are running in high traffic areas too. It stared in developing areas to take advantage ofReal estate Boom. Big Bazaar has changed the face of Indian consumer market a lot bygiving consumer a lot of alternatives to choose from.Big Bazaar’s CommitmentOur commitment is to deliver sustained growth, through empowered people, acting withresponsibility and building trust with customers. Here’s I am explaining what this means:Sustained Growthis fundamental to motivating and measuring our success. Big Bazaar’squest for sustainedgrowth stimulates innovation, places a value on results, and helps usunderstand whethertoday’s actions will contribute to our future. It is about growth of people and companyperformance. It prioritizes making a difference and getting things done.Empowered Peoplemeans we have the freedom to act and think in ways that you feel will get the job done, whilebeing consistent with the processes that ensure proper governance and being mindful of therest of the company’s needs.Responsibility and TrustForm the foundation for healthy growth. It’s about earning the confidence that other peopleplace in us as individuals and as a company. Our responsibility means we take personal andcorporate ownership for all we do, to be good stewards of the resources entrusted to us. Webuild trust between ourselves and customers by talking not by mouth but by our superiorcustomer service and being committed to succeeding together.NIFT, HYDERABAD Page 6
  7. 7. NIFT, HYDERABAD Page 7
  8. 8. FUTURE STRATEGIES AT BIG BAZAARAs w e k no w s upp l y ch ai n i s t h e ba c k bo ne o f an y i n dust r y. A su ppl y c h ai nco ns i s t s o f al l p a r t i e s i nvo l v ed di r e ct l y o r i n di re ct l y i n f ul fi l l i n g acu s t om e r re qu es t . T he s up pl y ch ai n i n c l ud es n ot o nl y t h e m an u fa ct u re r o rs up pl i e r pa rt but a l so t ra ns po rt er , w a r e ho us e a nd customer part. In retailespecially supply chain begins with the customer and his or her need for the product. In retailsupply chain involved in receiving and filling a customer request.As w e kno w c ust o m e r i s an i nt e gr al pa rt o f t he s upp l y ch ai n. In fa ct t h epri m a r y p a rt o f an y s upp l y c ha i n i s t o s at i s f y c ust om er n ee ds a nd i npr o c e s s gen e r at e p r ofi t f or i t s el f. Th e t e rm s u p p l y c h a i n c o n j u r e s u [images of product or supply moving from to manufacturer todistributer to retailer to customer along a chain. This is certainly part of supply chain, but it isal s o i m po rt an t t o v i su al i z e i nf o rm at i o n, fu nds and p ro du ct s f l o ws al on gbot h d i r e ct i ons o f this chain.In reality a manufacturer may receive material from several suppliers and then supply severaldistributers. A supply chain may include a variety of stages. 1. Customer 2. Retailer 3. Wholesaler/distributor 4. Manufacturer 5. Component/raw material supplierNIFT, HYDERABAD Page 8
  9. 9. Supply chain Process at BIG BAZAAR Procurement cycle Manufacturing cycle Replenishement cycle Customer order cycleThe supply chain Big Bazaar is managed by Future Supply chain, which has developedexpertise in supply chain management of consumer product categories such as fashion food,home and General Merchandise. The company operates from 60 strategically located hubs,servicing more than 2600 retail outlets spread across the length and breadth of the country. Itsnetwork of facilities and specialised expertise enable it to manage more than 3 million SKUs.This requires 30 million supply chains to be managed simultaneously, with their own specificrequirements that need customized solutions.Big Bazaar’s Supply Chain’s transportation capability enables it to implement Factory-Gatelogistics involving pick-up of goods from vendors across the country, national distribution of goods, andcity logistics that includes store deliveries and home deliveries. Big Bazaar’s Supply Chainsis the first organized intra-city transportation services company in India -carrying out not onlyB2B deliveries but also B2C deliveries in the form of thousands of home deliveries every day across thecountry, especially for Furniture and Consumer Durables.Big Bazaar is also working on the vendor network as well as the logistics network. The company has identifiedup to 40 anchor vendors, each with turnovers of US$45 million, to achieve economies of scale. Thegroup is also keen to ensure that its smaller vendors are able to reach turnovers of around US$1million and a growth rate of 40% annually, to be able to pass on the benefits of scales. The company is alsoworking towards bringing its 1,200vendors online, like Wal-Mart.NIFT, HYDERABAD Page 9
  10. 10. In India, Big Bazaar derives significant economies of scale in managing their supply chain. With more than170000 products, the company maintains a strong supplier relationship in a partnership mode, avoiding theexploitative supplier ± buyer transactional philosophy. The IT enabled back-end operationsand supply chain management increases the reliability and efficiency of the business.As part of the operation, Big Bazaar is also undertaking to reduce its warehousing coststhrough a consolidation process. In a country like India, where most retail stores are locatedin the heart of the city²where rents are high and storage space is scarce²supply chainmanagement has even more serious business implications. Future Logistics now handles two-and-a-half million SKUs (or stock keeping units) a day across the Future Group’s variousretail formats around the country. By 2010, this number is expected to increase to more than30 million SKUs a day.Even with 98% accuracy, some 600,000 pieces will not be delivered correctly, resulting in an estimatedsales loss of more than Rs 4 crore a day.Big Bazaar’s four main consumer sectors: Fashion, Food, Home and General Merchandisehave varied product lines, each with their own unique needs that require 30 distinct supply chain solutions.Food Supply ChainIn the present competitive environment customers have become more demanding and askingfor quality food which guarantees the safety. n time delivery is becoming a norm to reducethe inventory holding costs. The food industry is facing challenges due to increasing operationalcomplexity, frequently changing consumer needs, government regulations and short productlife cycles. It requires a very smart, efficient and agile supply chain to manage the everchanging needs of the end customers.Why managing Food Supply Chain is a challenge?The food supply chain is complex and difficult to manage due to its perishable nature andshort shelf life of the products as compared to other supply chains like electronics, homeneeds, consumer durables etc. It also requires a robust infrastructure of warehouses andtransportation network connecting suppliers, manufacturers, distributors and retailers. Thecomplexity of food supply chain increases further because of the belowmentioned parameters1.Food safety requirements2.Regulatory requirements3.Short shelflife of products leading to expiryand wastage4.Product recalls5.Product traceability requirements6.Effective handling of customer complaints7.High order frequencyand lowvolumesNIFT, HYDERABAD Page 10
  11. 11. Food Supply Chain categorization It is basically categorized into two broad categories Perishable and non PerishablePerishable Supply ChainIn perishable supply chain the shelf life for the products is very low. It requires managing the end to endsupply chain with utmost care. The perishable supply chain typically requires a cold chain tomanage it properly. The cold chain infrastructure is very capital intensive. The infrastructureconsists of pre-coolers, temperature controlled warehouses, refrigerated transport etc.Non- perishable Supply ChainThe shelf life for the product is considerable (varying from 3-18 months). Typically FMCG/Processedproducts, staples etc fall under this category. Although the shelf life of the product is 3-18months, the products falling under this category requires strict monitoring of FIF atdistributors end to ensure that the products reaching the end consumer are left with enoughshelf life.What is needed to manage this unique and complex supply chain?1. A well organized supply chain infrastructure of warehouses and transportation covering allthe major cities.2. Sophisticated cold chain for perishable products which guarantees a cost efficient and safedelivery of productsNIFT, HYDERABAD Page 11
  12. 12. 3. Warehouse management system to ensure traceability of products and minimize the lossesdue to product expiry4.State of the art warehouse infrastructure equipped with the sophisticated material handlingequipments to aid cross docking, flow thru which will reduce transit times and inventory5. Adherence to well documented GMP at the storage locations. This would ensure food safetyin storage condition (Warehouses)6. Vehicle tracking abilities GPS/GPRS to continuously evaluate the time to destination. Now Big Bazaar has, Gained and mastered art of managing the food supply chain due to its association with Food Bazaar. In house expertise to manage perishable ( Fruits and vegetables, dairy ,meat, poultry, Bakery ) and non perishable ( FMCG-Food, Staples, Processed food) State of the art warehouses across the nation which can cater to the customized needs. A strong in-house transportation department with fleet of vehicles for every need and type Availability of most advanced warehouse management system which would ensure all aspects like FIF, Lot management, product traceability, product recalls Availability of transport management system with vehicle tracking facilities to track product movement at every stage of transportation ( Real time visibility)Food supply chain of Big Bazaar can be divided into 3 categories:Farm Fresh-foods supply chainCurrently, Food Bazaar stores across the country have concessionaires handling the FarmFresh section of their stores. The concessionaires ensure that the supply chain complexitiesare reduced for the store, because they¶re in charge of the goods that they bring. ver a period oftime Big Bazaar has developed an expertise in managing this farm fresh foods supply chain in the mostefficient manner. Big Bazaar has removed the traditional mandi route supply chain thattraditionally existed in the Indian market, where fruits and vegetables would come a long andtardy way, right from the farmers to finally reach the customers, as depicted below. Food Bazaarhas links with farmers growing potatoes and fruits. It has also sourced produce from farmersgrowing exotic vegetables like red pepper, mushroom, etc.Earlier, agricultural and farm products, would first be collected by aggregators in differentvillages, and then they would sell the fruits and vegetables at the agricultural farm yards, whowould subsequently sell it to a wholesaler. Now semi or smaller wholesalers will buy theseproducts from the larger wholesalers and sell them to different smaller retailers, from wherethe customers finally bought the products.NIFT, HYDERABAD Page 12
  13. 13. But Big Bazaar has shortened the supply chain path in such a way that the farm products cannow directly reach the stores or take a slightly longer route of first getting collected at acollection centre which is then passed on to the processing and distribution centre, fromwhere they would be delivered to the store for sale to customers.These features has enabled Big Bazaar to efficiently carve it s supply chain, reducing irrelevantdelays and fruit s and vegetables wastage. Also farmers are at a benefits since they areselling direct to the retailer, hence cutting out the commission of unnecessary aggregators,wholesalers and farm yards.b) Cold chainA cold chain is a temperature controlled supply chain. An unbroken cold chain is anuninterrupted series of storage and distribution activities which maintain a a given temperaturerange. It is used to help extend and ensure the shelf life of products such as fresh agriculturalproduce,[1] seafood, frozen food, photographic film, chemicals and pharmaceutical drugs.c) FMCG Supply ChainBig Bazaar maintains the supply chain of 3 different kinds of FMCG products ± Food, Non-food, Health &Personal care, with the latter being the latest entry into its product portfolios. While FMCG-Food are againdistributed through cold-chain networks, non-food and health and personal care havedifferent supply chain network.The FMCG-non food category items follow usual general merchandise supply chainnetworks, where products are first stored from the factories to different vendorsor distribution centres, from where Big Bazaar replenishes its stock based on demand of theitems.NIFT, HYDERABAD Page 13
  14. 14. Whereas, health and personal care products may or may not be subject to refrigerateddistribution. They are more or less distributed as non-food FMCG goods too.Future aspects of food retail supply chainKishore Biyani’s Future Group is making a vigorous push to increase its share in the fruit and vegetablesbusiness, a category that has traditionally been an Achilles heel for the country’s largestretailer. The group behind supermarket chains such as Food Bazaar and Big Bazaar isempowering the specialised entity, Future Supply Chains which will now totally manage all theefficient supply chain for fruits and vegetables (F&V), marking a shift away from theoutsourced model it has followed so far.Mr Biyani is betting that by putting in place new sorting and grading technologies, better coldstorage and aggressively cutting out middlemen, he can bring down the prices of fruits and vegetables byabout 15-20% across categories. "The efficiencies created by this exercise will be passed on tothe consumer," he observed. The Future Group now outsources retailing of fruits and vegetables to vendors, whoare allowed to use space in its shops in exchange for a share of their revenue.Mr Biyani¶s move to take direct control of the fruits and vegetables business brings to focus the challengesfaced by organised retailers in selling fresh and perishable goods. India lacks a network ofcold storages and refrigerated trucking facilities that can efficiently transport fresh fruits andvegetables from a farm to the shop-floor while retaining its freshness.Future Group has a separate company that handles its dry vegetables supplies as well, but the new entity willhave independent profit and loss responsibilities as well. It will rent out space from FutureGroup’s stores and separately branded counters will handle sales of fruits and vegetables.Mr. Biyani has recently announce that he is planning to introduce the concept of freezingfruits and vegetable prices. That means, prices of fruits and vegetables will not fluctuatethroughout the year but sold at one fixed price around the year further adding benefits for thecustomers. If Big Bazaar does implements such a scheme, it will heavily depend and rely on its highly efficientsupply chain to deliver seemless supply of products even when demands are very high and cost of products verylow, reaping very less profit..In the process of setting up the retail networks, these large corporations are changing thedomestic agricultural landscape. For starters, they are introducing the Indian farmer tobetter seeds, new technology, supply chain management and food processing. Thesecompanies have already brought in technology that increases the shelf life of fruits andvegetables.Primarily, there are three models being worked on by India Inc. First, a model farm like Bharti’s Field Fresh.Second, contract farming. Third, contact farming. In contract farming, the farmer is supplied seedsand other ingredients by the company. The contractor buys the entire farm produce at a pre-fixed price.NIFT, HYDERABAD Page 14
  15. 15. However, in case there is a supply shortage and the price offered by the government is higherthan the price contracted by the company, the farmer can sell it all to the government.Contact farming is a more complicated. Here, a farmer takes land on lease from other farmers. He isgenerally paid Rs 15,000 per acre every year, while the marginal farmer is employed to work onhis land for which he is paid a monthly salary. But Bharti says it is switching to contract farming becauseof the complexities of contact or collaborative farming.In Ratnagiri, Maharashtra, farmers have formed cooperatives and regularly supply mangoes toretail chains. ³We sold 35,000 tonnes of mangoes from Ratnagiri last year. The farmers managed to get 90per cent of the original cost,´ says Arvind Chaudhary, CEOPantaloon Retail’s food business. If they had gone to a mandi they would have realised only 70 per cent of thecost. This year, Pantaloons Food Bazaar is planning to buy 100,000 tonnes of mangoes. The supply chainis managed such that mangoes are transported to the store a week before they become ripe. Coldchain is used only in the case of potatoes, where 5,000 tonnes are stocked in UP. Pantaloons food business isgrowing at 25 per cent in the entire Big Bazaar chain, which also sells FMCG products.However, there are certain issues that agro-retail chains will have to address before they canmake the farmer smile. Hurdles such as bad infrastructure, high cost logistics management,the middleman and the limiting APMC Act will have to be crossed if retail has to assist the farmer. Since theexisting supply chain allows them to connect with only those farms that are nearest to thecities, those living in the hinterland still have no access to markets. Importantly, the best of thesestores shy away from commenting on the investments.There has also been a call to set up an exchange market for agricultural produce. This freemarket principle, CEO s feel, will liberate the farmer in terms of actual price realisation andkeep him out of debt for the coming season. The National Spot Exchange Limited, an exchange which isdedicated for agri-produce, is supposed to create a benchmark even for the small farmer who cansell only one quintal. The NSEL is in the process of setting up 117warehouses and cold chains of700,000 metric tonnes capacity each to make the exchange operational.Right now, companies are mostly dealing with farmers on the periphery of cities but analysts say they wouldultimately have to invest in cold chains and move into the interiors. Whether companies ² except for those withdeep pockets like Reliance ² will have the courage to do that is in question. According to the confederation ofIndian industry, if India has to double fruits and vegetables production to 300 million tones by 2012, it wouldrequire pumping in close to Rs 20,000 crore. But analysts warn that such investment may not paydividend since it doubles the cost of transportation.Fung Capital, a private equity investment company of Fung families, has decided to invest around $30 million inthe logistics and supply chain arm of Kishore Biyani-led Future group .Future Supply Chain Solutions(proposed new avatar of Future Logistic Solutions Ltd.), in return, has agreed to divest up to 26 percent of equity stake in favour of the private equity firm.Future Supply Chain Solutions, which presently sevices over 1,100 retail outlets, manages over 2.6 million SKUsand over 3 million sq ft of warehousing network spread over 30centres, and handles a fleet of over 500 vehiclesplying across the country, will use the newly raised capital for enhancing logistics infrastructure,strengthening technology platforms, and expanding supply chain network of the company for its Big andFood Bazaar arms.³We are building a world class supply chain infrastructure for theconsumption products in India which is presently very limited, despite it being a critical support required inIndia’s rapidly growing economy. We will be investing in physical as well as technology infrastructure thatNIFT, HYDERABAD Page 15
  16. 16. will reduce the time-to-market and cost-to-market for fashion and apparel and other consumercategories,´ said Anshuman Singh, Managing Director of Big Bazaar. Another importantfuture aspect of supply chain rather the biggest driver in consumer logistics is going to be zerodefect in managing the supply chain. While infrastructure, technology, automation, processes andpeople will all play an important role, zero defect can only be achieved through verticalintegration across the entire supply chain²from raw material supply, production, wholesaleand retail. The different parts of the supply chain will no longer be able to work in silos as they dotoday.LOGISTICSOne of the most important challenge in organized retail in India is faced by poor supply chainand logistics management. The importance can be understood by the fact that the logisticsmanagement cost component in India is as high as 7% -10% against the global average of 4%- 5% of the total retail price. Therefore, the margins in the retail sector can be improved by3% - 5% by just improving the supply chain and logistics management. In India, withdemand for end-to-end logistics solutions far outstripping supply, the logistics market fororganized retail is pegged at $50 million and is growing at 16%. It is expected to reach $120-$130 million by 2010. Organized retail on the other hand is growing at 400% and is expectedto reach around $30 billion by 2010.Even supply chain and logistics firms like Hong Kongbased Heng Tai Consumables and ABS Procurement Co and ACM China(the greenhousespecialist) is also eying the opportunity for managing the supplies.The supply chain management is logistics aspect of a value delivery chain. It comprises all ofthe parties that participate in the retail logistics process: Manufacturers, Wholesalers, andThird Party Specialists like Shippers, Order Fulfillment House etc. and the Retailer. Here,logistics is the total process of planning, implementing and coordinating the physicalmovement of merchandise from manufacturer to retailer to customer in the timeliest,effective and cost efficient manner possible.Logistics regards order processing and fulfillment, transportation, warehousing, customerservice and inventory management as interdependent functions in the value delivery chain. Itoversees inventory management decisions as items travel through a retail supply chain. If alogistics system works well, the retail firm reduces stockouts, hold down inventories andimprove customer service – all at the same time. Logistics and Supply Chain enables anorganized retailer to move or store products more effectively. Efficient logistics managementnot only prevents needless movement of goods, vehicles transferring products back and forth;but also frees up storage space for more productive use.Retail analysts say on-time order replenishments will become even more critical once theWal-Mart/ Bharti combine begins operations - the American retailer works almost entirely oncross-docking and is likely to demand higher service levels, including potential levies fordelays in shipment.The efficiency and effectiveness of supply chain and logistics management can also beunderstood by the fact that modern retail stores maintain lower inventories than traditionalretail. In India, generally in the traditional kirana stores, three weeks inventories are kept;while in a modern retail store like Hypercity, its nine days and its under two weeks for FoodBazaar. Now, it is beneficial for both the manufacturer as well as the retailer. If we gothrough the following food supply chain in India, we find that a lot can be improved byNIFT, HYDERABAD Page 16
  17. 17. maintaining the supply chain and logistics, their availability on a relatively large scale andsupplying them to customers on a relatively small scale. Retailer is a Person or Agent orAgency or Company or Organization who is instrumental in reaching the Goods orMerchandise or Services to the End User or Ultimate Consumer.FOR BIG BAZAARBig Bazaar sells variety of merchandise, a t a f f o r d a b l e r a t e s , t h e prices of which itclaims are lowest in the city but the level of services offered is also very low. Usuallythe items are clubbed together for offers as on the lines of Wal-mart and Carrefour and italso offers weekend discounts. It currently o p e r a t e s o u t o f 6 4 s t o r e s a n dt o p 1 5 s t o r e s r e g i s t e r a cumulative footfall of 27 lakh a month on an average.P R O B L E M S A T B I G B A Z Z A R LOGISTICSSignificant losses/damages during shipping.The next problem in setting up organized retail operations is that of supply chain logistics.India lacks a strong supply chain when compared to Europe or the USA. The existing supplychain has too many intermediaries: Typical supply chain looks like:- Manufacturer - Nationaldistributor.Regional distributor - Local wholesaler - Retailer -Consumer. This implies that global retailchains will have to build a supply chain network from scratch. This might run foul with theexisting supply chain operators. In addition to fragmented supply chain, the trucking andtransportation system is antiquated. The concept of container trucks, automated warehousingis yet to take root in India.Inadequate infrastructureThe lack of proper infrastructure and distribution channels in the country results in inefficientprocesses. This is a major hindrance for retailers as a non-efficient distribution channel isvery difficult to handle and can result in huge losses. Infrastructure does not have a strongbase in India. Urbanization and globalization are compelling companies to developinfrastructure facilities.The storage infrastructure, too, is severely restricted. In2006, India had a total warehousingcapacity of 81 million tonne. Like the rest of the infrastructure sector, warehousing is highlyfragmented and unorganised Transportation, including railway systems, has to be moreefficient. Highways have to meet global standards. Airport capacities and power supply haveto be enhanced. Warehouse facilities and timely distribution are other areas of challenge. Tofully utilize Indias potential in retail sector, these major obstacles have to be removed.Almost 78% of total freight is transported by road.Almost 78% of total freight is transported by road . But, according to the FICCI-E&Y retailreport, roads connect less than half of the half a million Indian villages. The normal distancecovered by trucks and trailers in India are250-300 km a day, whereas the international normis 600-800 km a day. Most roads in India are designed to carry a maximum gross weight of16.2 tonnes, which allows for a maximum loading of about 9 tonnes. This severely restrictsthe ability to transport goods on larger vehicles.NIFT, HYDERABAD Page 17
  18. 18. Warehouses located far from city:Some of the warehouse are located in villages and are far from the city so it takes time forgoods to reach mall.RECOMMENDATIONSImprovement in supply chains:-Big bazzar should use more better techniques for improvising its supply chains. Theorganisational structure and the business model of Wal-Mart are its winning-formula forsome markets. But this also dooms it to failure in others. The heart of the matter is high-volume-low-cost strategy, which made it a success in cost-conscious smaller, everybody-knows-everybody cities in the US. But this very strategy doomed it to failure in larger(anonymity,high consumerism) cities in the US. A very high real estate cost in big cities wasalso detrimental to its strategy in such cities.Warehouse location :-Though it is a cost cutting formula of big bazzar, but now the Indian scenario has changed.Though it has its own logistics called Future logistics, it should try some other ways toimprove its in housing of goods. Many a times it happens that goods are not available tocustomers as the time taken between ordering and processing is very long.Improvement in packaging:-Big Bazzar should ask suppliers to send goods with good packaging so that losses due tobreakage should be avoided. Moreover its own handling and carrying should be improved.InfrastructureInternal ware house of big bazzar has very low capacity. Its completely hoch- poch. Due toinsufficient space of storage losses are very frequent. Shop lifting especially internal is veryhigh. It should allow its suppliers to have a track of their goods so that when stock finishesthey will automatically supply.NIFT, HYDERABAD Page 18