Retail In India
So the much awaited FDI push into the retail segment has finally taken place in India. However, one need not get too excited immediately as the scaling up of operations perhaps will not happen before a new government is elected in India in 2014. What the current move has done is help the companies involved in developing the organized retail segment ramp up backend operations.
The first and foremost requirement in this segment is an adequate surface transport network and good cross docking facilities. The government, NHAI and private players have a lot of ground to cover on this. Moreover, with the diesel price deregulation, there will be a tremendous cost pressure on surface transport in India moving forward. The use of pallets, structured inventory management and world class pick and pack operations in India are very rare to find. Except for certain blue chip firms, the warehouse is nothing but a godown and as long as materials inside have protection from rains, people are fine with it. On the other hand the entire business model of organized retail depends on operational efficiencies and sound logistics. So the logistics companies have to pull themselves up big time on this one. Here, one must also point out that the average willingness to pay for sound warehousing and logistical operations is very rare in India, even with the so-called India Fortune 100 companies. Whilst rapid strides have been taken in areas like marketing research, corporate office culture, the outlook towards logistics functions is anachronistic to say the least. Volumes are on the rise and FMCG wants to ensure that logistics operations costs not exceed 30 paise to 50 paise per case!
If the Retail segment has to grow as per projected business cases and presentations, there have to be the following things in place
1] Uniform VAT / GST without too many variations in local levies, that will ensure rapid development of large distribution centres to gain economies of scale.
2] Multi-user, palletized cargo handling with optimal cubic utilization of warehouse space will be the next major ask. Today, the 'godowns' are not very much focused on utilizing cubic space because material handling equipment [forklifts, small-scale reachstackers etc] is not in place in majority of the 'godowns'.
3] Containerized trucking will be the next critical success factor. As more and more cargo will get into palletized storage and transportation, there will be a high demand for containerized trucking and rapid fork-lift driven loading and unloading operations
4] Separation of Engine-Chassis Unit: In the current trucking scenario, the trailer and driving unit cannot be moved separately. This means that even if loading and unloading operations take 4 to 8 hours, the driver and the engine unit are forced to stay idle at the location. On the other hand, in the developed markets, the chassis and engine units are 2 separate entities allowing greater asset utilization of the engine unit [called the horse and carriage in local Indian terminology literally and figuratively!]
5] Temperature Controlled Logistics Infrastructure: Currently, cold chain logistics infrastructure is by and large restricted to the food business in both B2B and B2C segments. The current cold chain infrastructure can barely cope with 30% to 40% of the actual demand. Here again its a bit of the chicken and egg scenario; the investments in cold chain infrastructure have been directed towards the segment with higher willingness to pay rather than create infrastructure for futuristic needs. On the other hand, this very lack of cold chain logistics infrastructure that is resulting in over 30% of agricultural produce of India going to waste!!!
With adequate government support, there will be enough incentives for cold chain logistics infrastructure to scale up for the booming trend, thereby decreasing marginal costs for this segment and get a higher proportion of people under the service umbrella as the willingness to pay segment will grow
6] Upgrades in IT Infrastructure: Whilst a lot of ground has been covered by firms in developing ERP systems, WMS systems etc, there is a genuine lack of investment in Network Optimization software, Middleware systems helping better track and trace abilities within the domestic logistics segment. Such development has been by and large restricted to the express business segment. Thankfully, due to the advent of e-commerce space, some very positive development has been seen in the middleware segment. However, the core of the issue i.e. better network optimization software, easy to use warehouse management systems has been limited due to high setup costs.
We now have a lot of experience to pick upon from the developed world. The last 3 decades has seen a lot of research, trial and error in these aspects of IT capabilities by major retail corporations. It is becoming increasingly clear that only the high market-capitalization companies can use the full-scale software and enhance RoI in IT infrastructure. Even in highly mature markets like UK, US, Australia etc, the trend among Small and Medium Enterprises has been to use SaaS [Software As A Service] components for finer aspects. SaaS allows a firm to take a 'Pay As You Go' approach for many IT requirements, eliminating need for high setup costs and a lot of these modules are quite flexible and customizable to a firm's requirements.
It would be an over-simplification to say that all critical factors have been covered in the points above. All that I can say is that the points above are basic foundation blocks and that unless these foundation blocks are put in place the retail segment expansion in India can derail and the faster stakeholders meet and agree on mechanisms to take this forward, the greater the probability will be that the retail segment will kick-off as expected. Failing to get these in place will result in more Subhiksha like cases turning up [sound operations but negative profitability leading to shut-downs] or too much financial engineering to keep the ball rolling [Future Group for instance]
Automotive Logistics
The other critical segment that deserves attention today is the Automotive space. India has rapidly grown in this space both in domestic consumption segment and export markets. The Euro-crisis can soon question some of the volume projections in the export space and the automotive industry needs to be very aware and alert on this possibility. Should there be an event like Italy, Spain moving out of the Euro-zone and returning to their old currencies, the probability is very high that these locations will become far more cost-efficient than India. These locations already have sound logistics infrastructure and technology competent labor that can easily bring down marginal costs of production
Nevertheless, in the status quo scenario, India has not lagged behind developed peers in manufacturing domain and after-market segments. The real inefficiencies in India pop up in the In-bound and Out-bound segments especially for Finished Goods segment of automotive logistics. This has more to do with government regulation and the logistics infrastructure than lack of interest by most automotive industries. Whilst volume growth in the car segment has almost tripled over the last decade, the best practices from developed countries have not come in.
Cars are still transported in specialized trucks called 'Car-tainers'. One must recollect that there is only so much that a car-tainer can carry in one load and also move at speeds no greater than 40kmph. Taking into account the number of toll gates a truck has to go through in a 1000 km haul and the stoppages the truck has to take to cool down the engine, the transportation costs for cars is very high. Moreover, with the business volumes these days, the demand for car-tainers is increasing significantly [with 2 major beneficiaries; trucking firms themselves and the RTO agents placed at toll gates to harass the drivers and extract unreceipted payments to let the truck pass] According to the book '10000 Kms on Indian Highways', a haul from Chennai to NCR with a car-tainer load, the tolls and bribes alone suck out INR 50k in one haul. This increases costs for the automobile firm, it increases costs for the end-customer and the truck owner perhaps makes almost the same as what he used to make earlier.
The game changer is going to be containerized rail transportation for cars. In France, Germany etc, it is very common to see freight trains carry 4 to 6 containers of cars along with other containerized rakes that make the entire logistics process very cost efficient. I am personally very confident that this will be a major trend in India as well - it is only a matter of time. The rising diesel prices, other input costs for automotive firms and current operational inefficiency will only compound problems. The government on the other hand will be very lethargic to get these changes in place [regardless of which political party is responsible to pass this bill] The need of the hour is for automotive companies and logistics service providers to lobby with the government to implement rail transportation for cars, be it for domestic consumption or for exports in RO-RO vessels. The faster and greater the adoption of this policy, the more price competitive the industry will be.
The positive aspect of the Indian automobile segment is the agility with which world class manufacturing and operations processes have been implemented with the help of their foreign counterparts. Within the last 10 years, concepts like JIT, Kan Ban, Greenfield Operations, VMI, Kitting, Binning etc have become a part of the industry's DNA and this is a very encouraging sign.
The more disturbing trend is the excessive SKU proliferation that extends product lines for sure but raises questions on profitability. Rationalization of SKUs is more a marketing related issue than logistics related issue so I will leave it at that here. All the good practices that firms have adopted like JIT, TQM, modular production etc may need complete revamp should there be a drastic change in the Euro-zone economy. That will certainly not knock the death bell for the Indian automotive industry. What that move would do if it indeed happens on expected lines is that add many layers of sub-processes and increase in-bound and out-bound transactions in the Raw Material Inventory / Work In-Progress Inventory.
My reading of the current trend is that most firms have ignored this possibility. It is very critical to keep in mind the sudden need to change and hence the entire organization and logistics fraternity must be on their toes for this mega trend. As of now, logistics service providers are being selected on extreme basis; one end of the spectrum is the low-cost small players being contracted by firms. Whilst such practices may bring in short-term benefits, there are real risks of greater losses. Also trying to do automotive logistics in-house may not be the right thing to do. Time and again, it has been seen across the globe in various industry verticals that such experiments are hardly successful over a 5 to 7 year horizon. The logistics operations must be outsourced to competent logistics service providers as much as possible.
The need of the hour is consolidation and using scale effects through logistics service providers. If automotive firms can have strategic alliances for branding / manufacturing the product, there should not be a problem to deal with capable service providers on alliance basis. There will be a shared cost benefit that firms can derive from their logistics service providers. I have seen leading brands trying to venture out in this space and taste limited success so far. All that I can say is that I see light at the other end of the tunnel!!!
If we just think about the aviation industry, there was a time when East-West Airlines, Damania Airlines, Modiluft etc crop up in India in the 1990s and they vanished as fast as they came in! There was nothing wrong in the business model these companies adopted but it was just that the market as still not ready for the change. If you see the operational model of Jet Airways, erst-while Sahara, they are pretty similar to the models used by East-West Airlines or Modiluft; the only advantage that firms like Jet Airways and Sahara Airlines had was 'time to market'.
So all the good work that logistics service providers have put in automotive logistics, in India have so far not proven very lucrative in terms of finances. It was just that these services were a bit ahead of time. In the next 2 to 3 years, all these activities will be on the verge of a positive pay-off and it would be a good churn where-in the fundamentally and operationally strong players will shake out the weaker ones. The last thing that strong players would do is to abandon these activities for lack of profitability. If a pull-back was to be made it was during the last recession in 2008. Now that the activities have chugged along for 5 years with a drag, and just when the industry is on the cusp of a change, it would be detrimental to give up. One may choose to keep such operations in 'Cold Idle Stage' and simply pick the wage bill as usual and gear up employees for the future. The amount of severance pay that a firm would have to pay now only to pick up hiring 2 years down the line does not make sense.
In the next article, I will cover the challenges of revenue leakages in the Indian Shipping and Logistics, Lack of Willingness To Pay from clients and potential sources of revenue and yield generation for 2013.
So the much awaited FDI push into the retail segment has finally taken place in India. However, one need not get too excited immediately as the scaling up of operations perhaps will not happen before a new government is elected in India in 2014. What the current move has done is help the companies involved in developing the organized retail segment ramp up backend operations.
The first and foremost requirement in this segment is an adequate surface transport network and good cross docking facilities. The government, NHAI and private players have a lot of ground to cover on this. Moreover, with the diesel price deregulation, there will be a tremendous cost pressure on surface transport in India moving forward. The use of pallets, structured inventory management and world class pick and pack operations in India are very rare to find. Except for certain blue chip firms, the warehouse is nothing but a godown and as long as materials inside have protection from rains, people are fine with it. On the other hand the entire business model of organized retail depends on operational efficiencies and sound logistics. So the logistics companies have to pull themselves up big time on this one. Here, one must also point out that the average willingness to pay for sound warehousing and logistical operations is very rare in India, even with the so-called India Fortune 100 companies. Whilst rapid strides have been taken in areas like marketing research, corporate office culture, the outlook towards logistics functions is anachronistic to say the least. Volumes are on the rise and FMCG wants to ensure that logistics operations costs not exceed 30 paise to 50 paise per case!
If the Retail segment has to grow as per projected business cases and presentations, there have to be the following things in place
1] Uniform VAT / GST without too many variations in local levies, that will ensure rapid development of large distribution centres to gain economies of scale.
2] Multi-user, palletized cargo handling with optimal cubic utilization of warehouse space will be the next major ask. Today, the 'godowns' are not very much focused on utilizing cubic space because material handling equipment [forklifts, small-scale reachstackers etc] is not in place in majority of the 'godowns'.
3] Containerized trucking will be the next critical success factor. As more and more cargo will get into palletized storage and transportation, there will be a high demand for containerized trucking and rapid fork-lift driven loading and unloading operations
4] Separation of Engine-Chassis Unit: In the current trucking scenario, the trailer and driving unit cannot be moved separately. This means that even if loading and unloading operations take 4 to 8 hours, the driver and the engine unit are forced to stay idle at the location. On the other hand, in the developed markets, the chassis and engine units are 2 separate entities allowing greater asset utilization of the engine unit [called the horse and carriage in local Indian terminology literally and figuratively!]
5] Temperature Controlled Logistics Infrastructure: Currently, cold chain logistics infrastructure is by and large restricted to the food business in both B2B and B2C segments. The current cold chain infrastructure can barely cope with 30% to 40% of the actual demand. Here again its a bit of the chicken and egg scenario; the investments in cold chain infrastructure have been directed towards the segment with higher willingness to pay rather than create infrastructure for futuristic needs. On the other hand, this very lack of cold chain logistics infrastructure that is resulting in over 30% of agricultural produce of India going to waste!!!
With adequate government support, there will be enough incentives for cold chain logistics infrastructure to scale up for the booming trend, thereby decreasing marginal costs for this segment and get a higher proportion of people under the service umbrella as the willingness to pay segment will grow
6] Upgrades in IT Infrastructure: Whilst a lot of ground has been covered by firms in developing ERP systems, WMS systems etc, there is a genuine lack of investment in Network Optimization software, Middleware systems helping better track and trace abilities within the domestic logistics segment. Such development has been by and large restricted to the express business segment. Thankfully, due to the advent of e-commerce space, some very positive development has been seen in the middleware segment. However, the core of the issue i.e. better network optimization software, easy to use warehouse management systems has been limited due to high setup costs.
We now have a lot of experience to pick upon from the developed world. The last 3 decades has seen a lot of research, trial and error in these aspects of IT capabilities by major retail corporations. It is becoming increasingly clear that only the high market-capitalization companies can use the full-scale software and enhance RoI in IT infrastructure. Even in highly mature markets like UK, US, Australia etc, the trend among Small and Medium Enterprises has been to use SaaS [Software As A Service] components for finer aspects. SaaS allows a firm to take a 'Pay As You Go' approach for many IT requirements, eliminating need for high setup costs and a lot of these modules are quite flexible and customizable to a firm's requirements.
It would be an over-simplification to say that all critical factors have been covered in the points above. All that I can say is that the points above are basic foundation blocks and that unless these foundation blocks are put in place the retail segment expansion in India can derail and the faster stakeholders meet and agree on mechanisms to take this forward, the greater the probability will be that the retail segment will kick-off as expected. Failing to get these in place will result in more Subhiksha like cases turning up [sound operations but negative profitability leading to shut-downs] or too much financial engineering to keep the ball rolling [Future Group for instance]
Automotive Logistics
The other critical segment that deserves attention today is the Automotive space. India has rapidly grown in this space both in domestic consumption segment and export markets. The Euro-crisis can soon question some of the volume projections in the export space and the automotive industry needs to be very aware and alert on this possibility. Should there be an event like Italy, Spain moving out of the Euro-zone and returning to their old currencies, the probability is very high that these locations will become far more cost-efficient than India. These locations already have sound logistics infrastructure and technology competent labor that can easily bring down marginal costs of production
Nevertheless, in the status quo scenario, India has not lagged behind developed peers in manufacturing domain and after-market segments. The real inefficiencies in India pop up in the In-bound and Out-bound segments especially for Finished Goods segment of automotive logistics. This has more to do with government regulation and the logistics infrastructure than lack of interest by most automotive industries. Whilst volume growth in the car segment has almost tripled over the last decade, the best practices from developed countries have not come in.
Cars are still transported in specialized trucks called 'Car-tainers'. One must recollect that there is only so much that a car-tainer can carry in one load and also move at speeds no greater than 40kmph. Taking into account the number of toll gates a truck has to go through in a 1000 km haul and the stoppages the truck has to take to cool down the engine, the transportation costs for cars is very high. Moreover, with the business volumes these days, the demand for car-tainers is increasing significantly [with 2 major beneficiaries; trucking firms themselves and the RTO agents placed at toll gates to harass the drivers and extract unreceipted payments to let the truck pass] According to the book '10000 Kms on Indian Highways', a haul from Chennai to NCR with a car-tainer load, the tolls and bribes alone suck out INR 50k in one haul. This increases costs for the automobile firm, it increases costs for the end-customer and the truck owner perhaps makes almost the same as what he used to make earlier.
The game changer is going to be containerized rail transportation for cars. In France, Germany etc, it is very common to see freight trains carry 4 to 6 containers of cars along with other containerized rakes that make the entire logistics process very cost efficient. I am personally very confident that this will be a major trend in India as well - it is only a matter of time. The rising diesel prices, other input costs for automotive firms and current operational inefficiency will only compound problems. The government on the other hand will be very lethargic to get these changes in place [regardless of which political party is responsible to pass this bill] The need of the hour is for automotive companies and logistics service providers to lobby with the government to implement rail transportation for cars, be it for domestic consumption or for exports in RO-RO vessels. The faster and greater the adoption of this policy, the more price competitive the industry will be.
The positive aspect of the Indian automobile segment is the agility with which world class manufacturing and operations processes have been implemented with the help of their foreign counterparts. Within the last 10 years, concepts like JIT, Kan Ban, Greenfield Operations, VMI, Kitting, Binning etc have become a part of the industry's DNA and this is a very encouraging sign.
The more disturbing trend is the excessive SKU proliferation that extends product lines for sure but raises questions on profitability. Rationalization of SKUs is more a marketing related issue than logistics related issue so I will leave it at that here. All the good practices that firms have adopted like JIT, TQM, modular production etc may need complete revamp should there be a drastic change in the Euro-zone economy. That will certainly not knock the death bell for the Indian automotive industry. What that move would do if it indeed happens on expected lines is that add many layers of sub-processes and increase in-bound and out-bound transactions in the Raw Material Inventory / Work In-Progress Inventory.
My reading of the current trend is that most firms have ignored this possibility. It is very critical to keep in mind the sudden need to change and hence the entire organization and logistics fraternity must be on their toes for this mega trend. As of now, logistics service providers are being selected on extreme basis; one end of the spectrum is the low-cost small players being contracted by firms. Whilst such practices may bring in short-term benefits, there are real risks of greater losses. Also trying to do automotive logistics in-house may not be the right thing to do. Time and again, it has been seen across the globe in various industry verticals that such experiments are hardly successful over a 5 to 7 year horizon. The logistics operations must be outsourced to competent logistics service providers as much as possible.
The need of the hour is consolidation and using scale effects through logistics service providers. If automotive firms can have strategic alliances for branding / manufacturing the product, there should not be a problem to deal with capable service providers on alliance basis. There will be a shared cost benefit that firms can derive from their logistics service providers. I have seen leading brands trying to venture out in this space and taste limited success so far. All that I can say is that I see light at the other end of the tunnel!!!
If we just think about the aviation industry, there was a time when East-West Airlines, Damania Airlines, Modiluft etc crop up in India in the 1990s and they vanished as fast as they came in! There was nothing wrong in the business model these companies adopted but it was just that the market as still not ready for the change. If you see the operational model of Jet Airways, erst-while Sahara, they are pretty similar to the models used by East-West Airlines or Modiluft; the only advantage that firms like Jet Airways and Sahara Airlines had was 'time to market'.
So all the good work that logistics service providers have put in automotive logistics, in India have so far not proven very lucrative in terms of finances. It was just that these services were a bit ahead of time. In the next 2 to 3 years, all these activities will be on the verge of a positive pay-off and it would be a good churn where-in the fundamentally and operationally strong players will shake out the weaker ones. The last thing that strong players would do is to abandon these activities for lack of profitability. If a pull-back was to be made it was during the last recession in 2008. Now that the activities have chugged along for 5 years with a drag, and just when the industry is on the cusp of a change, it would be detrimental to give up. One may choose to keep such operations in 'Cold Idle Stage' and simply pick the wage bill as usual and gear up employees for the future. The amount of severance pay that a firm would have to pay now only to pick up hiring 2 years down the line does not make sense.
In the next article, I will cover the challenges of revenue leakages in the Indian Shipping and Logistics, Lack of Willingness To Pay from clients and potential sources of revenue and yield generation for 2013.
