Assignment on

Supply chain practices of FMCG industry

in India

Submitted To
Prof.Vijaya Bandyopadhyaya

Submitted on: 15/11/10 Submitted by:

Juli kumari
PGDM(02/09)
Introduction to FMCG industry

Fast Moving Consumer Goods (FMCG), also known as Consumer Packaged Goods (CPG),
are products that have a quick turnover and relatively low cost. Consumers generally put
less thought into the purchase of FMCG than they do for other
products.
The Fast Moving Consumer Goods (FMCG) industry in India is one of the largest sectors in the
country and over the years has been growing at a very steady pace. The sector consists of
consumer non-durable products which broadly consists, personal care, household care and food
& beverages. The Indian FMCG industry is largely classified as organised and unorganised. This
sector is also buoyed by intense competition. Besides competition, this industry is also marked
by a robust distribution network coupled with increasing influx of MNCs across the entire value
chain. This sector continues to remain highly fragmented.
Market Overview
Total Market Size
• The Indian FMCG sector is the fourth largest sector in the economy with a total market size of
US$18 billion as of 2007.
• By 2015, the sector is predicted to scale up to US$33.4 billion.
• The sector generates 5% of total factory employment in the country and is creating employment
for three million people, especially in small towns and rural India1.
India’s FMCG Market Size (In USD Billion)

Sources: Naukri Hub, IBEF, Chennai Online

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Key segment

SCM Practices in Indian FMCG Industry

In a low margin and high volume business like FMCG, it requires a very close attention on the
planning and operational part of the entire value chain activities because these minutest details
can change the fortune of any organization. While branding differentiates the image of the
product, the distribution system will determine the faith of the organization up to a very large
extent in FMCG industry. The diversity of India and existence of vast untapped markets of rural
areas provide the bundle of opportunities to companies. The best price or quality product
offerings combined with heavy promotional and advertising budgets will not help the product
succeed if one of the major ingredients of the marketing mix as distribution is not properly
focused. The table1 shows the types of FMCG outlets are available across the India. Every

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organization needed to serve a large percentage of these outlets to reap the economies of the
scale.
Table-l: Types of Outlets in Indian FMCG Retail Industry (Source: ORG-MARG, 2003)

TYPES OF OUTLETS PERCENTAGE TERMS

(%)
Total Outlets 100
Grocer 34.6
General Store 12.8
Food Store 7.1
Cosmetic Store 4.5
Chemist 5.9
Paan Bidi 16
Others 19

Table-2 The Basic Supply Chain of Indian FMCG Industry

Supply Chain Planning & Management

Own Manufacturing
Contract Manufacturing / Imports

Outbound Transportation

Depots

Carrying and Forwarding Agents

Stockists / Distributors

Retailer

Customer
The traditional basic structure of FMCG supply chain has not changed over the years. The basic
supply chain related with distribution side of FMCG industry is shown in Figure 1. The

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competitive scenario has changed the importance of each element of the chain operation i.e. a
detailed planning and analysis of every activity of the chain so that to make the same efficient
and effective.

There are 5 factor on which Indian FMCG industry supply chain works
Factor 1: Collaborative Planning, Forecasting, Customer Service and Relationship
Efforts: This factor comprises the six practices that address collaboration among supply
chain partners.

 Reducing customer lead-time and on–time delivery performance would

strengthen the customer relationship.
 Formal and accurate demand and supply forecasting system provides integration
across supply chain planning and movement.
 Responsiveness towards customer is a critical success factor.
 Preparation of forecast in collaboration with customer, while taking care of
historic & future sales potential is more reliable & accurate.
 Mechanism of customer care and service is tailored around the needs of
customer & based on the value of interactions with customers.
 Real-time demand/inventory/ point-of-sales (PoS) data obtained from retailers &
sales personnel set the ball rolling for better customer service levels in SCM.
Factor 2: Operational networking with suppliers and logistics service provisions:
This factor involves the ten operating practices related with suppliers and logistics service
providers.
 Service level agreements with transporters provide effectiveness & reliability to logistics.
 Customer requirements have been analyzed in terms of design and manufacturing
feasibility of the new product development cycle.
 Clustering and networking with suppliers near focal firm’s location is advantageous for
organization.
 Dynamic mode of route selection is effective in reducing inventory levels and costs.
 Part/ unit outsourcing is advantageous than system outsourcing.
 Key suppliers locate personnel within focal firm to provide support for activities such as
order planning& technological assistance.(JIT-II)
 Lean approach of manufacturing leads to operational improvements across the supply
chain.
 Integration of outbound and inbound movements is effective in reduction of waste.
 Transporter rating system enhances the performance of logistics and distribution.
 Suppliers’ are evaluated on total cost, not on unit price of product/service.

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Factor 3: Cross Functionality of joint action with suppliers and dealers: It involves four
practices, out of which two are directly related with the involvement of suppliers and customers
in new product development process.
 Sharing of real-time demand and inventory information with suppliers smoothen the flow
of supply chain.
 The readiness of supply chain partners is required for adoption of IT practices.
 Outsourcing of non core competent activities improves on-time delivery and lead times.
 Organization realizes that collaboration and close working relationship with key suppliers
are critical to its success.

Factor 4: Strategic Partnership and Outsourcing in Competitive Environment: This

involves four practices.
 Organization prefers strategic partnerships with selected suppliers.
 Competition among suppliers is encouraged by the organization to get the benefit of cost
and quality.
 Modularity of system is beneficial for SCM implementation.
 Organization shares financial risks and rewards of market changes with its key suppliers
& dealers under SCM.
Factor 5: Strategic Supplier Selection, Evaluation and Development: It involves three
practices.
 Preferential selection of suppliers depends upon customization and flexibility in volume.
 Suppliers must be involved early in new-product development process.
 Formal suppliers performance scorecard should be made available for evaluation of
suppliers and dealers under partnership and supply chain networking are considered to be
dominating factors for Indian FMCG organizations.

This seems to be quite true with the rapid spread and development of IT and telecommunication
tools and techniques throughout India, which is facilitating the bi-directional flow of information
and enhanced level of coordination and collaboration. Besides that leanness or operational
efficiency factors have high degree of agreement but low level of adoption. The reasons behind
the same are basically infrastructural bottlenecks and the presence of unskilled and semi-skilled
suppliers at backend and distributors at front end of the supply chain. However, cross
functionality and strategic outsourcing are leading on adoption continuum.
A truly integrated supply chain requires a huge amount of commitment by all members of the
supply chain. The focal firm might require to overhaul the purchasing process and integrate
suppliers’ R&D teams directly into its own decision making processes so as to leverage on it’s
own core competency and partners’ core capabilities. Integrating the purchasing and logistics
processes with other key corporate processes creates a closely linked set of manufacturing and

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distribution processes. It further allows focal firm to deliver products and services to both
internal and external customers in a more timely and effective manner.

Challenges for the FMCG industry

A few FMCG companies have already outsourced manufacturing to some degree - including
Sara Lee, Nike and several beverage companies
Markets all over the world have been on a roll in 2003 and the Indian bourses are no exception
having gained almost 60% in 2003. During this period, while there are sectors that have
outperformed this benchmark index, there are also sectors that have underperformed. FMCG
registered gains of just 33% on the BSE FMCG Index last year.

At the macro level, Indian economy is poised to remained buoyant and grow at more than 7%.
The economic growth would impact large proportions of the population thus leading to more
money in the hands of the consumer. Changes in demographic composition of the population and
thus the market would also continue to impact the FMCG industry.

Recent survey conducted by a leading business weekly, approximately 47 per cent of India's 1 +
billion people were under the age of 20, and teenagers among them numbered about 160 million.
Together, they wielded INR 14000 Cr worth of discretionary income, and their families spent an
additional INR 18500 Cr on them every year. By 2015, Indians under 20 are estimated to make
up 55% of the population - and wield proportionately higher spending power. Means, companies
that are able to influence and excite such consumers would be those that win in the market place.

There are many challenges before the Indian FMCG Sector & Designing a Blueprint for
Future two of them is related to Supply chain

1.Excellence in operations - Value Chain De-Verticalization

Excellence in Operations remains an illusion for most FMCG companies. This will be remaining
as long as they stay confined within the organizational structures and mindsets associated with
today's vertically integrated business model.

According to a McKinsey report based on problems and opportunities relating to operational

excellence, the study comes out with the following findings: -

• Operations issues get neglected from top-management two main business processes
of customer management and consumer management. It suggests that Operations
issues get a lot less than 20% of the Executive Committee's agenda time. To
compound the problem, only around 10% of top executives in FMCG companies
have direct personal experience in Operations. It is hardly surprising; therefore, that

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 the commitment to drive radical change may not be as strong in Operations as it is in
the other two business processes.

• Organization structure of many MNC's makes it's tough to optimize decision-making

or to spread best practices across units or countries. Around 10% of FMCG
companies have a global Operations director with full responsibility for both
operational improvement and strategic resource allocation.
However, successfully launching and growing market share around a branded product in
India presents tremendous challenges. Take distribution as an example. India is home to six
million retail outlets and super markets virtually do not exist. This makes logistics particularly
for new players extremely difficult. Other challenges of similar magnitude exist across the
FMCG supply chain.

2. Distribution
One of the age-old problems that FMCG has been facing not only in India but globally is that of
distribution. Integrating operations with your distributors and channel partners is a Herculean
task. Few ways to reduce pain involved in this link:

Reducing supply chain costs by reducing intermediaries - Organised retail chains have set up
systems for inventory management and quick servicing, thereby offering the opportunity for a
company/supplier to reduce distribution cost by reducing intermediaries such as
wholesalers/distributors and supplying directly to the warehouse of retail chain.
Increasing sales by driving channel width - The relative share of grocers to FMCG sales has
dropped from over 50% in the early 90's to 35% in the late 90's. On the other hand the
contribution of chemist outlets and paan outlets has been increasing. This has been a result of
both SKU's (sachets) and hardware (mini dispensers) being specifically designed to facilitate
entry to these outlets and increase consumer interface.

References
en.oboulo.com/supply+chain+management+practices+in+fmcg+industry
www.economywatch.com
www.coolavenues.com
www.articlesbase.com

Gentry Julie J. and Vellenga David B. (1996), ‘Using Logistics Alliances to Gain a Strategic
Advantage in the Marketplace’, Journal of Marketing Theory and Practice, 4(Spring), pp.
37-44.

Lambert Douglas M., Stock James R. and Ellram Lisa M. (1998), Fundamentals of
Logistics Management, Irwin/McGraw-Hill, Boston, pp. 8-28.

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Mentzer John T. (2001), ‘Supply Chain Management – Response Book’, Sage Publication,
3-4.

Mason T. (1996), ‘Getting Your Suppliers on the Team’, Logistics Focus (4:1), pp. 10-12.

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