RECONFIGURING DISTRIBUTION CHANNELS FOR EFFICIENT SUPPLY CHAINS

by Rajiv Aserkar SP Jain Centre of Management, Singapore Email: rajiv.aserkar@spjain.org ABSTRACT Consumers the world over seek a good value for their money. They take good quality, product availability, a good brand image and excellent after sales service for granted and are willing to pay a fair price for these attributes. They however do not want to pay for the inefficiencies in the product by way of wastage, delays and layer upon layer of margins built into the product while moving into the distribution channel.This paper discusses the Bharti-Wal-Mart collaboration in India, who has introduced a unique Cash and Carry model of wholesale business. This new business model is the product of regulatory environment in India, which prohibits Foreign Direct Investment in India in multibrand retail. Bharti-Wal-Mart has made an attempt to transform the agricultural supply chain by cutting down the number of intermediaries and thereby reducing the inefficiencies. Bharti-Wal-Mart has designed a new distribution network, which is a major departure from traditional agricultural distribution network in India. In this joint venture, Bharti brings in their intimate knowledge of doing business in Indian, where as Wal-Mart brings in their expertise in strategic sourcing and cutting edge supply chain management practices. Together they have created a business model, which is within the regulatory frame work of India, which effectively tries to overcome the inefficiencies of logistics infrastructure and which benefits all the stake holders in the supply chain, right from farmers to the consumers. In the process, it eliminates inherent wastages in the traditional agricultural supply chains. It also creates opportunities for further innovations to bring the logistics costs down. KEYWORDS Bharti-Wal-Mart, India, Logistics, Distribution, Sourcing INTRODUCTION India is an economy whose growth today is compared with the growth of Chinese economy. It is one of the very few economies, who could sustain a very healthy growth rate even during the financial crisis of 2008-09. It is a wellknown fact that Indian economy largely depends on agriculture. Approximately 70 per cent of Indian population is directly or indirectly engaged in agriculture related activities and contribution of agriculture sector to Indias Gross Domestic Product (GDP) is approximately 25 per cent. The Internet connectivity enjoyed by Indian farmers is resulting into adoption of modern methods of farming, use of genetically modified seeds, and changes in the pattern of crops sown; from twice a year traditional crops to multiple cash crops. If such a sea change is witnessed in the production of crops, the traditional supply chains are also undergoing a major change. As companies strive to increase customer value by improving performance while simultaneously reducing costs, many companies are turning their attention to purchasing and to Supply Management the part of Supply Chain Management that focuses on the management of inbound goods and services (Manczka et al., 2003). Indian companies trading in agricultural products are also focusing on efficient supply side management in order to achieve cost reduction, improve material delivery and quality improvement. Distribution refers to the steps taken to move and store a product from the supplier stage to a customer stage in the supply chain. Distribution occurs between every pair of stages in the supply chain. Distribution is a key driver of the overall profitability of a firm because it directly impacts both the supply chain cost and customer experience (Chopra et al., 2004). Logistics cost is an important component of the distribution cost. Logistics costs in India are quite high when compared with other countries. Variable transit time and in-transit damages make transportation in India a very expensive affair (Shah, 2009).

TABLE 1 RATIO OF LOGISTICS COST WITH GDP Country Ratio of logistics cost with GDP (in %) Japan 8.7 United States 8.5 Korea 16.5 India 12.3

Source: G. Raghuram and J.Shah, Roadmap for Logistics Excellence: Need to Break the Unholy Equilibrium, Working Paper, Indian Institute of Management Ahmedabad In a developing country like India, some of the practices followed for distribution of products are age old. They were formulated in an era where the concepts of supply chain management were unheard of. Instead of forecasting the demand and storing the economic order quantities, the emphasis was more on keeping the large stocks of goods, while they were available. The idea was to keep the stocks ready for surge in demand due to festivals and other seasonal factors and book large profits. Some other reasons for these practices to be followed were large population, demand being more than supplies and government rules and regulations which allowed production in limited quantities under licence and permit regime. This created artificial scarcity of essential commodities and led to hoarding. At the moment, India has one of the most fragmented produce-supply chains on the planet. Industry experts estimate more than 30% of all fresh produce is lost or spoils before it reaches the market. On average, goods pass through six or seven middlemen before a consumer can buy it, resulting in tortuous journeys, big mark-ups and poor quality. Replacing that system requires not just building a modern, efficient network but adapting it to Indian conditions (Robinson,2007) Until 1990s, markets in developing countries remained largely untouched by international retailers. However, the dual forces of neoliberal economic reforms and the application of information technology have facilitated the expansion of handful of major retailers including Wal-Mart, Carrefour and Ahold, into international markets (Wrigley, 2000). CASE STUDY This paper examines how Wal-Mart, the worlds largest retailer reconfigured traditional agricultural supply chains in India to develop a unique Cash and Carry model of Wholesale business. The focus of this paper is to understand What is the rationale behind the tie-up between Wal-Mart and Bharti? How is the newly configured supply chain by Wal-Mart different from traditional agricultural supply chain in India? What are the benefits of newly configured supply chain to the various stake holders? This paper also touches upon the regulatory compulsions which led to this reconfiguration. Rationale behind Bharti-Wal-Mart tie-up Bharti Enterprises is one of Indias leading business groups with interests in telecom, agricultural business, financial services, retail and manufacturing. Bharti Airtel, a group company, is one of Asias leading providers of telecommunications services with operations in India and Sri Lanka, spanning mobile services, telemedia services and enterprise services. It is one of Indias 10 biggest companies, with an excellent track record of joint ventures. Wal-Mart is the US based retail giant operating in 14 countries outside United Sates, serving millions of customers world wide.

TABLE 2 WAL-MART OPERATIONAL OVERVIEW Wal-Mart USA 2010 Sale $258,229 2010 Operating Income $19,522 Retail Units 3,708 Total square footage 602.9 (In millions, except retail units) Source: Wal-Mart 2010 Annual Report Wal-Mart International $100,107 $5,033 4,112 269.9 Sams Club $46,710 $1,512 596 79.4

Clearly any entry into a new market requires a certain degree of tailoring to its specific needs and conditions. But for some companies entry into India has forced a fundamental rethinking of product offers, cost structures, distribution systems and management teams. Companies that successfully tap into the promising Indian market often ignore the conventional wisdom, including the need for joint venture (McKinsey, 2005). The joint venture between Wal-Mart and Bharati, which was announced in 2006, is a win-win situation for both the organizations. Bharti have a deep understanding of Indian market as well as political and business environment, WalMart on the other hand has a history of innovations in retailing and Supply Chain domain. It is important to note that Wal-Mart has chosen a joint venture route for their entry in to Indian market. At present, Foreign Direct Investment (FDI) is not allowed in India in multi-brand retail, which is dominated by the neighbourhood mom and pop stores known in India as Kirana stores and is a politically-sensitive topic. However, foreign players are permitted in wholesale trade as also in single-brand retail. Since FDI is not permitted in retail, world's number one retailer Wal-Mart has settled for a cash-n-carry (wholesale) joint venture with the Bharti Group (The Economic Times, 2010). There are in fact two agreements between these two companies. The first agreement is to create a 50-50 joint venture for Cash and Carry wholesale operation and to manage its supply chain, by creating sustainable supply base to ensure guaranteed availability of high quality products at competitive prices. The second agreement is to allow transfer of retail know-how and technology by Wal-Mart to Bharti to establish a retail operation in India. In this case, Bharti Retail Limited, a wholly owned subsidiary of Bharti would establish a retail chain all over India using the retailing expertise of Wal-Mart. It offers food and grocery categories, fresh fruits and vegetables, meat and poultry, dairy products, staples, FMCG and processed foods, electronics and appliances, clothing and footwear, furniture and furnishing, and other household articles. Reconfiguring the distribution channel India's current food-distribution system is a legacy of the 1940s and '50s, when chronic food shortages led the government to crack down on hoarding of produce by unscrupulous cartels. In 1966 the government introduced a new law that banned farmers from dealing directly with retailers and forced them to sell through licensed middlemen, called mandis. The law, which also aimed to give farmers a fair and consistent price, "was initially done with a good purpose," But over the years it grew into a monster, gaining layer upon layer of intermediaries, none of whom added any value to the fruits and vegetables they traded even as they added on their own margins. The result: a grossly inefficient system in which farmers are divorced from market feedback and often must wait months to be paid (Robinson, 2007). Figure 1 shows a typical supply network in Indian agricultural sector, with a number of intermediaries between the farmer and the consumers. A typical retailer in India has a small area from 100 to 500 square feet and does not always have a storage space. He is totally dependent on the wholesaler for the storage space as well as transportation from the warehouse to the retail store.

FIGURE 1

As can be seen, there are inherent inefficiencies in this distribution network in terms of mark ups added by each intermediary, damages and delays due to repeated handling, transportation and storage of the products which benefit neither farmers nor the consumers. It is therefore imperative that to be successful in the Indian market, a multinational corporation needs a strategy which will benefit both; the farmer as well as the consumer. The Strategy-Structure-Performance (SSP) paradigm predicts that a firms strategy created in consideration of external environmental factors drives the development of organizational structure and processes (Galunic et al.,1994).The strategy adopted by Bharti-Wal-Mart was to reconfigure the supply chain in order to remove the various intermediaries, thereby creating a lean supply chain. Lean is about the elimination of waste and the increase of speed and flow. Although this is a high-level oversimplification, the ultimate objective of lean is to eliminate waste from all processes (Goldsby et al., 2005). The presence of middlemen in the retail and the wholesale industries had been a key characteristic of Indias retail sector. Wal-Mart has made the supply chain lean by reducing the number of middlemen and connecting producers directly with the retailers. The idea was to bring down the prices in order to boost the consumption; which in turn will further drive down the prices. Alignment between Supply Chain strategy and structure will enhance organisational performance through revenue enhancement, operating expense reduction, working capital efficiency and fixed capital efficiency (Defee et al., 2005). With the new reconfigured supply chain (Figure 2), in addition to reduction in the cost of products due to elimination of intermediaries, following additional benefits are observed1. Bharti-Wal-Mart helps the farmers with getting bank finances at lower interest rates, thereby helping supply chain financing. Banks are more comfortable financing the farmers due to the introduction made by Bharti-WalMart. Bharti-Wal-Mart helps the farmers with technology to improve the quality and yield of their products. Bharti-Wal-Mart provides re-usable packages to farmers which reduce use of packing material. The Cash and Carry stores are located in strategic areas away from city centres, thereby reducing the cost of rent. Also it provides ample parking space to the customers. Low prices at Bharti-Wal-Mart stores provide great publicity, thereby eliminating the advertisement costs. Lean logistics is being adopted by many companies seeking to cut costs, improve profitability and remove kinks from their supply chains (Gilligan 2004). Considering the inefficient logistics infrastructure in India, which leads to high logistics cost, Bharti-Wal-Mart source their products within 200 kilometres of their wholesale stores. By avoiding to source from long distance suppliers, it is possible to reduce the transit time, delays, and damage to the goods. This in turn translates into reducing waste and cutting costs. For outbound logistics, customers bring their own vehicles to carry the goods.

2. 3. 4. 5. 6.

FIGURE 2

7. Unique Mera Kirana and Business Solutions Centre created to share solutions with small and medium retailers on best practices in assortment planning, layout & fixtures, displays, licences, hygiene, customer retention, accounting and value added services. 8. My Partner program launched by Bharti-Wal-Mart includes seminars on taxation for Kirana owners, food safety and hygiene workshops and live demonstration for hotels, restaurants and caterers. CONCLUSIONS Regulatory constraints are the primary reason for Wal-Mart to enter Indian market as a wholesaler rather than a retailer. This the first time, Wal-Mart has assumed the role of an up-stream supply chain partner. Regulatory environment is also the reason for Wal-Mart to consider a joint venture with an Indian company. The change in the organization structure in the Indian arm of Wal-Mart is the result of this joint venture. In Latin America, the rapid proliferation of Wal-Mart and its unprecedented success have come largely at the expense of national and international supermarket chains, rather than small-scale and informal retailer, provoking a widespread process of expansion and consolidation (Biles, 2006; Coleman, 2003). It can therefore be expected that the small retailer at the end of supply chain is not going to be affected due to the presence of the largest retailer in the world, despite the wide spread criticism and opposition to Wal-Marts, backdoor entry into Indian market. Infrastructural deficiencies have forced Wal-Mart to consider near sourcing rather than sourcing from the most competitive suppliers. Wal-Marts hegemony has induced domestic supermarket chains to emulate the firms business practices. For example, Mexican retailers have imitated Wal-Marts procurement practices, implemented centralized information systems, integrated their logistics operations, adopted the super-center format, and established their own distribution centres (Biles, 2006). Indian market will have an opportunity to learn from the best supply chain practices adopted by Wal-Mart, which in turn may trigger supply chain innovations by Indian firms to overcome the logistical challenges which they presently face. Lastly, the operations of Wal-Mart and other national and international retailers in India may bring about an improvement in transportation, warehousing, port and airport infrastructure to facilitate a smooth and cost effective movement of cargo.

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