Top 5 trends in SCM in India
ET Intelligence Group
June 21, 2006
India is on the global supply chain map, and there’s no doubt about that anymore. From IT to auto parts, from
concepts and design to hardware, almost every major global company now sources from India. And that in
turn has placed some extremely interesting challenges for supply chain management, not just for Indian
companies, but multinationals as well.
Industry always had supply chain in some form, if not in name. It would be called commercial, or dispatch, or
stores, or billing. It would be more oriented as a means to get the goods to the consumers without much
thinking on its strategic or financial implications, both short and long term.
That was ten years ago.
Today, supply chain management is emerging as a full-fledged discipline in its own right. Careers can be
started and made in SCM, departments are being reorganized into ‘ Supply Chain’, ‘logistics’ headings and a
great deal of strategic vision has come into being. Changes unleashed by India’s increasing integration into
the global supply chains are changing the very fabric of business. Here we list some of the key trends that
will shape India Inc’s supply chain management. All are linked to a booming economy and improving
infrastructure- two vital factors on which SCM heavily depends for its growth.
1. From cargo to express: As a result of industrial and regulatory liberalization since 1991, India’s demand
patterns and demographics are changing so rapidly that companies need to fulfill a demand today, not
tomorrow. They need to cut time to market like never before in their histories. This compression in time
to market has only become more severe these days. This in turn created the need to deliver fast, and
more importantly, deliver with a great deal of certainty about its whereabouts. In response, an entire layer
of service providers evolved since 1992-93. More truckers rebranded themselves into logistics providers,
and when that proved just another form of trucking, and insufficient, evolved further into express- time
sensitive, guaranteed delivery- mode sometime around 2000. This shift was considerably assisted by the
realization that users were willing to pay a premium for the savings in time and reduction in uncertainty.
This premium more than offset the drop in operating margins that hit truckers and distribution providers
due to ever rising fuel prices on one hand, and intense price competition on the other, which cut margins
down to as low as 5%. By contrast, operating margins of express-mode logistics providers are even today
14-18% and are much less sensitive to cost fluctuations. This trend towards express got another fillip with
the advent of global scale giants like UPS, FedEx, TNT and DHL who redefined investment, branding in
SCM, technology and systems. This trend towards express logistics is only just gathering pace. Any
serious player today projects speed and network- two crucial express prerequisites, and not heritage or
2. Warehousing: Usually seen as a backend job, a necessary evil fostered onto business due to archaic
laws that made it more cheaper to put up warehouses in every state, warehousing is now changing into a
strategic asset as companies realize that bundling in an efficient re-distribution point with express
movement gains them competitive advantage. Crores of investment from Indian companies like Gati, TCI,
Safex, AFL and Om is going into refurbishing sheds, getting IT, security, insurance and manpower and
average warehouse sizes are increasing to over 60,000 square feet, though far below global standards.
Metro markets are being ringed by modern 40-foot ceiling controlled access warehouses that allocate
space dynamically depending on demand, price and ageing. MNCs like Exel, Sembcorp and Toll are
getting in as well. Warehouse managers now provide much more information to their customers than just
stock position; these are increasingly becoming the watchdogs of customers on the ground, alerting for
ageing, or lack of space or non-viability proactively. Due to this surge in interest in warehousing, owners
of land are now keen to let out space for long term as well with variety of rent/ lease agreements. As
value added tax spreads in India, warehousing networks will shift as well: you will have 4-5 large mother
warehouses feeding many small, pure reconsolidation warehouses nearer markets. Warehousing will then
be determined by business logic, not taxation.
3. Banking: banks were usually seen as providing working capital in the value chain of the company, but
over the past two years, banks have started taking a far more active role in every link of the supply chain,
moving away from lenders to financial partners. In the earlier mode, the banks looked at each entity on its
own merit, and went by fairly standard and rigid ‘permissible bank financing’ kind of formulae. Now,
banks are trying to look at value chains around large manufacturing companies, looking at them like
OEMs. They are looking to finance the suppliers and distributors of OEMs. They consciously devise
solutions such that credit quality of the OEM rubs off on suppliers and distributors, enabling these smaller
entities to get required financing at cheaper rates. This helps all parties in the value chain, as production
and material movement becomes smoother backed by ready and cheap financing. In practically every
industry, we find such partnerships developing and this trend will accelerate in a rising-cost environment
such as exists today. The banks, in essence, are moving away from a financial risk to a performance
guarantee based line of credit. Because it’s the bank financing the supply chain, its also in their interest
that suppliers be fiscally more prudent, disciplined and deliver on time- crucial prerequisites for
4. International impacts: India is now increasingly impacted by global mergers and acquisitions, and the
trend will only intensify. Two trends will drive this: as more MNCs source from India, they ask their
logistics providers to tag along; eventually in order to grow , these acquire local players or their existing
offices are merged. Secondly, companies now see India and China as the two major drivers of trade
globally and struggle with an eye to acquire create networks within India as a strategy. DHL bought out
Blue Dart in late ’04, and took started the integration of Exel into itself in June ’06 in India, creating one
of India’s largest such providers. Toll of Australia bought out Singapore-based Sembcorp, which has
warehouses in India as well, though Toll has no plans to change in India as yet. Linfox, another Australian
company is also looking at India for warehousing, as it feels the need to globally expand and create scale.
The recent controversy of Dubai Ports was felt in India as well. Australia’s AMP Capital also bought
into Gati in early ’06, while UPS’s acquisition of Menlo worldwide in the US would also change the
structure here in India. Global giants are increasingly looking to provide seamless connections into and out
of India, and we should see changes on this front accelerating in the later half of this decade as well.
Ever since China allowed MNCs to acquire their local partners, UPS and FedEx have done so quickly,
getting control over the entire chain- that trend should be more visible in India as well.
5. Information drive: IT is literally the lifeblood of SCM, and Indian providers are realizing it. Even within
the past five years, IT awareness and spends have risen. Investments have shifted from just pure
business software to operations hardware, disaster recovery, database management, ERP, SCM
planners, dynamic planners, and track and trace. Even though the penetration of GPS and RFID remains
low, companies and service providers are fully aware of their uses and benefits, and experimenting as
well. The fact that latest servers, drives, software and programming arrives in India almost the same time
as in the US points towards SCM being a major IT growth segment. Indian majors like Infosys, Satyam
and Wipro have started up divisions to focus on SCM software in India, alongside their US/ Europe
focus. Open source like Linix is being experimented with in companies like Om Logistics. The nature of
IT investment and application is changing and this trend bodes well for IT and software in India.
There are several other impacts visible as well- jobs in supply chain are increasingly well-paid, strategic in
nature. Senior persons of ranks of directors head the SCM department. Innovations are beginning to emerge
all across- from planning to delivery to operations. Infrastructure is improving- that’s a trend that can only be
beneficial for India Inc.