SC integration imperative for FDI

India is welcoming the foreign brands with FDI relaxations. But groundwork is required for integrated supply chain management.
FDI & SC integration

The retail sector in India worth more than USD 400 billion and is expected to further grow at a rate of around 30 per cent per annum for the next few years. Already many of the major global retail brands are present in India and many more have exhibited their interest in entering this vast, complex and exciting retail market. The retail industry is witnessing growth mainly because of the demand coming from Indian consumers who, due to the increase in disposable income, want to consume products offered by global brands. The Indian market is already competitive with the presence of global plus domestic retailers vying to secure the attention of their target set. In such a scenario, the competitive advantage that these retailers derive is not only from product differentiation but also from the fact that how quickly they are able to launch their latest offerings in the target markets. Thus arises the importance of supply chain management in adequately fulfilling this requirement of retail industry and providing the differentiated advantage of reaching out to consumers faster than competition.

SCM is the winning key 

In essence, retailing is mostly about supply chain management. And while the retailing giants might have a strong expertise in other markets, in India it will be a different game altogether. While we do have in India the necessary infrastructural set up in place, there is still a lot of potential to further smoothen the entire infrastructure to achieve greater cost efficiencies. It may be noted that in India approximately 30 per cent of the produce goes waste due to logistical predicaments arising from traditional supply-chain network, insufficient warehousing capacities, poor road and rail connectivity, lack of cold storage chains, etc. Although FDI in retail can only attract foreign retailers, but to help them grow their business and reach out to a mass audience, which includes majorly the semi-urban and rural population, it will be mandatory to spruce up the back-end supporting infrastructure. Since retailing would involve distribution of goods to far out places, it will be economically profitable only when all the costs associated with transportation and distribution are optimised. Just for a fact – the logistics costs in India are around 13-14 per cent of GDP as compared to the world average of around 6 per cent.

Areas the need corrections

Recently, the Government of India commendably introduced a note to allow FDI in multi brand retail but had to withdraw the same due to opposition faced in parliament, but still progressed with allowing 100 per cent FDI in single brand retail. This is well received and should pave the way for future reforms in this context. While these moves could enable the entry of foreign retailers to set up shops in the lucrative Indian market, overcoming and managing logistical bottlenecks will be definitely a key challenge that they will face. To name a few key elements - there are inadequate and very few cold chain systems, technologies are not fully incorporated into supply chains, several small stakeholders such as farmers, wholesalers, food manufacturers, retailers operate in layers with very less collaboration, which can actually result in achieving mutual gains.

Apart from the necessary investments needed in developing back-end infrastructure, India, like other developing economies, needs to also develop its last mile distribution segment. India is a vast with 70 per cent of the population residing in rural areas. The ability to reach consumers and transport or distribute goods to them is challenging mainly due to the absence of robust infrastructure and logistics systems. This is needed to increase availability of goods in the far hinterlands and also help companies source directly from producers. Establishing an efficient supply chain network that directly links farmers and small manufacturers with retailers will result in realising financial and operational gains to all stakeholders. Additionally, it will minimise wastage (especially in perishable goods segment) leading to increase farmers’ realisations, encouraging best practices in crop management and improving food safety and hygiene.

As modern trade proliferates gradually in India, supply chain efficiency will assume increased importance in offering competitively priced products and at the same time responding faster to customers’ changing needs. The entry of foreign players will lead to a transformation of the entire supply chain network as it will bring with it the technologies and expertise required to build robust supply chains, connecting farmers with retailers and achieving last mile connectivity.

The author is CEO, Damco South Asia



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