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ISSUES AND CHALLENGES OF SUPPLY CHAIN MANAGEMENT IN FMCG

SECTOR

Article · January 2019

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 ISSUES AND CHALLENGES OF SUPPLY CHAIN MANAGEMENT
IN FMCG SECTOR

DR. P. RAJAN CHINNA

Assistant Professor,
Dept. of Logistics Management,
Alagappa University,
Karaikudi- 630 004. (TN) INDIA

Impact of globalization policy India has accepted, many Indian and foreign company’s
started business in India due to global manufacturing hub. Increasing demand in domestic
and international markets is opening a new world of opportunities for the Indian Industry.
Indian industries to provide cost effective quality output with stringent delivery schedules.
Issues in supply of inferior quality, delayed supply, unwarranted cost escalation, etc. would
adversely impact the credibility and business potential of the Indian industry. Amongst many
difficulties faced by Indian manufacturers, supply chain disruption management is a major
issue, which can result in large tangible and non-tangible losses. The current research paper
deals with Supply Chain Management is and how it is affecting organizations, what are
different challenges and it can be proved as a tool for improving overall performance in
today’s global competitive environment.

Key words: supply chain management, SME, issues and Challenges

Introduction

Global markets are expanding beyond borders and re-defining the way demand and supplies
are managed. Global companies are driven by markets across continents. To keep the cost of
manufacturing down, they are forced to keep looking to set up production centers where the
cost of raw materials and labor is cheap. Sourcing of raw materials and vendors to supply the
right quality, quantity and at right price calls for dynamic procurement strategy spanning
across countries. With the above scenario you find companies procuring materials globally
from various vendors to supply raw materials to their factories situated in different
continents. The finished goods out of these different factory locations then pass through
various chains of distribution network involving warehouses, exports to different countries or
local markets, distributors, retailers and finally to the end customer.

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Why SCM strategy is important for an Organization?

Supply Chain Strategies are the critical backbone to Business Organizations today. Effective
Market coverage, Availability of Products at locations that hold the key to revenue
recognition depends upon the effectiveness of Supply Chain Strategy rolled out. Very simply
stated, when a product is introduced in the market and advertised, the entire market in the
country and all the sales counters need to have the product where the customer can buy and
take delivery. Any glitch in the product not being available at the right time can result in the
drop in customer interest and demand which can be disastrous. Transportation network
design and management assume importance to support sales and marketing strategy.

In a global scenario, the finished goods inventory is held at many locations and distribution
centers, managed by third parties. A lot of inventory would also be in the pipeline in
transportation, besides the inventory with distributors and retail stocking points. Since any
loss of inventory anywhere in the supply chain would result in loss of value, effective control
of inventory and visibility of inventory gains importance as a key factor of Supply Chain
Management function.

FMCG SECTOR IN INDIA

The fast moving consumer goods (FMCG) sector is the fourth largest sector of the economy
with the size of about more than Rs 500 billion. FMCG sector generally includes a wide
range of frequently purchased consumer product such as soaps, dairy products, confectionary,
soft drinks, fruits and vegetables and batteries. FMCG products usually have a low unit cost
but large volumes. Top ten FMCG companies in India consist of both global players such as
HUL, Nestle, Cadbury, P&G and Indian companies such as Amul, Asian Paints, Dabur etc. In
the FMCG sector the supply chain performance is a key factor. The FMCG industry is
characterized by complex distribution network and intense competition forcing firms to
constantly work on supply chain innovation. Companies with better supply chain system will
perform well, whereas those with poorly managed supply chains will find it tough to even
survive in the competitive market.

SOME OF THE MAJOR CHALLENGES ARE THE FOLLOWING

Managing availability in the complex distribution Set Up

The Indian FMCG sector has to work with very complex distribution system comprising
multiple layers of numerous small retailers between company and end customer. For example
a company like, Marico has to ensure reach to 1.6 million retailers spread throughout the
country. As the number of SKUs (Stock keeping Units) have been increasing exponentially,

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just ensuring availability at the last stage of distribution has become a nightmare for
companies. Standard solutions applicable in developed countries are not suitable for a
country like India. Working with smaller pack Sizes Unlike in developed countries ,where
companies have been trying to work with large pack sizes (reduction in transportation
,handling and packaging costs for large pack sizes can be passed on as price cuts to price
sensitive customers),in India the trend is in the opposite direction. To increase market
penetration, Indian companies have realized that they need to reach out to consumers present
at the lower end of the economic pyramid. This consumer base can be tapped in to only by
offering small pack sizes. However smaller pack sizes mean higher packaging and
transportation costs for the companies. Eventually companies will have to find innovative
ways of balancing market penetration and logistics cost

Entry of National Players in the Traditional Fresh Products sector

National players want to market “fresh” products that have been traditionally handled by
local players in each region. For example, ITC wants to make inroads in the market for
‘ATTA’ and Nestle for yoghurt. In these items, the freshness of the product is an important
requirement from the consumer’s point of view. Traditionally national companies have
worked with centralized plants, where they can manage quality and also enjoy big economies
of scale. As freshness is one of the most important criteria from the customer’s point of view,
national players will have to work with decentralized manufacturing plants. Balancing
quality, freshness and cost is a major issue for national players. The following is an important
case of AMUL where a local firm has successfully managed the complex tradeoffs by
building superior supply chain capabilities.

Dealing with complex taxations structures

Because of the complex taxation structure, it is difficult to treat India as one market. Varying
local tax structures across states encourage traders to indulge in the smuggling of goods
across states, leading to the creation of grey markets. Experts are of the view that smuggled
goods account for about 15 percent of the total goods flow. Such activities distort the plans
and activities of FMCG companies. Further because of the tax on the interstate sales,
companies can never ship goods to customers located outside the state. They first have to
transfer goods to the state level warehouses on a consignment basis and then supply the
goods to the customers. With the introduction of VAT, harmonization of taxes across states
and the possible removal of tax on inter-state sales, FMCG companies will see lots of
changes in the way they have been managing their supply chains.

Dealing with Counterfeit Goods

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According to recent study conducted, counterfeits accounted for loss of sale worth more than
Rs 300 billion for the FMCG sector every year. P&G found that various counterfeit products
of Vicks Vaporub raked in sales equivalent to 54 percent of the original. To prevent such
losses, FMCG companies in India have to ensure that they exercise greater control over their
distribution channel and not just leave it to the market forces.

Opportunistic Games played by the Distribution Channel

It is a common notion in distribution that only 50 percent of the promotion actually reaches
the final customer. This is due to the fact that many distributors work unscrupulously. Rather
than playing the role of the facilitator, they try to grab a significant part of the promotion
budget for themselves. One FMCG company found that it ended up paying significant
amounts as rebate to its trade channel because of illegal printing of coupons by some
wholesalers and distributors. Some of these distributors also indulge in the illegal movement
of goods from one market to another during local promotions. Due to which companies lose
control of the sales of their products (the company may want to target a specific market but
the distributors might divert the goods to different region). Thus, FMCG companies end up
wasting a significant part of their resources on these issues, which do not really add any value
to their customers.

Infrastructure

Poor roads and unreliable transport systems have an adverse impact on costs and
uncertainties. Non-availability of infrastructure, like cold chains affects certain product
categories significantly .even if the cold chain is available, power problems add to the
uncertainty. For example in the ice-cream business, if the ice-cream melts even once because
of the non-availability of power, the quality in general and the taste in particular, of the ice-
cream are adversely affected. Most Indian cities face power problems in summer and ice-
cream manufacturers have to live with these problems in their distribution network. In
general FMCG companies have to take these issues into account while planning their supply
chains.

The Dabbawalas of Mumbai case

The Dabbawalas of Mumbai deliver home prepared food to the middle class office workers.
on every working day they collect more than 175,000 lunch boxes (dabbas) from the
customer’s house between 7:00 and 9:00 am and deliver the same to the respective offices by
12:30 pm .the empty lunch boxes are picked up by 3:30 pm and returned to the homes of their
respective customers by 6:00 pm. the dabbawalas have developed ingenious systems that use
a very simple but effective coding system to sort the lunchboxes, on both the forward and the
reverse journey’s. The extensive use of public infrastructure in Mumbai (local trains) helps

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keep the operation costs low. The use of local trains and an ingenious coding system allows
them to manage their supply chain remarkably well, which translates in to high quality
service, at an affordable cost for the customer

Emergence of third –Party Logistics provider

Traditionally most companies have been managing all logistics activities themselves so far
the logistics sector in India has lacked professionalism. The new players are still to learn a lot
about Indian conditions and also are not in a position to offer economies of scale. Hence they
will be of value only to new MNCs and FMCG players who operate in the mid volume high
variety segment of the market. Established FMCG companies like Nestle and HUL are
unlikely to use their services as logistics solution providers as they are not likely to be cost
effective. The problem gets compounded further because most Indian FMCG companies have
skewed sales patterns that place huge demands on service providers in the last week of
month. Thus service providers are not in a position to manage their resources effectively.
Over a period of time these 3PL companies will develop an understanding of the Indian
market and also the relevant capabilities necessary to handle these markets. This will enable
them to bring down their costs and to provide cost effective services to even large players like
HUL

Emergence of Modern Retails

In the west large departmental or discount chains have managed to grab huge market shares
and have clout with FMCG companies. On account of their bargaining power, they are able
to demand huge discounts from FMCG companies. Like developed markets, modern retailers
in India have been trying to extract higher margins from FMCG companies so as to offer
better deals to their customers. Unlike in the west margins in distribution are traditionally
quite low in India. Hence in India the FMCG sector finds it difficult to offer the kind of deep
discounts that the modern retailers have been demanding. On one hand FMCG companies
will have to bypass their existing stockists and distributors, so there is a likelihood of channel
conflict. On the other hand they also have to examine the impact of higher discounts to
modern retailing on the overall distribution system. Further modern retail chains are also
likely to introduce private label brands which will pose a considerable threat to the existing
manufacturers

HUL’s Initiative

A significant part of India lives in rural areas not well connected by road. Most FMCG
companies have not been able to penetrate these rural areas. HUL has launched a new
initiative called project-SHAKTHI to increase its penetration in rural areas in a cost effective
manner. HUL has partnered with self-helping groups (SHG) to extend its reach to rural areas

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particularly those areas where there are no established HUL distribution networks because of
lack of connectivity. A SHAKTHI dealer is a member of an SHG, who works as a direct –to
consumer HUL Distributor selling primarily to villages in her neighbourhood. HUL also
provides sustainable livelihood opportunities to underprivileged rural woman.

Ensure permanent on-shelf product availability

You need access to accurate information on product flows at all times during product transfer
from production plant to warehouse, or to the end customer. Reliability of tracking and alert
information is crucially important to uninterrupted goods supply, enabling you to anticipate
and implement backup solutions whenever needed. NWCC meets your demanding needs here
by offering high-performance information systems and real time supply-chain traceability
utilities.

Optimize costs and investments

Optimization of costs and investments is a matter of priority and has to be factored in along
with your production needs. So you expect your logistics partner to provide advice and
strategic intelligence on the organization of your transport plans and industrial processes at
logistics sites. You can count on the experience of NWCC to help you optimize your
investments and achieve continuous improvement.

Anticipate and organize during peak periods

To anticipate seasonal peaks and achieve year-round operational excellence, especially

during promotional offer periods, you need total adaptability. For many years now, NWCC
has been addressing this challenge on a daily basis, through optimum management of human
resources.

Accommodate environmental and social concerns

Transport plans are designed to allow for environmental impact and maximum attention is
given to personnel safety throughout all operations. NWCC implements a panoply of
measures and initiatives on environment and safety issues, mobilizing its personnel to ensure
due consideration for sustainable development throughout the supply chain and full
compliance with applicable standards and regulations.

Conclusion

Indian economy as a whole and the manufacturing sector in particular, need to improve
supply chain performance considerably if Indian firms are to compete globally. Indian firms

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 need to learn from progressive firms in developed economies, which have managed to
improve supply chain performance considerably. The companies whether it is a national or
global, give importance to supply chain management system to enhance the business and to
become the competitor as well as leader in the market.

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