Why India is Reinventing its Traditional Distribution Networks

This article originally appeared on 28th July 2017 issue of the Financial Chronicle

On the first of July, after a lot of excitement, confusion, and concerns, GST was rolled out all across India. The highly anticipated tax reform which had been in the works for at least a couple of decades is expected to greatly simplify the ease of conducting business across the federal nation. While the benefits and complications of GST have been debated at length, the important supply chain changes that it may cause have been sidelined and its importance overseen. If well used, the abilities of GST combined with omnichannel commerce can empower brands and manufacturers to finally reinvent their long-standing systems.

Traditional Distribution Structures

Indian FMCG and manufacturing industries have traditionally had multi-tier CFA, dealer/distributor, wholesaler, and retailer networks with the number of nodes increasing or decreasing depending on the size of the company and market presence in their particular geography. The previously existing excise and sales tax components meant that the supply chain network was mostly designed to optimize tax outflows and not really the core value drivers of any supply chain which, in an even playing field would be the cost of manufacturing, cost of procurement, labor, and logistics costs. Post GST, most companies could have a real opportunity to relook their supply chains with a critical eye and design networks and nodes (factories, stocking locations, regional distribution centers) based on fundamental supply chain principles and not mere tax evasion. Consequently, we can already see major automotive and FMCG companies investing in large automated warehouses that are much more sizeable and technically superior to their otherwise existing infrastructure.

The Omnichannel Disruption of the Marketplace

The last decade has seen massive growth in ecommerce and omnichannel marketing in India, both in urban and rural market spaces. Apart from the more famous ecommerce platforms such as Flipkart and Amazon, most retailers have their own ecommerce websites. Market spaces like Tata CliQ and  BigBasket are gaining increasing popularity in urban clusters. The ease of an omnichannel experience that a user expects by ordering on their mobile phones and similar processors translates into a redesigning of traditional distribution networks and fulfillment strategies. India’s largest FMCG multinational has been running a program where an end customer can order from their homes through an app while a neighborhood retailer can fulfill the order.

The Reinvention of Traditional Structures

A combination of the two above mentioned factors i.e. real supply chain optimization enabled by the GST reform and omnichannel commerce and fulfillment strategies mean that companies are thinking about reinventing their traditional structures, whether to keep up to customer demands or to invest more in their growth, now that their obligation to evade tax has eased. Traditional distribution management systems where sales and inventory details need to be synced at scheduled intervals are slowly being replaced by mobile apps, web-portals, and microsites. Retailers or distributors in the lower node of the supply chain can order from the CFAs or manufacturers directly. The manufacturers in turn gain clearer visibility, making them agile enough to pass on promotions and other schemes much quicker. This also leads to a more even battlefield for small local brands, allowing them to reach a pan India market, as they are no longer dependent on stocking locations in every state to reach their customers. In contrast, the multinational and Indian majors who controlled the channels on the virtue of their size (apart from brand pull) need to effectively nurture engagement and loyalty amongst their channel partners in order to retain as much monopoly as they can garner.

Business to business commerce in India is expected to get a serious facelift, and the customer-friendly aspects of business to customer marketing are expected to be incorporated into the systems and processes of B2B as well. Clunky software products, file transfer protocols at the end of a day’s business and month end pile up of invoices that need to be printed, will slowly give way to online ordering, mobile-based collaboration and replenishment mechanisms, as the millennial workforce will increasingly make up the employee numbers of India.

Share

General Manager and Business Head, Strategic Initiatives at Capillary, Jayaraman Krishnamurthy has 20 years of total experience in CPG, Manufacturing and Retail Industries having consulted and worked for leading organizations in both India and across continents. He has headed Business Transformation Initiatives, Supply Chain and Logistics Functions for brands under SAP, TCS, Satyam Computer Services and Asian Paints etc.