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Page 1 of 1 Reliance Industries plans for retailing in India Strategic Implications for the supply chain and logistics industry in India Sachin Baxi ET Intelligence Group January 25, 2006 The logistics industry is upbeat about the prospects for business arising out of Reliance Industries plans for entry into India’s burgeoning retail industry. Everyone from truckers to IT providers are following developments closely and charting out their strategies in tandem. ETIG rounds up a few key views and implications. We will update as events occur. The plans There are several implications for the Indian supply chain scene if all goes to plans announced by RIL. For starters, the plans announced, in line with most RIL plans, call for some of the largest investments in retail ever seen or announced in India- over Rs 3,400 crore, or US$ 0.8 bn. A separate subsidiary is being formed for this venture as well. RIL plans the entire gamut of retail formats, from hypermarkets to convenience stores in over 700 cities in India. Plans are to launch over 1,000 or more of these formats. Implications Such plans call for a massive investment, planning and logistical support. A retailer with ambitious plans can only succeed if his supply chain is in place- flexible, scalable, adaptive, and responsive- all of it and more. Given RIL’s proficiency in project management, it can be assumed it would put in place the backend, the supply chain, before going in for the front end, and although one would depend on the other, a clear focus and action on the SCM front remains paramount. Increasingly, the battle is between supply chains, and not really formats. So, what are the implications for the supply chain in India? 1. Logistics: The key to successful pan-India retail will remain logistics, the physical movement of goods – to stores from vendors or other stores/ distribution centers, and return flows to vendors and stores. The scale of the plans means that there are opportunities for warehousing players, express logistics, vehicle owners and drivers, brokers and truckers. RIL could well tie up with existing logistics players (possibly preferring those who have retail logistics experience, or have established retail divisions) for either regional logistics, or specific routes, or a turnkey contract for national level. It could also tie up logistics providers for certain categories, like imports, or jewellery or apparel. It would certainly attempt for backhaul agreements with other companies, like HLL or ITC, for making sure return loads are available and squeeze out more cost savings from logistics vendors. RIL understands perfectly well that remaining ‘asset-light’ is vital to logistics. It won’t want to buy trucks or warehouses; it will lease them and that means more business for players. What it does also mean is that many of the players will need to seriously look at their cost structures, their skills, manpower, investments and positioning to really be able to fit into RIL plans as they evolve. 2. IT: many technologies of vital importance to India’s success in global supply chains haven’t been adopted yet by both retailers as well as players and companies because of a lack of scale that would help reduce cost per piece. There’s also inertia and lethargy- possibly even Page 2 of 2 a lack of vision. Certainly funding is no issue, with banks and even buyers offering credit and assistance. Usually, at least for Indian vendors, it’s only at the instigation of large retailers – stakeholders in business, if you like- like wal-Mart, Tesco and Metro that vendors go in for bar coding, RFID or cross docking or track and trace systems. These buyers bring in massive scale and drive home that advantage. That scale could well be created by Reliance if its plans go well. ETIG’s research with logistics players shows that RIL has already started talking about ECR (Efficient Customer Responsiveness), RFID, bar coding, common standards for all formats and so on with agencies like software providers and GS1, the ECR / RFID standards body. Given RIL’s tendency to plan for the next decade, it may be quite possible they would demand best possible technology support from their vendors. Clearly, there’s business in it for software providers, ERP, tracking technology players, hardware majors, computers, telecom and so on. But more importantly, the benefit of scale should enable players to reduce cost per implementation, leading to higher investment in production, or imports. That in turn should make it easier for other retail players to buy latest IT cheaper than before– especially RFID or bar coding. 3. Warehousing: this will be key. Warehousing anyway was a key focus area for most logistics players (as was clearly brought out in ETIG’s SCM Best Practices survey 2005, (hosted on www.etintelligence.com / research channels / supply chain mngt / reports) with every player planning to lease (mainly) or buy (rarely) space near strategic locations, either demand centers (Mumbai/ Delhi etc) or strategic geographical centers (Nagpur/ Indore/ Hyderabad). Ril will need distribution centers (DC) to feed the various formats- and that means space, location and IT. Some logistics players will benefit directly, while many local city-specific players may well be assisted by RIL to set up DCs. These DCs cannot be just space- they necessarily have to be ‘logistics pivots’ around which entire systems of replenishment, logistics, storage, IT and time will revolve. Inventory management skills will be in great demand, so will be forecasting and planning. This in turn means that those players who have invested in it already stand a good chance of getting in with RIL on the ground floor. Players may also need to create hubs around major centers, close others and open yet many more. In retail, its service levels in replenishment that matter the most- with scale or consolidation necessary accessory considerations. 4. Manpower /employment: there was already an acute shortage of trained manpower in logistics in India. The requirements of RIL for its various formats will be huge- right from entry points all the way to the CEO levels and that will create a whole new market dynamics. Top-level movements have already happened- from retail players and from other vendor companies to RIL. The retail industry would expect pressure to retain people in their SCM departments along with other people like category managers, or floor managers. It’s not impossible to imagine that eventually, if plans go well, RIL itself may start training SCM managers or tie up with colleges to get manpower. Either way, it’s a good time to be in the supply chain job market! This means that we could see a shift upwards in salary levels of many supply chain functions, if not across, than certainly in the retail and logistics fields. It would also mean the influx of much overseas talent – either Indians lured back from the Middle East or SE Asia, or expatriates. 5. Vendors: RIL’s massive plans for retail are of vital significance to vendors of all kinds- especially product providers. Globally, again, it’s the retailers like Wal- Mart and Tesco that Page 3 of 3 have driven a lot of changes through production, design, logistics, value engineering – leading to more competitive pricing- into the vendors business. Indian vendors – especially the SME segment- will need to gear up for scale and quality at competitive prices. The spill over effect is that a good vendor is good news for the rest of the retail industry as well. SME vendors should – even without RIL’s plans- increasingly use banks as strategic partners rather than financiers. RIL’s backing for purchase or procurement with a SMERA (SME Ratings Agency) rating should be good news for SME vendors. Insurance should see upswing as well, as the larger scale brings the need to insure safety in greater focus. 6. Standards: You set the pace if you’re the biggest. Wal-Mart does it well. Its insistence on adopting RFID caused ripple effects throughout the world. RIL may be able to set the pace here if it insists on a common standard for many aspects- coding, data, storage, track and trace, billing, invoice details, order fulfillment. This would be good news as it would develop a common platform for the retail industry- and supply chain players, which would make data handling, and analysis easier. 7. Sourcing and Compliance: a new vital area for such a large undertaking is procurement and its compliance. Sourcing will be crucial, as the massive amounts of data, information, SKUs and packs will need keen awareness of where to get what and at what price. Having procured the goods and services, both RIL and service providers will need to have a system in place to make sure the goods and services are sold / bought as per the terms and conditions- and that means compliance. Put together, spend management – as a business and a discipline should see demand. Professionals’ expert in sourcing and procurement, as opposed to pure purchase, will see greater demand for their skills. There are significant opportunities that retail development always throws up- after all the stores have to be fed goods and services in real-time at least cost. Retail supply chains can be complex, and when dealing with a fickle constituency like customers, need to be really well grounded to adapt as per requirements. The implications for a large-scale entry like RIL plans is as critical for retail industry as it is for ancillaries and logistics service providers.