FMCG Sector Chains

FMCG and Organized Retail supply chains – Current trends and challenges

Situations of competitive advantage

Nestle

• Nestlé is the first company to operate in hundreds of countries in the same manner as if it operated as one• Cold Supply Chain• Focus on building sustainable supply chain for long term growth

Sourcing Strategy

With “Farmer Connect”, Nestle built direct contacts with producers to:

•Ensure traceability up to farmer’s level

•Assure quality, safety and volume growth of raw materials

•Mitigate price volatility exposure

•Reduce transaction costs and serving our brands guaranteeing access to specific raw materials


General Mills

Packing Innovations• Constant attempts are made to reduce the package-to-product ratio• In 2012, lighter weight Yoplait cups were introduced that decreased the cup’s weight by almost 18%. This innovation

itself saves 8 million pounds or nearly 3600 metric tons of plastic annually. • In the same year, the carton weight was also reduced by 17% by reducing the thickness of paperboard used. This

saved more than 180 metric tons of packaging material per year

Distribution strategy

• GM follows Intensive Distributionbecause their target is to sell their products to as many consumers as possible

• Reduced the transport-related fuel usage and its associated GHG emissions by almost 47%.

• Substituting wooden pallets with slip sheets and by shifted all the load movements from trucks to oceanic transport, hence, allowing the team to load almost twice as many cases per container

Sourcing

• GM commissioned a cost study to know its environmental dependence on various natural resources

• 2/3rd of greenhouse emissions and 99% of water usage occurs outside GM’s own operations.

• 4 step sustainable procurement model:

• Assessment,• Strategy Formation,• Transformation, • Monitoring and Evaluation.


Zara retail

Consumer driven process

• Close connection between customers and designers

• Internal interfaces to collect information, e.g. sales, staff, leftovers analysis, complaints etc.

AgilityZara has developed anefficient agile supply chain, with all designers, buyer experts and management in one place andproduction facilities close to them, assuring full flexibility and agility

Retailer powerZara owns its store chain and don't franchise, in order to avoid the standard problemsIts agile supply chain results in less stock carried and lower inventory

Demand seasonsThere are more than 40,000 items designed per year. These are continuously supplied to its stores increasing the number of ‘seasons’ radically and breaking the tradition two season model

Supplier pressure• Zara is a pioneer in fast fashion with twice a week supply to its stores, keeping them fresh and

interesting for its customers producing small quantities and numerous different outfits throughout the year

• These both aspects help reducing markdowns, sales and outlet to one of the lowest in the industry, compared to the old fashion retailers

High levels of supply effectiveness by• Monitoring early season retail sales to forecast• Quick response in manufacturing• Continuous monitoring of retail sales• Dispatch from warehouses on replenishment basis

Retail monitoring, coordinated and quick response supply chain


Asian Paints

Paint tinting machines• By acquiring a technology that enabled mixing of colors and base paints to get the appropriate

shade in a few minutes, Asian Paints obtained a competitive advantage by delaying the differentiation

• Retail inventory costs have come down, while at the same time, product availability went up

Delayed differentiation and Technology development

Distribution strategy• Created a Large Network of Dealers• Established a Network of Company

Depots• Created a Marketing Organization that

matched its Distribution Intensity• Successfully Resolves the Cost-Service

Conflict in Distribution• Strong Commitment to Distribution

Cost Control

Logistics• The warehousing facilities are well maintained• The company is adapting eco-friendly production

methods• Maintains low inventories in off seasons, and high

inventory in festival seasons• The company has huge base of raw material suppliers,

giving company bargaining power resulting in higher profit margins than competitors

• The company has succeeded in establishing themselves in rural parts of India by large distribution network, retail outlets etc.

Technology adaption• Asian Paints has deployed SAP R3, i2 supply chain planning suite, ERM employee platform formula

management, product lifestyle platform, SAP HANA CRM etc. with positive results


Asian Paints

Paint tinting machines• By acquiring a technology that enabled mixing of colors and base paints to get the appropriate

shade in a few minutes, Asian Paints obtained a competitive advantage by delaying the differentiation

• Retail inventory costs have come down, while at the same time, product availability went up

Delayed differentiation and Technology development

• Many other innovative concepts like Home Solutions (painting solutions Service), Kids World

(painting solutions for kid’s room), Colour Next (Prediction of Colour Trends through in-depth

research) and Royale Play Special Effect Paints

• It has over 27000 direct dealers as opposed to 14000 of the nearest competitor and over 35 % of

dealers are exclusive dealers of Asian Paints.

• Maintains low inventories in off seasons, and high inventory in festival seasons. The Average

Inventory level is around 28 days as compared to industry average of 51 days which means 45 %

lower inventory cost.

Technology adaption• Asian Paints has deployed SAP R3, i2 supply chain planning suite, ERM employee platform formula

management, product lifestyle platform, SAP HANA CRM etc. with positive results


HUL Ltd

• HUL has generally sought competitive advantage through a continuous reengineering of the supply chain

Horizontal differentiation and vertical integration, non – departmentalized management cadre

Shakti Amma - Inclusive business strategy

• Targeting low income consumers in rural Indian villages

• Commission based model with free training in hygiene

• Created a Marketing Organization that matched its Distribution Intensity

• Successfully Resolves the Cost-Service Conflict in Distribution

• Strong Commitment to Distribution Cost Control

Supermarkets• HUL has set up a full-scale sales organisation,

exclusively for retailing outlets in metros• The business system delivers excellent customer

service, while driving growth for the company and the store

• At the same time, innovative marketing initiatives are taken to provide consumers with experience of our brands at the store itself, through product tests and in-store sampling

Technology adaption• An IT-powered system has been implemented to supply stocks to redistribution stockists on a continuous

replenishment basis• Stockists have been connected with the company through an Internet-based network, called RSNet, for

online interaction on orders, despatches, information sharing and monitoring• RS Net is part of Project Leap, HUL's end-to-end supply chain, which also includes a back-end system

connecting suppliers, all company sites and stretching right upto stockists

Benetton

Manufacturing outsourced model

Selling casual garments in 120 countries

Biggest market is Europe

110 million garments per year

Higher quality and durability with higher price than H&M and Zara

Its has 5000 stores

produce revenue of around $2 billion

Thread purchased and Supplied to Contractors by Benetton

Only Dyeing is done In-House as it is “Scale Sensitive”

High no. of contractors

High capacities

Location of subcontractors : Close to Benetton factory

Machines: Provided by Benetton

Builds responsiveness to supply chain

Financial support is also provided

Supply chain

Outsource those activities where it is unable to achieve in-house economies of scale.

Investment strategy , operations such as weaving , cutting, dying & quality control kept internal.

Benetton has a controlling share

in its main suppliers of raw

materials, to ensure fast supply to its

factories

Postponement: EDI information

allows manufacturers

to delay the dyeing process up until market requirements are known.

This eliminates the build up of

wasteful inventories,

thereby reducing costs, slashing cycle

times and maximising efficiencies.

Retail outlets

It has larger stores like 1500-3000m2 mega –stores that can display the whole range of Benetton products only and reinforce the

Benetton shopping experience.

Benetton

Logistics and Warehousing

Single Central Warehouse to serve as finished goods inventory.

Inventory centralization reduces inventory and inventory carrying costs.

Goods shipped directly from warehouse to shops through air/road/ship depending upon the needs of the customer.

Benetton have invested in highly automated warehouse, close to their main

production centers that store, pack and assemble individual orders for their retail

networks.

Controls the supply of raw materials achieving cost savings in supplier

overheads. It has a very close relationship with the sub-contractor base, ensuring that the factories under their control are able to

satisfy market trends at short notice

Information Systems & Technology

POS

• Point of Sales (POS) data collected directly from retailers to discern the products in demand.

• Dyeing & Distribution based on Point of Sales

IT

•Geis global integrated network has enabled agents to forward customer order details to the 500 sub-contractors based in the Veneto heartland where the manufacturing capability has been located. Within days they are able to receive multiple orders from various country agents and rapidly set in motion the manufacturing work by fully exploiting the vast network of sub-contracted labour.

Technology

• Use of sophisticated CAD/ CAM technology has enabled Benetton to gain the upper hand on its competitors by being quick and flexible at this point in the production process

Challenges and Recommendations

Competition from Levis, large retail chains such as The Limited, Charming

Shops, Petrie etc in US

•In addition to their regular distributors , Benetton should explore possibility of new range of distributorsdealing with competitors products.•Benetton should increase the no of stores in other European counties

Dell

Globally 2nd in computer hardware design, manufacturing and distribution with a market share of around 16%.

Greater than $50 Million sales per day through the internet with yearly revenue of $55.908 Billion with employee base of 78,000

1987 --first computer systems company to offer next-day, on-site product service .

Direct Value Chain

Push process : Procurement cyclePull process : Customer order and manufacturing

cycle

Why SCM is important in PC business

Material costs account for 74%($21 billion) a year for dell.

Improving SCM by 0.1% has bigger impact than improving manufacturing process by 10%

Changing technology obsoletes Materials’

value by almost 1% per week .

With about 2,000 product transitions a year, the

ability to reduce product time to market is critical.

To provide large variety of customizable products with reasonable products.

Dell SCM Strategy

To achieve high flexibility and responsiveness

Handle a large variety of products and build highly innovative products

Dell

Competitors’ Disadvantages vis-à-vis Dell

Inventory

• Need to hold inventory at each step in value chain

Prepaid

• Have to pay suppliers first before getting paid from customers

Product transition

• Stuck with excess inventories of slow selling products .

Dell’s competitive advantages

90% supplies ordered

online using integrated

websites of supplier and Dell (B2B).

95% of suppliers situated very

close to assembly plant

hence coordination is

easier.

Dell’s factories have only 7 hrs worth of inventory for most

items whereas industry wise it is around 10 days.

15 suppliers provide almost

85% of all supplies.

Dell chose i2 Technologies for its SCM system.

i2 serves almost 70% of the SCM market. Instead of forecasting the daily supply needed, Dell receives the exact material every two hours to fulfill actual

customer orders

Every 20 sec the S/W aggregates orders, analyzes material

requirements ,compares Dell’s on-hand inventory with its suppliers’

inventory and then creates a supplier bill of material to meet its

order needs

Pizzahut

Pizza Hut is one of the flagship brands of Yum! Restaurants International, which also has KFC, Taco Bell, A&W and Long John Silver’s under its umbrella.

It is the world’s largest pizza chain with over 12,500 restaurants across 91 countries.

The first Indian outlet was opened in June 1996 in Bangalore.In India, Pizza Hut has 139 restaurants across 36 cities.

Facilities & Inventory

Production, storage sites and commissionaires in Noida , Mumbai, Kolkata and Bangalore.are in Noida

, Kolkata, Mumbai and Bangalore

The base is prepared in the

commissionaires and then transported to

different retail outlets.

Transportation

The outlets keep the inventory stock of only three days because it is a perishable goodHence, the inventory stock cost is reduced.

As only the base is transferred to the store, in case of any particular item demand is increased, it does not create any problem.

They use the refrigerated trucks in which the base is kept and there is controlled temperature.

There are 110 trucks to supply the bases across India.

There is also a vacant space in which extra base is kept to fill the demand of a particular store

The company will not incur any additional transportation costs as the counters are along the highway or on the truck’s route.

InformationThere was no proper medium of coordination

between the suppliers and the out let managers.This all happened because of customer database was not maintained and outlet manager could not recall

the need of customer.The cost got increased and they were not able to

come across this problem in the absence of proper information system.

Therefore, commissionaires were created.

SourcingThe Pepperoni and Mozzarella a cheese is imported

from Australia and Spain respectively.To compensate an increased cost, they maintain a

local supply chain to reduce the cost like vegetables, wheat, tomatoes.

This provides the world class facility and taste by importing its main ingredients from Spain and

Australia but other ingradients from local vendors.

48%

20%

32%

Market Share

Pizzahut

Dominos

Others

Pizzahut

Outsourcing the ingradients

Supplier relationship

Strategic suppliers: dealing with issues that are going to make a difference in a company’s competitive success and generally relates to items that one buys, that

are used to create the product or service that a firm sells

In case of Pizza Hut, their strategic decision is to form a chain of local suppliers to reduce their cost. Now the company buys95% of the ingredients from the local vendors.

The key suppliers include Bharat Bor Factory Ltd(for Pizza Hutboxes), Elmac Agro India PvtLtd (for sauce, baby corn and red bean among other ingredients),Midas Foods (for soups and cornmeal),and Western Hatcheries and Venkys(both for chicken toppings, patties and wings

•Jalandhar,PunjabWheat

•Karnal,HaryanaCheese

•BhubaneshwarTomatoes

Baby Corn •Nepal

US Retail Product Segment

67.30

29.30

3.40

US Product and Services Revenue Percentage

Media

Electronics and other generalmerchandiseOthers

Books

CDs/DVDs

Magazine subscriptions

Competitors

Product focused retailers

Online Marketplaces

Mass merchandise

• Supply Chain Design– Deciding on the no and locations of distribution centers to support a seasonal and growing

business

– Ever expanding product line

– Warehouse design

• Inventory Segmentation and Policy– Which inventory to store in its facilities, versus inventory to be stored in upstream tiers in the

supply chain

– which products should not be carried at all, but supplied by third-party affiliates

• Order sourcing Cost Minimization– Which internal facility or external partner should be responsible for fulfilling the order

• Fulfilment Costs– Reducing variable cost per order

• Transportation – Balancing Cost and Service– Amazon.com offers free shipping and other options that can enable them to achieve a longer

planning cycle through longer service windows to customers

Supply Chain Challenges and Opportunities

Operating Models and Supply Chains

Amazon as Seller Amazon as Intermediary Amazon as Full Service e-Commerce Providers

• The base Amazon.com sales channel is the web store front-end that serves as the core of their business.

• Customers go to the Amazon.com website, browse for products, and place orders

• Once an order is placed, Amazon.com decides which internal distribution centre or drop shipper should be responsible for shipping the order to the customer

Initiated in 2000, the Amazon Marketplace and Merchants@ programs allow third-partycompanies to list their products on Amazon.com's website. Marketplace serves individualsellers and smaller companies.

This model allows retailers to maintain their brand and website customer ownership, while utilizing Amazon.com'sfulfilment network. An example of this is the website that Amazon.comdesigned and operates for Target, Inc.

Challenges

• Ownership of the customer relationship

• Owns or purchases the inventory• Executes the logistics of each

order

Challenges

• Amazon.com does not have a high degree of control over the supply chain delivery service that each partner provides

Challenges

• Amazon.com is responsible for sourcing the order from the appropriate distribution centres and delivering the order to customers

• Retail Outlets

– Amazon.com has zero retail outlets.• All sales are generated through the virtual stores created by the Amazon.com website and

affiliate websites. Amazon.com does not have to incur the incremental cost of opening a new physical retail store to attract new customers.

• Distribution Centres (Fulfilment Centres)– Amazon.com operates eight leased distribution centres throughout the

United States• These eight facilities account for a total of 4,465,000 square feet

– Location decisions are made based on proximity to customer concentrated

areas and tax implications.– Products that are easily sortable and conveyable are stored in highly

automated facilities

– Products that are large or have irregular dimensions are stored in less

automated facilities.

US Supply Chains Network

• Transportation Hubs - "Injection Points“– Amazon.com operates a number of transportation hubs that they refer to as

injection points

– Injection point locations are located in heavily customer concentrated areas

• Drop Ship Locations– Amazon.com utilizes the capabilities of its supply chain partners to deliver

orders directly to customers. These shipments bypass the amazon.com internal distribution centre network

US Supply Chains Network

Multi – Tier Inventory Model

• In this model, Amazon.com IT systems pass information to each tier in the supply chain model

• Physical products can then flow from any tier to the customer• Partners in second and third tier replenish Amazon.com distribution centres with their

inventory

Supply Chain Network

Supply Chain Network

Distribution Channel Network Procurement Channel

Value Chain


Marico

• Enhance long term value of company brands by achieving excellence in distribution performance

• Reduce total delivered cost

• 882 direct distributors, 153 super distributors, catering to 2393 small stockists and 4523 van markets

• Every month, 56 million consumer packs are sold to about 1.8 million households through 1.6 million retail outlets

Approach

• Just-In-Time• Global Sourcing• Shorten its planning cycle to 15 days from 30 days• Revised its demand planning process • Leveraged IT System• ERP system: MI net• Vendor Managed Inventory

Results

• Decreased stock-outs associated with distributor sales to retailers by 33%• Reduced lost sales due to stock outs by 28% thereby improving revenue by 1.5%• Lowered excess distributor inventory by 33%• Reduced late deliveries to distributors by 37.5%

Dabur

• Maintaining the Oldest supply chain in India• “DARE” (Driving Achievement of Retail Excellence): Direct Shipment Strategy• Advantages of implementing strategy are –

· The retailer avoids the expense of operating a distribution centre· Reducing lead time• Reduced transportation cost• Reduced Bull Whip effect

• MILK RUN system


ITC

• E-Choupals• Link directly with rural farmers via the Internet for procurement• E-Choupal tackles fragment ed farms, weak infrastructure and the involvement of

intermediaries

• Installs computers with Internet access in rural areas of India to offer farmers up-to-date marketing and agricultural information

• Farmers can directly negotiate the sale of their produce with ITC Limited• Each ITC Limited kiosk having Internet access is run by a sanchalak — a trained farmer• Each installation serves an average of 600 farmers in the surrounding ten villages within about a

5 km radius• The warehouse hub is managed by the same traditional middle-men, now called samyojaks

Results

• Helping ITC in creating strong connect with villagers• Enhancing its supply distribution network• Entry-level soap brand, Superia, widely available in the village because e-Choupal

Sanchalaks were helping in local marketing• Greater pricing power to the company• Good quality output• Farmers get real-time information

Supply Chain Challenges and Issues

Supplier/partner relationship management

• Different organizations, even different departments within the same organization, can have different methods for measuring and communicating performance expectations and results.

• Managers must let go of internal biases and make a conscious choice to follow mutually agreed upon standards to better understand current performance and opportunities for improvement.

• Using a common language and framework makes it easier for teams to communicate, speeds benchmarking efforts, and enhances the evaluation of best practices.

• For example, SCOR provides a common language for supply chain classification and analysis.


Talent Management

• As experienced supply chain managers retire, and organizations scale up to meet growing demand in developing markets, talent acquisition, training, and development is becoming increasingly important.

• Supply chain leaders need a thorough understanding of the key competencies required for supply chain management roles, specific job qualifications, methods for developing future talent and leaders, and the ability to efficiently source specific skill sets.

• Develop Multi Functional, non departmentalised Management Cadre

• Recruitment of well qualified management trainees.

• Inculcating a professional “learning” culture


Downward Flow of Information


Sales and Operations

• All companies were operating S&OP at some level but reported not to the levels of discipline and standards required to utilise the process as the company´s one operational planning process utilising ‘one set of numbers’.

• Improved use of IT and more standard reports available from ERP

• Reduced and more focussed S&OP meetings

• More discussion and focus on exceptions rather than regular issues

• Improved accuracy of demand planning

• Integrating Distributors within the S&OP process


Sustainability

• Sustainability has become a key priority in design and operation of supply chains.

• Customers becoming more environment conscious and thus increasing importance to develop sustainable supply chains.

• Reducing risk and improving financial performance.

• Making world more sustainable.

• Most concrete actions have been in reducing risk and improving financial performance.

• While much needs to be done, many companies have reported success in improving sustainability.

• Firms should measure and report on four main categories – Energy consumption, Water consumption, Greenhouse gas emissions, Waste generation.

• Switching to a more efficient light bulbs at stores, adding skylights for natural light.

• Reducing packaging, banning plastic bags etc.

Supply Chain Performance Attribute for FMCG Industry

SUPPLY CHAIN PERFORMANCE ATTRIBUTES FOR THEFAST MOVING CONSUMER GOODS INDUSTRY

MADHU BALADINESH KUMAR

Introduction

• FMCG industry is a quick, agile industry with a wide range of products.• Such a huge industry is recognised by its customers, and its supply chains are seen as

role model for other industry.• FMCG supply chain is faced with unique issues like Bullwhip effect and high return &

transit losses.• In order to achieve the organisational goal of making money , supply chain managers

try to find cheaper suppliers, low-cost manufacturing facilities, strategically located distribution centres and highly profitable or high-volume customer markets

• The concern lies with the performance indicators the supply chain managers use to manage and monitor the supply chains , resulting in using inappropriate measures to tackle the supply chain issues.


Supply chain activities in a consumer good activity chain

• Most of the products are non durables and are consumed within a month• Require well coordinated distribution network• Agile and rapid responsiveness are the key differentiators• Buying and selling are the key functions of FMCG industry• Making, moving and storing are less important functions that are normally outsourced• Manufacturing process is simple but complex distribution networks.


Typology for FMCG Supply Chain

Functional Attributes

Attributes Contents

Products procured Standard (raw material) and specific (packaging)

Sourcing type Multiple (raw); Single/double (packaging)

Organisation of the production process Flow line

Repetition of operations Batch production

Distribution structure Three to four stages

Pattern of delivery Dynamic

Deployment of transportation Unlimited routes (third stage)

Relation to customer Stable

Availability of future demand Forecasted

Product life cycle Several years

Product sold Standard

Portion of service operation Tangible goods

Loading restrictions Chilled & frozen transport


Issues faced by FMCG Supply Chain

• Supply chains own various production plants, including co-manufacturers and co-packers,which increases complexities in the supply chain• Distribution is handled by specialized firms, which increases the pressure on relationships• The retail sector is pressurising the industry to manufacture and supply at the lowestpossible price and to decrease the response time. •The other concern with the retail sector is the ‘dealer-owned brands’, which makes them not only the FMCG organisations’ customers, but also their competitors.

Comparison of operation performance model

Criterion REA SCOR BSC

Suitable for FMCG Industry Not Strong Very Strong Strong

Define standard supply chain activities Not Strong Very Strong Strong

Analyse and measure performance at all levels/all activities

Not Strong Strong Very Strong

Provide benchmarking Not Strong Very Strong Not Strong

Suggest best practices Not Strong Very Strong Not Strong


Definition of Supply Chain performance attributes

Performance Attribute Performance attribute definition Performance indicator variable

1. Supply chain reliability The performance of the supply chainin delivering: the correct product,to the correct place, at the correcttime, in the correct condition andpackaging, in the correct quantity,with the correct documentation, to thecorrect customer.

1. Perfect order fulfillment

2. Supply chain responsiveness The speed at which a supply chainprovides products to the customer.

2. Order fulfillment cycle time

3. Supply chain flexibility The agility of a supply chain inresponding to marketplace changes to gain or maintain competitive advantage.

3. Upside supply chain flexibility

4. Upside supply chain adaptability

5. Downside supply chain adaptability

4. Supply chain cost The costs associated with operating the supply chain.

6.Supply chain management cost

7. Cost of goods sold

5. Supply chain assetManagement

The effectiveness of an organisation in managing assets to support demand satisfaction.

8.Cash to Cash cycle time

9.Return on supply chain fixed assets

6. Component Manager The operational management of supply chain components such as supplier & customers.

10. Supplier Management

11. Customer Management

Documents

FMCG Sector Chains