How FDI in retail shall impact supply chain services and logistics in India.

Ongoing debate notwithstanding, cabinet has given a much awaited nod to increase in FDI in retail – 51% in multi brand and 100% in single brand. For common man, this means that there will be more malls and for the informed it means India could soon have the likes of Tesco, Ikea, Wal-Mart, Best Buy, Starbucks, Carrefour, etc setting shops in India. Viva la consumerism!

This decision shall surely impact logistics and supply chain services, my consulting bread & butter. But how? Following reflections gathered from the historical evidence across geographies shall help build up a near foreseeable scenario.

The deepest impact of more supermarkets shall be on retail procurement systems. Read on…

When the number of stores in a given supermarket chain grows, there is a tendency to shift from a fragmented single store replenishment system to a distribution center serving several stores in a given catchment, and eventually the whole country. The catchment of a distribution center or set of them usually starts as the zone (such as Delhi NCR) and then widens to several distribution centers representing a centralized system for procurement over all zones across country.

This de-fragmentizes, integrates and centralizes the procurement system over the country. This comes with fewer procurement officers and increased use of centralized warehouses. Increased levels of centralization may also occur in the procurement decision making process, and in the physical produce distribution.

Centralization increases efficiency of procurement by reducing coordination and other transaction costs, although it may increase transport costs by extra movement of products.

The next, and economically logical, step is Internationalization to set up regional distribution centers to allow coordinated procurement over few countries. A logical further extension is insertion into global procurement networks.

More supermarkets shall mean shift from reliance on traditional wholesale to use of non-traditional – specialized/dedicated wholesalers and logistics firms.

This means that a shift from dependence on traditional wholesale markets and brokers towards use of specialized/dedicated wholesalers who are specialized in a product category and are dedicated to the supermarket/s as main supplier.

These specialized wholesalers shall cut transaction, coordination, and search costs, and enforce private standards and contracts with suppliers on behalf of the supermarkets.

Retail chains increasingly outsource logistics and wholesale distribution function sometimes to a sister company within the same holding company or enter into JVs with other firms.

Retail procurement system shall see a shift from wholesale markets to contracts or preferred suppliers in the products / categories where there is greatest need for quality and consistency, and where farmers or processors are associated collectively or are individually large to lower the transaction costs.

Finally the retail procurement system change shall see the rise of standards both in quality and packaging and also enforcement of public standards. To me this can be a biggest game changer which sadly has not yet been fully understood and appreciated by many including large corporations where the writer has worked or consulted.

Well, if you agree with above premise and are expert in reading between the lines, you would have understood by now that, left alone to move on their own inertia, small farmers, small suppliers and small retailers for that matter, will have little room for maneuver in such a scenario. However, there is a silver lining. These small business entities can coalesce to form larger groups (producer companies for eg) that can eventually become knowledge based producers and suppliers to these growing supermarket chains with increased bargaining power. Time to do it is NOW. Interested to implement such a solution to milk the development utopia called Organized Retail in future at your works. Get in touch with me, the specialists who is paid to plan and implement similar customized solutions across the value chains to supply chain start-ups and organised retailers. Visit www.agrisolutions.in or drop me a line at anil.chopra@agrisolutions.in


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