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“Supply Chain Management:
A key to Success in Indian Rural Markets”
Submitted by:
Vishal Bishnoi
1
Associate Professor,
School of Business Studies
Shobhit University,
Meerut
Email: [email protected]
Contact No: +91-9411261432
Residence : A-50, Vaishali Colony,
Garh Road, Meerut,
Pin. 250001.
2
“Supply Chain Management:
A key to Success in Indian Rural Markets”
Abstract
“In India, approximately 60% of food quality is lost in the supply chain from the farm to
the final consumer. Consumers actually end up paying approximately about 35 percent more
than what they could be paying if the supply chain is improved, because of wastage as well as
multiple margins in the current supply structure. The farmer in India gets around 30 percent of
what the consumer pays at the retail store. Compare this with the situation in developed
countries, where farmers may receive up to 70 percent of the final retail price and wastage levels
are as low as 4 to 6 percent. One can easily understand the benefits that could be generated from
emulating those practices and tapping that expertise for the supply chain in India.”
Supply Chain Management has to play a key role in rural market of India, contributing to
improved relationship with suppliers and customers and income generation. Managing the
supply chain has become a way of improving competitiveness by reducing uncertainty and
improving service. This paper will seek to highlight the importance of managing the Supply
Chain and logistics in Indian rural markets to delivers goods and services in a cost effective
manner.
Keywords: Consumer, Fast Moving Consumer Goods (FMCG), Gross Domestic Product,
Logistics, Supply Chain Management, Rural Market, Warehouse,
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1. INTRODUCTION
One of the guiding principles of modern management is – ‘think global, act local’. To be
able to “act local” hence it is necessary to be familiar with the “local”. India lives in villages,
agriculture contributes slightly more than 23% of our GDP but supports nearly 75% of our
population (source: Economic Survey 2007-08).
Rural markets are small and cater for a limited number of near-by households. The
traders in these markets are mostly farmers themselves with well-established small circles of
customers. The access to the local market is easy but the supply at the market is very limited and
fluctuates according to the season. Local traders are most often women or children of the
household who collect the products from local producers and sell them to their established circle
of customers while exchanging the news with the neighbours and watching the small children.
Even though larger markets would be accessible to these traders, social benefits at the local
market outweigh the modest economic benefit of engaging with the regional market.
Today, more than seven out of 10 rural house hold posses watches, one in 50 has a colour
television set, seven in every 100 every household has an electric iron. Between 60-70 % soap
cases, casual and PVC footwear, tooth powder, and cooking oil are sold in the rural market.
While all this highlights the importance of unfulfilled potential of rural markets, on the
other hand, “In India, approximately 60% of food quality is lost in the supply chain from the
farm to the final consumer. Consumers actually end up paying approximately about 35 percent
more than what they could be paying if the supply chain is improved, because of wastage as well
as multiple margins in the current supply structure. The farmer in India gets around 30 percent of
what the consumer pays at the retail store. Compare this with the situation in developed
countries, where farmers may receive up to 70 percent of the final retail price and wastage levels
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are as low as 4 to 6 percent. One can easily understand the benefits that could be generated from
emulating those practices and tapping that expertise for the supply chain in India.”
This paper focuses on improving the competitive advantage of Indian rural market
through Supply Chain Management and also highlights some of the most important initiatives
our government has taken so far.
2. Understanding Indian Rural Market
Supply Chain Management involves procuring the right inputs (raw materials,
components and capital equipments); converting them efficiently into finished products and
dispatching them to the final destinations; there is a need to study as to how the suppliers obtain
their inputs. The supply chain perspective can help the retailers identify superior suppliers and
distributors and help them improve productivity, which ultimately brings down the customers
costs. At the same time, Market logistics helps planning the infrastructure to meet demand, then
implementing and controlling the physical flows of material and final goods from point of origin
to points of use, to meet customer requirements at a profit.
According to the survey conducted by Marketing and Research Team (MART) in 1995
on India’s traditional haat (Rural weekly market) and Melas says “There are about 47,000 haats
held through the country and mostly on weekly basis, out of a sample of 128 haats that were
covered for in-depth study, not even in one was any product from National Fast Moving
Consumer Goods (FMCG) or Durable marketer present”. These haats actually turned to be the
replenishment points for rural retails making the supply chain much easier.
Agriculture is vital to India. It produces 23 per cent of the GDP, feeds a billion people,
and employs 66 per cent of the workforce. Because of the Green Revolution, India's agricultural
productivity has improved to the point that it is both self-sufficient and a net exporter of a variety
of food grains. This has given rise to the per capita income of rural India and its standard of
living also.
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Source: NCAER
The graph given above clearly shows 10 % improvement in BPL over10 Yrs., Rural
population is Fast Catching up with Urban, rural population has a rippling effect on the overall
BPL of India, and Rural population overall fairing better than Urban India. India with nearly
6,00,000 village accommodate approx 700 million of population and contributing to more than
50% GDP of the country. The figure given below shows that there is very small gap between
urban and rural India in terms of richness.
A survey conducted by the National Council for Applied Economic Research, India's
premier economic research entity, recently confirmed that rise in rural incomes is keeping pace
with urban incomes. From 55 to 58 per cent of the average urban income in 1994-95, the average
rural income has gone up to 63 to 64 per cent by 2001-02 and touched almost 66 per cent in
2004-05. The rural middle class is growing at 12 per cent against the 13 per cent growth of its
urban counterpart. Even better, the upper income class — those with household incomes of over
Rs one million [$22,700] per annum — is projected to go up to 21 million by 2009-10 from four
million in 2001-02. It will have a 22 to 23 per cent rural component.
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Figure: 1
3. Bottlenecks of Indian Rural Markets
The problems of Indian rural markets arise out of the uniqueness of rural consumer, uniqueness
of market structure and distribution infrastructure in the rural area. The low stock turnover ratio
and low sales volume do not attract the manufacturers to invest in rural markets. Farmers have
only an approximate idea of price trends and have to accept the price offered to them at auctions
on the day that they bring their grain to the mandi. As a result, traders are well positioned to
exploit both farmers and buyers through practices that sustain system-wide inefficiencies. The
main problems with the management of supply chain in Indian rural markets can be categorized
as:
i. Transportation Infrastructure is a major hurdle in the management of supply chain in
rural markets nearly 50% of 5,76,000 villages of the country are not connected by roads
at all. Still today many villages in India have “Kachaa road” and in monsoon even these
roads become un-operational leaving lots of villages totally unconnected. Due to such
infrastructure bottlenecks, the supply and distribution network of most of the companies
does not penetrate the backward areas of the State.
Thus there is a significant constraint of essential commodities and other items of
general utility, which is leveraged by the local convenience stores, selling them at high
margins or even selling duplicate and spurious goods. The study ICICI on rural markets
has shown that the village shops have an important role to play for making goods of
frequent requirements available to mass village population specially the lower income
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Figure: 2
section of the society. Certainly the development of road network and improving their
condition will help improving the “supply chain management”. Insufficiency of suitable
carrier is also one of the constraint that not only increases the distribution time and cost
but also ends up with wasting large amount of material quality and very small profits to
producers.
ii. Lack of Organizational Relationships Strategic alliances and partnerships are important
for a successful supply chain. They encourage firms to focus their attention on the entire
supply chain and reduce the number of suppliers they deal with. Many companies have
developed preferred vendor programs, as well as carriers, to ensure that a quality product
is received where and when it is needed. However, in India the markets are informal and
emerge at cross-roads with small concentrations of households to facilitate the exchange
of products among local farmers and villagers. These markets are not connected to the
national markets and little attempt is made to engage with the larger markets in the
region.
iii. Warehousing also is a big problem in rural India, it is very difficult to find suitable
godowns in many parts of India and even there is no Government and public warehousing
facilities available in many villages of the country. Much of the material goes waste due
to the unavailability of required space. Today many companies find holding inventory is
costly and try to push the inventory onto someone else in the supply chain. Where
inventory is held is a challenge in most chains. Some companies are demanding the
manufacturer deliver the inventory to private customer warehouses in smaller lots, more
frequently. Some important inventory issues for SCM include:
a. shorter delivery times (as part of cycle time reduction)
b. just in time (JIT) (a shift from batch ordering)
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c. point of sales (POS) data
d. vendor managed inventory
e. consignment inventory
The first three issues are quite complementary. To utilize a JIT system, shorter delivery times are
needed. POS data are required to know what products need to be quickly replenished. These
three issues rely on information sharing to succeed. Vendor managed and consignment inventory
are emerging management strategies designed to efficiently place inventory in the supply chain.
iv. Communication is necessary to reduce uncertainty and improve inventory levels. The
willingness to share information must extend across the supply chain (suppliers and
buyers). Rural markets have peculiar characteristics and differ even from village to
village, Communication may decide who the customer is and what the company's goals
are, and may make sure that these two issues match. The long term SCM goal is to
increase information sharing in the supply chain. Communicating the following types of
information is essential for a successful buyer/supplier relationship:
Product improvements and/Or Innovations
Demand Forecasting
Vendor Communication
Production schedules
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Figure: 3
It is important to get information about end-user back through reverse supply chain.
Companies realize the importance of creating an integrated relationship with their
suppliers and customers. Effective communication can become a way of improving
competitiveness by reducing uncertainty and improving service.
v. Cost Issues Supply chain management must be able to quantify a bottom line impact.
Major reason to establish a supply chain is to reduce various costs such as inventory,
Logistics, Obsolesce, Channel members costs by taking out the redundancies in the
chain. The concept of vendor managed inventory is the glaring example. This system
allows the inventory to be pushed back to the vendor and as a result lowers the
investment and risk for the other chain members. As product life cycles getting short,
lower inventory level in the chain is becoming important. SCM can also reduce cycle
times by quick response inventory system which is the need of Indian Rural Markets.
4. Importance of Supply Chain Management
The major advantages of implementing the concepts of “Supply Chain Management” are many
folds, different authors have explained many benefits, some of them are listed below:
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In Store Demonstration to Rural Retails
Figure: 4
i. Reduce Inventory Capital Tie-up Cost: No organisation wants to hold inventory in the
supply chain. One reason to establish a supply chain is to reduce capital tie-up cost due to
inventory levels by taking out the redundancies in the chain. For example, in most
situations the producer wants less inventory and as a result, the concept of Vendor
Managed Inventory (VMI) has become popular. This system allows the inventory to be
pushed back to the vendor and as a result lowers the investment and risk for the other
chain members.
Now a days product life cycles are getting shorten, reducing inventory investment in
the chain has become important. Cycle times can be reduced as a result of Just in Time
(JIT) inventory system. The JIT system improves customer service because the customer
gets the right amount of product, when and where it is needed. Quick response also
serves to increase inventory turns and velocity, which manufacturers like to see.
ii. Improved Customer Service: Customer service is an important aspect of business. To
remain competitive, firms implement supply chain management to improve customer
service through increased frequency of reliable product deliveries. Some respondents
stated that increasing demands on customer service levels is driving partnerships with
vendors and suppliers.
The ability to serve their customers with higher levels of quality service, including
speedier delivery of products, is an important concept that results in partnering. Having a
successful relationship with a supplier or vendor results in trust and the ability to be
customer driven, customer intimate and customer focused.
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iii. Build Competitive Advantage for the Channel: Achieving and maintaining
competitive advantage in an industry is not an easy task for a company, effective and
efficient supply chain management is seen as a competitive advantage for companies that
employ the resources to implement the process. It also serves to increase clout in the
channel because these companies are recognized as “leading edge” and are treated with
great levels of respect. Attaining competitive advantage in the channel came with top
management support for decreased costs and waste, in addition to increased profits.
These cost-reducing tactics tend to increase the competitive efficiency of the entire
chain. Companies have become more market channel focused, in other words, they are
watching how the entire channel's activities affect the system operation. Recently, the
channel power has shifted to the retailer. Retailer channel power in the distribution
channel is driven by the shift to some large retail companies (e.g., Walmart, Target, K-
mart). The large size of these retailers allow them the power to dictate exactly how they
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SVC: Service Centre
ASC: Authorized SVC
SSD: Sales & SVC Dealers
Source: Consumer Goods companies must go the Rural Way - A case Study of LG India
Figure: 5
want their suppliers to do business with them. The use of point of sales (POS) data and
increased efficiency of distribution also have been instrumental in improving channel
power and competitive advantage.
iv. Operational Flexibility: Large manufacturers stressed that an important attribute for all
suppliers will be flexibility. An agile company modifies production facilities and Supply
Chain networks in terms of:
Operational efficiency
Improved Productivity
Faster New Product Introduction
Standardized Packaging Machines
Accelerated development of new products
When the firms move to SCM, they are concerned not only with internal plant efficiency,
but also the relationship to supplier’s efficiency. The key driving force to supply chain
operational efficiency seems to be flexibility rather than economies of size. Investments
in plant and distribution equipment are important to remain an agile company in a supply
chain.
v. Realistic Requirements: Supplying the correct shipment information could be the most
important aspect of having a "perfect order.” The concept of having proper shipping
procedures implemented has been an important issue. It is extremely important that the
product is received in a condition that will make it easy for the buyer to use it in their
company. A good supplier must ship products with speed and reliability in a reasonable
time frame. The effective Supply Chain ensures this.
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vi. Network / Channel Development: Effective management of Supply chain results in
increased market reach, more customers and hence more sales. That is what LG has
practiced and proved.
5. Government / Corporate Initiatives for Rural Markets
The Government of Madhya Pradesh proposes to develop Rural Shopping Malls (RSM)
across the State to cater to the needs of population residing in the rural and backward areas
outside the retail and distribution network of manufacturing companies. The envisaged
malls would be base on an amalgamated model of supermarket and discount store and
would offer substantial savings over the goods as compare to the local conveniences stores.
The proposed facility would be a geographic concentration of shopping and warehousing
space, eating joint, facilitation cell and other amenities of specific and generic use. The
RSM would offer one-stop shop solutions and a unique integrated shopping experience to
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Source: Consumer Goods companies must go the Rural Way - A case Study of LG India
Figure: 6
the rural population and would specifically address the needs and utilizing tendency of
these.
The State Governments are willing to invite private participation for the envisaged project
and is willing to extend significant fiscal and non-fiscal incentives to the private player.
They would assist the private player in the identification of land at the suitable location and
it will be the key facilitating agency for the project and would assist in the expedite
clearances of proposals across the State administrative machinery.
Bharat Nirman Yojna , is without doubt, about providing urban amenities in rural areas.
However, it is not just about that. Bharat Nirman is something more than better rural roads,
rural housing, rural connectivity, rural schools and hospitals. It is all these, but most
importantly, Bharat Nirman is about building a new India. An India in which the urban-
rural divide is no longer a visible one. An India in which our farming community can rub
shoulders with corporate India and feel as an equal in wealth creation. An India in which
our rural citizens have the same quality of life as those living in cities.(Speech by Prime
Minister Dr. Man Mohan Singh, The Global Logistics Summit, December 05, 2006,
Hydrabad).
Andhra Pradesh Rural Livelihoods Programme (APRLP), a Business Resource Centre
(BRC) has been established. It is a partnership initiative of the Co-operative for Assistance
Everywhere (CARE), Commissioner Women Empowerment and Self Employment (CWE
& SE), Sri Ramananda Thirtha Rural Institute (SRTRI) and APRLP. BRC is expected to
pave the way for recognising the rural poor as potentially significant part of the economy.
APRLP initiative in rural enterprise development combines infusion of new skills and
technologies, helping the emergence of a service sector in rural areas, creation of markets
and distribution networks and enabling extended networks that give maximum reach and
value for products and services.
ITC’s E-Choupal was seen as a medium of delivering critical market information
independent of the mandi, thus allowing the farmer an empowered choice of where and
when to sell his crop. The e-Choupal model has shown that a large corporation can
combine a social mission and an ambitious commercial venture; that it can play a major
role in rationalising markets and increasing the efficiency of an agricultural system, and do
so in ways that benefit farmers and rural communities as well as company shareholders.
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Conclusion : Supply chain management is a major issue in many industries as companies realize
the importance of creating an integrated relationship with their suppliers and customers.
Managing the supply chain has become a way of improving competitiveness by reducing
uncertainty and improving service. One aspect of successfully managing the supply chain
requires that a company understand their logistical strategies and practices. The fundamental idea
behind SCM is the management of information instead of the management of inventory. SCM
also has helped companies make the transition from an organizational structure based on
functional silos to a process-orientated structure. Thus after this entire discussion and the
conditions prevailing in Indian Rural Market one can say that “Supply Chain Management is a
key to Success in Indian Rural Markets”.
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Figure: 7
“Improving the lives of the billions of people at the
bottom of the economic pyramid is a noble endeavour.
It can also be a lucrative one”
C.K Prahlad
Reference:
1. Bose D.K, (2008), Reaching out to the Rural Millions, Economics
Times (Brand Equity), Dec 28, 2008
2. Charles Assis, Indrajit Gupta (2003), “ITC’s Rural Symphony”, E-
Business, Vol. 4, No.3.
3. Cooper, Martha C. and Lisa M. Ellram.(1993) “Characteristics of
Supply Chain Management and the Implications for Purchasing and Logistics Strategy”.
The International Journal of Logistics Management. Vol. 4 No.2, pp. 13-24.
4. Economic Survey Report 2007-08.
5. Girish V Rao V . (President, Sales & Marketing), “Cutting Edge
Solutions in Rural Marketing”.
6. Prashanth Reddy (2003), “Rural market is crucial for survival of
SHGs'”, The Hindu, March 15, 2003.
7. Prime Minister Dr. Man Mohan Singh (2006), “The Global
Logistics Summit”, Hydrabad, December 05, 2006.
8. Pummy Kaul, (1997), “Are you Adding Value Through Ruarl
Selling”, Business Today, January, 1997,pp.98-102.
9. Sunil Chopra, Peter Meindl (2005), “Supply Chain Management:
Strategy, Planning, and Operation”, Pearson Education, New Delhi.
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