Feature | 156 days ago |

In a country where lack of sustainable infrastructure resulted in primeval warehouses and unorganized logistics, the entry of Wal-Mart may bring about a change, says Anuja Abraham.

Wal-Mart is probably the biggest unbeaten retailer out there that can make their competitors pull up their socks. It is growing rapidly with 5,236 stores in 14 countries outside the United States. They are famous for their tough negotiations with suppliers and forcing competitors to bring down prices, all in the hope of delivering quality products to their customers at the lowest prices.

They have currently made their presence felt in India through their only cash and carry store in Gurgaon. Now the retailer wants to expand its presence in India and hopes to open retail stores, if the government relaxes rules on the 51 percent FDI scheme.

But will it affect anything more than the purchasing choice of industrialists, hoteliers, and restaurateurs with its offering of products of highest quality at lowest prices?

According to Ms. Sharmila Amin, South Asia – India Area Head of PanProjects Business Division of Panalpina World Transport India (P) Ltd, logistics is at the heart of the Wal-Mart operation that will enable them to lead ahead of their competitors at a lower cost. “When a company like Wal-Mart, which has one of the world’s most sophisticated supply chain management (SCM) practices, enters a market like India,” says Ms Amin, “with those systems the net result would be to push their competitors to upgrade their SCM system. It will force Indian counterparts to upgrade and synchronize its SCM systems just to remain competitive.”

Switch To Organized Sector
Wal-Mart is able to replenish goods directly from the manufacturer’s warehouse to the store shelf in less than 48 hours, faster than any other competitor. It has the largest private fleet in the world. It also has a “private fleet driver hand-book” with strict rules of conduct in it; non-compliance will result in the termination of the driver’s services. Transportation costs of Wal-Mart were estimated at approximately three percent of the total costs as compared to five percent of its competitors.

Mr. Uday Malya, CFO of BLR Logistiks India says, “It might do some good to the organized logistics sector considering much work is allocated to the unorganized sector at present.” He believes that there is not much unity in the rate, efficiency of the unorganized sector. But this will change, since big players like Wal-Mart deal with only organized players.

Currently, India’s logistics sector comprises six percent of organized and 94 percent of unorganized logistics and it contributes at least 13 percent to the country’s GDP.

Transportation in India is not only largely unorganized, but also fragmented. Inadequate skills, lack of technological know-how, outdated machinery, and competitive prices are still prevalent in the industry. Cost-cutting is a major factor that drives the Indian logistics sector.

Mr. Tom Joseph, CEO of Agility Logistics, holds similar views. He believes the logistics sector is in its infancy with the presence of roughly six percent-eight percent of organized warehousing, coupled with limited capabilities of the operators in terms of infrastructure, IT capabilities and processing.

But most industry experts believe the logistics sector is in for a makeover in the coming years.

“With my experience of working with Wal-Mart in the US, I can confidently say that they are true game changers,” says Mr. Asim Behera, General Manager at SwissLog. “They are a very progressive company that studies every aspect of logistical efficiencies. I firmly believe that they are going to be a vital catalyst for changing the Indian logistics scene for retail. I foresee them as the pioneers for possibly bringing the concept of Mega Distribution Centers in India. With regards to India being ready for handling Wal-Mart’s stringent requirements, I think we should look at McDonald’s supply chain success in India, which is a testament to the fact that India can produce wonders with the help of visionaries.”

Upgrading Warehouses
Wal-Mart has one of the largest private distribution operations in the world. They have more than 40 Regional Distribution Centers (DC). Each one is over one million square feet in size. They operate 24/7 to keep their fleet of tractors and trailers rolling. Inside each DC, more than five miles of conveyor belts move over 9,000 different lines of merchandise. Each DC supports between 75 and 100 stores within a 250-mile radius.

Warehousing and distribution is vital to the back-end of any supply chain. As of now, the warehouses in India cannot match the sophistication of international warehouses. This sector is focusing on increasing the shelf life of products through product maintenance and pick efficiency to match industry standards.

“While  the opportunity is  big,  it  also  calls for  upgrading  the   mindset of  the  warehousing  users  in India  to  use  an outsourced  operation  who  can bring  in  more  visibility on the stock, which  will help  in  reducing the  stockholding  cost, increase  the availability of the  stock at the  shop  floor  available for  sale ( without  a stock-out situation while  stock remains in the warehouse) and  reduced  inventory levels in warehouses by making  sure that  stock is on the move rather than remaining in the warehouse,” says Mr. Joseph.

Mr Pankaj Chandra and Mr Nimit Jain of IIM-A have published a study (2007) in which they note that warehousing dominated by small players, with poor infrastructure and poor deployment of handling, stacking and monitoring technologies, has had a detrimental effect on the food supply chain due to low investment in cold chains and allied machinery.

Mr. Vishal Gupta, MD of Total logistics, notes that warehousing and distribution will definitely be impacted by the entry of big players like Wal-Mart. Mr. Vineet Kanaujia,General Manager (Marketing), Safexpress says, “Warehousing will be the nucleus of growth of the supply chain and logistics industry in the near future. There will be an exponential growth in demand for world-class warehousing. More and more companies will start concentrating on their core competencies, while having outsourced their warehousing requirements to 3PL service providers.”

According to a 2008-09 KPMG report, Indian warehousing occupies 433 million square feet (msf) area. Of this, eight percent is organized warehousing (36 msf) and 92 percent (298 msf) is unorganized. In the unorganized warehousing space also, 27 percent (107 msf) is unaccounted supply, 29 percent (117 msf) is public sector and 44 percent (173 msf) is in-house.

According to the Planning Commission, the total existing warehousing capacity is 80 million tons. The additional requirement over the next five years is 35 million tons.

Inevitable Change
The prospect of a total refurbishment of the back-end supply chain that mainly consists of warehousing and distribution is also very high due to the entry of big players in the market, believes Padmini Pagadala, General Manager of TPG Consulting. Ms Pagadala says: “Wal-Mart alone will not be responsible for modernization of  warehousing. The time is right, the economy looks good. Irrespective of Wal-Mart, people are already starting to get conscious about a few things: Service level and how they can deliver in the most efficient and cost effective manner. There are a lot of businesses moving from conventional warehouses to more sophisticated warehouses just to address these two points. However, the entry of MNCs will quicken the process.”

Wal mart’s sustainability reports are impressive for the fact that they have the most sustainable and efficient logistics in the US and UK. Wal-Mart has a distribution center in Tianjin, China, that has won a Green Supply Chain Award from the China Supply Chain Council in 2008. The 4,55,000-square-foot distribution center has a number of sustainable features that help reduce CO2 emissions and energy and water consumption.

The Seiyu Group, a subsidiary of Wal-Mart in Japan, has made it possible to transfer 16 percent more goods over the same distance  through methods of efficient routing, loading techniques for trucks, consolidating operations and deliveries between 2007- 2008. They have set an aim to reduce fuel consumption required to transport one ton of goods over one kilometer by 25 percent by 2012.

Looking at the effect Wal-Mart has had on the supply chain of neighboring Asian countries shows that it, indeed, holds a promise for an upgradation in the Indian logistics sector.

“It may not be immediate,” discloses Mr. Behera “they will try to localize practices and adopt the local culture, but eventually it will change.  Topics such as pick efficiencies, cold chain compliance, ergonomics in a Distribution Center operation, and safety will be discussed much more than they are today.”