insights into india supply chain

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Direction Lessons ADvAntAge mArkets process

By Jayanth Jayaram and Balram Avittathur

Dr. Jayanth Jayaram ([email protected])is a Full Professor of Management Science and Moore Research Fellow at the University of South Carolina. Dr. Balram Avittathur is a Full Professor of Operations Management at Indian Institute of Management Calcutta. He can be reached at [email protected].

India is a highly attractive market for multinational companies. But to successfully source or sell products there, they need to realize that conditions may differ greatly from the more developed economies they are used to. This is especially true when it comes to the supply chain. The framework offered here can help these companies pursue the right supply chain strategy to advance their business goals in India.

A modern highway infrastructure, tracking technologies like Global Positioning System (GPS), techniques such as cross docking, and state-of-the-art container ports have all become the norm for supply chains in the developed world. They are far from the norm,

however, in the lesser developed countries of the world. For multinational companies that are doing businessor that want to do businessin these countries, it is vital to under-stand the supply chain gaps and challenges.

The focus of this article is on supply chain conditions in one emerging economy that has enormous long-term growth opportunity: India. In addition to a rapidly growing market, India possesses a workforce that is considerably younger and larger than more developed regions like Europe and North America. These factors have prompted multinationals to seri-ously consider India both as a source for manufacturing and as a market for their goods.

Yet doing business in India brings its own set of challeng-esa slow and cumbersome bureaucracy, infrastructural constraints such as shortages in electricity and skilled labor, and road and port congestion, among them. With respect to supply chains, what may be taken for granted in devel-oped economies is often the exception rather than the rule in India. Shipments by road that can be completed in three days in the U.S., for example, could take as long as nine days in India. Similarly, ships can wait up to five days to dock at an Indian port, compared to little or no wait time in Europe. Further, there are few logistics firms in India with a fleet size larger than 100 trucks. Moreover, very few trucks are fitted

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with a GPS tracking device, thereby prevent-ing any real-time tracking of shipments.

At the same time, Indian firms lag in supply chain performance. For example, Pantaloon Retail, a major Indian retailer, had inventory equivalent of about 100 days sales from 2006 to 2009. Even after improvements made in 2010, their inventory levels fell only to about 77 days of sales. Yet this is still well above the inventory levels of leading retailers in devel-oped economies. Walmart, for example, had an inventory equivalent of only 29 days of sales in 2010. Additionally, many supply chain activi-ties such as transportation, warehousing, and retail store replenishment remain very frag-mented in India. A big part of the problem is that organized retailing accounts for less than 10 percent of the countrys total retail trade.

Given the state of Indias development, this article attempts to capture the key challenges facing companies doing business in India. We categorize these challenges as demand-side challenges and supply chain challenges. We then offer four viable supply chain strategies that companies can consider for succeeding in India and summarize key lessons for supply chain professionals based on our research and experience.

Demand Side ChallengesMultinational firms targeting the Indian mar-ket may find it difficult to succeed by offering products that worked well for them in their home markets. Multinationals need to rec-ognize, for example, that Indian consumers overall are still many years behind customers in developed economies in terms of seeking sophisticated higher end products. The coun-try still has a large population that is poor, and for this segment the most important criterion for product purchase tends to be price.

The experience of Indian companies is instructive here. A number of these firms such as Hero MotoCorp (worlds leading

Garry Hunter



India

two-wheeler manufacturer), Hindustan Unilever-HUL, Maruti Suzuki (leading car manufacturer), and Big Bazaar (leading retailer) have focused on this segment, which is heavily represented in the rural and semi-urban regions. In serving these segments (popularly known as the Bottom of the Pyramid, or BOP), they typically emphasize low-frill, standardized products. They also seek to expand their customer reach. An example of one such initiative by HUL is called Project Shakti. The ini-tiative uses self-help groups (poor women in rural areas) as direct-to-consumer sales distributors for products such as soaps and shampoos. HUL helps these individu-als to become micro-entrepreneurs by providing train-ing in sales and in bookkeeping. By 2009, about 45,000 women were involved in this project, averaging annual sales of approximately $3,000.

The severity of the challenges faced on the demand side can be seen through two main factors: (1) market penetration and customer reach and (2) sophistication of product features. Obviously, low market penetration and high customer reach potential points to a big market opportunity that is waiting to be tapped. Passenger cars, laptop computers, and appliances such as televisions, refrigerators, and washing machines all are examples of such products. While the market penetration for cars per thousand people exceeds 500 in most developed countries, it is still below 50 in India and China. Yet as income levels in these countries rise, the pace of market expansion for these products accelerates.

Manufacturers can exploit these market opportuni-ties by making affordable products for consumers with lower income levels and by understanding the opera-tional issues that limit consumption. To illustrate, Tata Motors has designed its $2,200 Nano car in a frugal way that uses fewer components than a conventional com-pact car, while performing nearly on a par. Apart from a lower purchase price, cars like the Nano are attractive to customers with limited household budgets because of the high mpg. Another good example of understand-ing demand comes from Korean manufacturers LG and Samsung, which have innovated to make their refrigerators and washing machines more attractive in

Indian markets. Specifically, the machines they sell in India consume less electricity and water, both scarce resources in most Indian households.

Very often, a company from a developed economy enters an emerging market like India with established products that are relatively sophisticated and have many features and high levels of customization. But such products that are popular in developed markets may appeal only to a small segment of an emerging economy. For instance, even today most refrigerators that are sold in India include a freezer. However, most Indian house-holds seldom use the freezer, preferring instead to eat freshly cooked food rather than reheating frozen food. Nor is it popular to put ice in soft drinks, reducing the need for an icemaker in the unit. Without consider-ing demand and usage (as Samsung and LG did in the

example above), multinationals end up try-ing to sell bulkier products with redundant features at a higher priceand higher utility bills for the customer.

Supply Chain ChallengesBeyond the demand challenges, Western firms may find it difficult to replicate supply chain processes and practices in India that

have been successful in their home countries. For one thing, the necessary infrastructure that enables superior supply chain management practices is considerably lag-ging in India. In particular, infrastructure development is needed in such areas as transportation, warehous-ing, information technology, availability of competent supplier clusters, and managerial skills. (Exhibit 1 lists some other conditions that also can impede supply chain development in India.) In this environment, companies are challenged to maintain supply reliability while keep-ing costs competitive.

EXHIBIT 1

Conditions that Heighten the Supply Chain Challenge

Availability of land and the related bureaucracy of acquisition

High electricity cost as share of total operating cost

High logistics cost as a share of total cost

Low price/weight ratio of shipments (hence, less opportunity to use higher cost expedited transport modes like air)

High process complexitymany different types of raw materials and processes, large supply base)

Low share of inputs sourced from nearby suppliers as a share of total purchases

Limited access to world-class supplier clusters

Limited information sharing and integration with supply chain partners

With respect to supply chains, what may be taken for granted in developed economies is often the exception rather than the rule in India.



India

Perhaps the most critical challenge faced by manu-facturing firms in India is the availability of land. This is a densely populated country with large portions of land devoted to agriculture. Ownership is extremely fragmented. Acquiring a tract of land with more than 100 acres can be extremely time consuming, requiring extensive interactions with government agencies. Large-scale projects of steel makers such as ArcelorMittal and POSCO, automobile manufacturer Tata Motors, and big power projects have all been delayed by the bureaucratic mechanisms associated with acquiring land. This challenge often pushes firms to locate their factories in areas where it is relatively easier to acquire land. While this may be a near-term practical solution, it may not be the best decision from a supply chain standpoint because of the distance to the source of raw materials and consumer markets as well as to the accessibility to ports and roadways.

Another critical supply chain challenge relates to electricity. Electricity generation capacity in India has not kept pace with the needs of the burgeoning econ-omy; in fact, the countrys Prime Minister often spe-cifically points to this as a growth-inhibiting factor. This sector has been hampered by issues such as availability of large tracts of land for new projects, constraints in coal production, pollution, and various regulatory con-trols. Power outages are common in many parts of the country, particularly during summer months and peak consumption hours. Unreliable electric supply can be highly disruptive to a supply chain, especially in opera-tions incorporating just-in-time and lean manufacturing techniques. Firms that are concerned with tight lead times and delivery delays cannot afford to have disrup-tions in power supply. So they often rely on their own power generation using diesel generator sets, a practice that increases their energy costs.

Other infrastructural issues that hamper supply chains in India include the scarcity of express highways,

the inability of ports to handle goods quickly, and the lack of modern technology in warehouses. Though there are considerable investments underway to address these issues, such projects take large amounts of time in India. By comparison, emerging economic countries like China and Brazil have been able to complete infrastructure proj-ects on a considerably shorter timeline than has India.

Apart from the infrastructural challenges, businesses in India dont always have access to the best supply chain services for a variety of reasons. The low acceptance of integrated third party logistics (3PL) firms in India is one part of the problem. The cost differential between the integrated 3PLs and existing transport firms is wide. So shippers find it difficult to justify the additional cost of a 3PL even though they would be receiving higher tech-nology support and generally superior service from such a provider. Further, the infrastructural challenges men-tioned above constrain the internationally known 3PLs from operating with the same speed and efficiency as they do in developed economies.

In addition, supply chain services based on informa-tion technology, particularly services that enable manu-facturers to share data and information with their sup-pliers and channel partners, are less advanced. Thus, supply chain practices such as vendor managed inven-tory (VMI) or collaborative planning, forecasting and replenishment (CPFR) are rarely pursued. This, in turn, serves as an impediment to developing supply chain management strategies.

Finally, despite the proliferation of business schools and the emergence of specialized programs in supply chain management, the availability of managerial talent with expertise in the key supply chain functions (pro-curement, logistics, demand planning, process man-agement, and so forth) remains limited. The supply of good supply chain talent is projected to fall well short of expected demand. And while membership in inter-nationally recognized professional associations such as APICS, the Council of Supply Chain Management Professionals (CSCMP), and the Institute for Supply Management (ISM) is on the increase, more widespread

Infrastructural issues that hamper supply chains in India include the scarcity of express highways, the inability of ports to handle goods quickly, and the lack of modern technology in warehouses.

Research Methodology

Our research sample included participants in an execu-tive MBA program on Leadership in Manufacturing at a top business school in India. The average supply chain experience of the participants in this study was roughly seven years. We formulated our areas of inquiry based on past seminal works in this area, relevant articles in practi-tioner magazines, and the domain knowledge expertise of both authors in supply chain management.


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participation is required to advance the overall profes-sional knowledge in this business discipline.

Choosing the Right StrategyFrom our discussion of the demand side and supply chain challenges, its clear that pursuing a one-size-fits-all supply chain strategy would not be wise for firms desiring to participate in the emerging economy of India. Based on our field experiences and research with a number of supply chain professionals in this country (see accompanying sidebar on the research methodol-ogy), we have developed a framework to help companies determine the right supply chain strategy for them. The approach considers product design and supply chain issues for different combinations of demand side and supply chain challenges. (See Exhibit 2.)

When the firm is challenged most severely on the demand side (upper left quadrant of Exhibit 2), it should focus on developing local products with minimum fea-tures, combining various components and inputs. In addition, the products should be launched in high vol-umes. The firm should provide minimum variety and follow a standardization design strategy. This approach would enable it to exploit efficiency and economies of scale not only in procurement and pro-duction but also in logistics and distribu-tion. Any product customization should be delayed as late as possible in the supply chain. Such a frugal design would enable the firm to sell the product at a lower price, which in turn would attract greater volumesa critical factor in keeping costs low. A company with high demand-side challenges also could target direct mar-keting (as described in the HUL example earlier) and easy financing options via the use of mass marketing; this, as opposed to relying heavily on dealers, advertisements, and brand power.

Siemens, for instance, has a clear-cut strategy for entry-level products in India. The company plans to launch close to 30 products in different product categories by 2012 with an estimated market size of about $28 billion. General Electric plans to spend over $3 billion over the next six years in creating at least 100 health care products and services with lower costs, increased access, and higher quality. One such example is an electrocardiogram (ECG) device specifically developed for

use in rural Indian markets. Godrej & Boyce, a leading Indian manufacturer, has

just launched a low cost refrigerator named Chotukool (translated as Little Cool) that weighs less than 22 lbs and has a capacity of 8 gallons. The unit relies on cooling chips instead of the conventional energy-hungry compres-sor. In addition to running on electricity, the Chotukool can be operated by battery. It consumes only about 55 watts, while keeping the food at 20 degree Celsius below ambient temperature. With far fewer parts than other refrigerators, this product has relatively low maintenance requirements. To address the issue of rural reach, the manufacturer intends to sell this product by forming part-nerships with village entrepreneurs that it has identified and developed.

When the firm is challenged only by the constraints in the supply chain (lower right quadrant), it should focus on designing for supply reliability. Petroleum products and FMCG (fast-moving consumer goods) are examples of products that typically fall in this category. Operations in emerging economies are often based on a low-cost criterion. Yet many of the decisions based solely on costs sow the seeds for unreliable supply chains. In a supply chain-constrained scenario, before making any

EXHIBIT 2

Matching Strategies to Demand-Side and Supply Chain Challenges

Develop Local Products withMinimum FeaturesLocalize Product Only: Frugal design Minimal customization and variety High volume with low price Efcient supply chain

Low

High

Low

Severity of Supply Chain Challenges

High

Severity ofDemand

SideChallenges

Develop Local Products AndDesign Reliable Local Supply ChainLocalize Both Product and Supply Chain: Minimal product design and reliable supply chain design High volume and low variety Efcient and reliable supply chain

Examples Siemens solar x-ray machine GE ECG device Godrej Chotukool refrigerator

Examples Ford Motors India Toyota Etios sedan

Serve Global MarketsLocalization Not Required: Suits high variety production without sacrice of scale Global dominance on cost

Design Reliable Local Supply ChainLocalize Supply Chain Only: Focus on long term sustainability Partnerships Reliable supply chain

Examples Gems and jewelry, garments, motor bikes, mobile phones and other electronic products, pharmaceutical drugs, automobile components, machine tools and components

Examples Reliance Jamnagar Renery Kraft Foods (Cadbury India) Nestle India Hindustan Unilever (HUL)



India

low cost decision, the firm needs to evaluate the reli-ability issues associated with that decision. In the long run, a company is better off investing in a supply chain that is costlier but much more reliable.

The Reliance Jamnagar refinery offers an instructive example of investing in a reliable supply chain. Because much of the crude oil for the refinery is sourced from abroad, Reliance Jamnagar could have located its refin-ery anywhere along Indias vast coastline with a port facility. The firm chose a barren underdeveloped locality near Jamnagar town. It created an entire infrastructure for the operation including roads, port, and a township for the employees. The company addressed a shortage of water by building a desalination plant while invest-ing in training for nearby villagers to become electricians and welders. By planting over two million trees, Reliance Jamnagar also won the support of local residents. Instead of looking at these investments as money drainers, the firm viewed them as fundamental to creating a reliable supply chain. This refinery is today one of the most effi-cient in the world and serves faraway global markets despite being distant from crude oil sources.

Cadbury India (Kraft Foods), Nestle, and HUL offer interesting examples of multina-tional firms that have created reliable supply chains in India:

Instead of the conventional arms length relationship, Nestle forged strong long-term relationships with its principal supplier of raw materialthe farmer. The company invested in training and educating farmers, improved irrigation facilities, introduced scientifically proven agricultural practices, helped with financing, and invested in facilities such as milk collection centers.

Cadbury India pioneered cocoa cultivation in the country and has a history of collaboration with local uni-versities and farmers. Today it enjoys a 70 percent mar-ket share of the Indian chocolate market.

As a response to the unreliable electricity grid and to conserve energy, HUL reduced its unit energy consump-tion by 41 percent from 2004 to 2010. It has invested in tapping energy from bio-fuel and wind. Now, renew-able energy is 9 percent of the companys total energy consumption. HUL has launched vendor-development initiatives to create high quality, flexible and reliable sup-pliers. It also has invested in a strong information tech-nology infrastructure that enables collaboration with suppliers and distributers.

The upper right quadrant of our framework represents situations where the firm is tested both by

demand and supply chain side challenges. The suggested approach here is to design products for local consump-tion and design supply chains that are specific to India. Two companies in the automotive industry that have done this successfully are Ford Motor Co. and Toyota.

Ford India has committed to spend $1.7 billion to become a major player in the Indian car market, which is expected to grow to nine million vehicles by 2020. One notable success to date is the launch of its compact car Figo, which has trebled its market share to 4.5 percent in a span of three years. To ensure an efficient and reli-able supply chain, Ford India built an engine plant in Chennai that can smoothly switch over from gasoline-powered to diesel-powered engines. The result: flexible production lines that can produce a wide variety of prod-ucts. In fact, the plant can build up to 530 variants for the Figo alone.

Toyotas strategy was to enter the country through a joint venture with Indias Kirloskar Motors. Though not always successful, joint venture partnerships can be an

effective way of doing business in India. As we noted earlier, many foreign firms are totally unaware of the critical success factors of doing business in this country. Complicating matters, because they come from environ-ments with more developed infrastructure, they often dont have the experience or managerial skills to handle the challenges of working in a less-developed economy. A local partner can help greatly in dealing with government agencies and the local community as well as in acquiring land. The partner can help identify the right type of sup-pliers, distributors and employees required in the Indian context. It also can serve as a quick bridge in assimilat-ing the social and cultural valuesa critical competent of business success. Toyota has recently launched the Etios sedan that targets a broader market; its a high-end vehicle at prices starting from just $12,000.

Finally, the last quadrant (bottom left) depicts a situation in which the severity of demand and supply chain challenges is low. Products in the quadrant would include, for example, garments, televisions, and mobile

Although India has come a long way from being a bureaucratic economy to a globally competitive open market, companies need the local connection to maintain seamless supply chains.


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phonesall categories in which market penetration and customer reach in India is catching up with the more developed economies. Because these products are rela-tively affordable and enjoy huge overall demand, greater product sophistication and features does not necessarily result in lower sales. In fact, firms can profit by offering higher product variety.

Because of the low supply side challenges in this cat-egory, production in India and the supply chain would be highly reliable, enabling these products to be produced at a much lower cost than in developed economies. In this scenario, a firm could tap India as a global sourcing hub to serve its worldwide markets. Examples of where this has worked include gems and jewelry, garments, motor bikes, mobile phones and other electronic prod-ucts, pharmaceutical drugs, automobile components, and machine tools.

Supply Chain Lessons LearnedOur research and analysis into the state of supply chains in India has yielded some important lessons learnedlessons that may well resonate with companies seeking to improve their supply chain capabilities in emerging econ-omies such as India. Six takeaways deserve mention here:

1. Carefully Analyze the Infrastructure: It is important to consider infrastructural issues such as acquisition of land for plant or distribution center devel-opment, access to ports and highways, and supporting information technology. These challenges can be for-midable in India and may tempt firms to go with easier, low-cost choices. But the better approach may be to make the longer and more time-consuming infrastruc-ture investments that lead to success over the long term.

2. Deploy Context-specific Energy Strategies: Energy poses another serious challenge that can jeop-ardize an otherwise well-conceived supply chain strat-egy. To avoid this outcome, we suggest pursuing energy strategies that reduce reliance on costly sources like diesel and oil; developing energy-efficient products with particular attention to the Indian context; and carefully considering customer preferences in weighing tradeoffs between more options and cost efficiency. The examples of HUL, Godrej & Boyce, and GE mentioned earlier illustrate these strategies.

3. Plan on Developing the Workforce: An effec-tive supply chain requires specialized talent in key areas such as global procurement, lean manufacturing, busi-ness analytics, and strategy development. In addition, you need logistics professionals with a background and

experience in working with 3PLs. These capabilities are not yet plentiful in India. Firms doing business here will need to work on developing and then retaining the needed talent pool. Because India has a relatively young workforce with a great desire for career growth, an effec-tive talent deployment strategy is vital.

4. Design Products for the Indian Market: Localized product design is characterized by basic functional features and few frills, locally available com-ponents, and alignment with existing manufacturing capabilities. The successful cases of Siemens local-ized pacemakers, Godrejs Chotukool refrigerator, and General Electrics ECG validate this design approach. Many western firms like GE, Intel, and Siemens have already shifted a substantial amount of their global design activities to India, taking advantage of the lower costs and availability of product design talent. These research centers could catalyze the innovation of local-ized products and help the foreign firms build a larger presence in India.

5. Align Product Design and Supply Chain Design: Effective product design and supply chain design should be considered simultaneously. Our frame-work (Exhibit 2) offers direction on some choices that are effective based on two sets of challenges: demand-side and supply chain. If demand and supply side challenges are relatively low, for example, an effective approach for the Indian market would be to build high-variety products.

6. Work with a Local Partner: It is important to choose the right local partner. Although India has come a long way from being a bureaucratic economy to a glob-ally competitive open market, companies need the local connection to maintain seamless supply chains. Building relationships with local partners and enhancing reli-ability on the supply side are essential to preventing or mitigating supply chain disruptions. In the case of a dis-ruption, firms can leverage their own expertise in dealing with disruptions in their home country with the knowl-edge and access of local partners to return to normal operations as soon as possible.

Collectively, these lessons learned form an initial knowledge base that needs to be constantly fine-tuned and updated because of the fast pace with which this important economy is growing. Yet we believe this researchand the framework developed from our inter-viewsprovide useful guidance for any company seek-ing to do business successfully in the dynamic Indian market. jjj


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insights into india supply chain

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