FMCG Industry In India Commerce Essay

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1st Jan 1970 Commerce Reference this

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India can boast of being the fourth largest Fast Moving Consumer Goods (FMCG) Sector globally (India Brand Equity Foundation, n. d., p. 2). The estimated size of the FMCG sector of India is Rs. 1,300 billion (Gnimoline, n. d.). It has shown further growth of about 11 percent in the recent times. However, the FMCG sector of India is not like that of the developed markets, which are only dominated by few major players. It is defragmented and comprised of large number of sellers who conduct business in both organized and unorganized markets. Among 12-13 million retail stores, about 9 million stores belong to the FMCG segment. The population of the country is over one billion, so it has a strong customer consisting of about 300 million middle class buyers. It is considered to be among the largest economies because of the large purchasing power of the people (Sharma, and Bakshi, 2012, p. 472-474).

India is considered to be the fastest developing countries in the world now, so the disposable incomes of the people are increasing and even the standard of living of the rural people has gone through drastic change. The Indian FMCG market is flooded with goods and services and the consumers have access to innumerable products based on their needs and requirements. The major players in the FMCG sector of India are Britannia Industries, Dabur India, ITC, Nestle India, Palmolive, Marico Industries, Tata, Amul, and many more (Sharma, and Bakshi, 2012, p. 472-474). It was derived from a research that an average Indian spends around 40 percent of their income on products like grocery and about 8 percent on the personal care items, as can be seen in Figure 1

Figure

Source: (India Brand Equity Foundation, n. d., p. 4)

In order to understand the usage of ERP and its pros and cons in the supply chain of the FMCG sector, it is very important to first segregate the segments of the FMCG industry because the different companies selling diverse products utilize ERP based on their convince, business strategies and goals of the company. The major segments in the FMCG sector of India are household care, food and beverages, and personal care. There are few minor segments too.

1.2 India Competitiveness and Comparison with the World Markets

Due to the diverse climatic condition and different landscapes, wide range of food processing companies has the opportunity to do business and generate revenue in India. India is regarded as the largest supplier of milk, livestock, coconut, cashew, spices, and sugarcane. It is also the second largest producer of vegetables, rice and wheat. The country also has ample supply of caustic soda, and the soda ash which is the raw materials required for the detergents and soaps. Tata Chemicals is the largest company in the world, which produces the synthetic soap ash. The Indian companies also have a significant presence in the global FMCG value chain, which ranges from raw materials to the finish and packed products. Amul is the most popular company in India which deals in dairy products. Apart from the advantage of having raw material in abundance, India also enjoys the huge resource of low-cost labour resource, among all the Asian countries, as can be seen in Figure 2.

Figure

Source: (India Brand Equity Foundation, n. d., p. 7)

Two major resources are there in adequate amount in the country. Many multinational companies have set up factories or manufacturing units in India to minimize their cost of production. For example Unilever a global giant sources a huge part of their product requirements from the Indian subsidiary called Hindustan Lever Limited. Unilever has outsourced about US$218 million products from HLL, which are mainly the personal, home care, and food products. Even Procter and Gamble has outsourced an Indian company in Hyderabad to manufacture Vicks Vapourub, so that Procter& Gamble can export them easily to Japan, Australia and the other Asian countries (India Brand Equity Foundation, n. d., p 9-10).

India has always tried to compete in the world market and allowed internationals or multinationals to trade in the country. With this idea, the policies were developed to attain international competitiveness, such as by reducing the excise duties, lifting the restriction on the quantity, eco-friendly food law formulation, and by permitting the brand names of the foreign products in the country.

1.3 SWOT Analysis of the FMCG Industry in India

According to Bohm (2009, p. 2) “SWOT analysis is a strategic management tool which can be utilized to evaluate the strength, weakness, opportunity and threats of the supply chain of the Indian FMCG market. SWOT analysis can assist in designing an effective plan that would capitalize the opportunities, utilize the strengths, by neutralizing the threats and minimizing the effects of weaknesses.”

Strengths

All the major brands around the world are present in the FMCG market due to the strong supply chain framework in India. Even the base of the raw materials in the country is adequate for the procession of food products industries. The raw materials for the agro-based industries are also available and this is because of the diverse climatic condition which supports the growth of different crops in different parts of the country. Apart from these things, the production cost, delivery cost and the labour cost is also low, so this acts as a major advantage for not only domestic manufacturers, but also for the international manufacturing companies (Soundarapandian, 2002, p. 50-54). A good aspect of the supply chain in India is that it is uniformly spread in the urban as well as the rural areas of the country (Krishnamacharyulu, 2011, p. 404). Technological advancement in every parts of the country is also reflected in the supply chain segment too. IT enabled supply chain has high demands in the Asian markets, which also includes India. In India the FMCG countries provide ample assistance to the rural sector and the agricultural industry too. That is why increasing usage of technology in agriculture is seen these days (Ferrell, and Hartline, 2010, p. 122-124).

Weaknesses

The major weakness is the growing market of fake products of popular brands. The “Me-too” products are sold less that their duplicates in the rural markets and also in the semi-urban markets (Kashyap, and Raut, 2005, p. 150-151). Though the usage of technology is growing, yet the scope of investment on technology is still limited. The risk is high and companies are reluctant to take risk (Mukherjee, and Patel, 2005, p. 124). Moreover, the export level is also high due to the increasing level of competition in the market. Though the raw materials are getting cheaper, but the FMCG companies are raising the prices of the products, and due to the vast market size, companies have become more interested in earning profit and creating power brands.

Opportunities

The Indian FMCG industry now has many suppliers who have identified ways of decreasing their cost and have introduced innovative ideas to enhance and improve the supply chain. Efforts should be made by the Indian companies to improve the quality of the supply chain. The population of the domestic market in India is 1.2 billion. The growth possibilities of the Indian companies are immense especially in the rural areas, as about 12.2 percent population of the country stays in rural areas (Euromonitor International, 2008). Apart from this the increasing focus and initiatives of the government towards the FMCG companies also depicts a growth prospect for the companies. Globalization and liberalization has also opened fresh horizons for the FMCG companies of India. Healthy products such as eco-friendly goods are gaining popularity in the world market; similarly Indian FMCG market should also utilize their resources to cash such an opportunity.

Threats

The rural India includes 627,000 villages (IIM Ahmadabad, n. d.). So challenges are faced by the supply chain companies in distribution networks. Problems related to IT sourcing, professionals and procurement activities for involving more and more members in the supply network can also be faced. Moreover, lack of investments for the technological advancement, lower level of computer literacy, and low penetration of internet facilities in the rural areas. The complex framework of the supply chain in the country may also make the distribution of products difficult.

1.4 Supply Chain in FMCG Sector

In order to succeed in the highly competitive markets, companies should align the supply chain along the market demand and serve accordingly. The performance of the supply chain provides an edge to the company over its competitors. Supply chain management involves the right co-ordination of location, production, transportation, inventory, and information. Indian FMCG industry is ranked as the fifth most eye-catching and budding markets in the world, in case of supply chain management practices. It has also been graded second in the GRDI (Global Retail Development Index), which included a comparative analysis of 30 different developing countries (Munjal, Kumar, and Narwal, 2011, p. 156-162). The Indian FMCG sector is characterized by the stiff competition between the unorganized and the organized sector, and also among the highly established intermediaries and distribution networks. Even a strong presence of the multinational companies can be seen in the value chain of the entire FMCG sector of India. Though the performance of this industry had been inconsistent during the phase of 2000-2003, and even the investors in this sector could not derive any profit, but in 2005 and so on, the FMCG sector has seen a demanding growth. Further, in the year 2006, the FMCG industry not increased the disposable income but also improved the economic health of the country. The FMCG sector has grown further by 60 percent till 2010. The rural segment and the middle class of the country are considered to be the most promising segment of buyers in India. This also gives the brand makers the opportunity to convert these FMCG products into brands (Munjal, Kumar, and Narwal, 2011, p. 156-162).

1.5 ERP (Enterprise Resource Planning) in Supply Chain

Over many years the companies have started embracing new style of resource management and planning software structure in order to integrate the different processes, manage the resources in a better manner and enforce the integrity of the data. The systems which contain all these qualities intact can be termed as an ERP solution or system (Davenport, 2000; Boykin, 2001, p. 99-100; Sadagopan, 1999, p. 179-181). Before ERP was introduced, the supply chain segment used to enjoy the advantages of material requirement planning (MRP) in case of delivering performance and inventory turnover (Schroeder, Anderson, Tupy, and White, 1981, p. 1-4). Though statistics speaks that 80 percent of the companies implementing ERP have failed (Sarkis and Sundarraj, 2003), Cliffe (1999) revealed that about 65 percent of the executives have a belief that the ERP solutions can be harmful, and these perceptions further lead to the failure of the ERP system or poor implementation of the systems that even lead to the bankruptcy of the companies (Appleton, 1997). However, it goes without saying that those evidences of failures are there, but benefits of ERP are also innumerable. The top management of the FMCG companies having clear vision regarding the implementation process and its results can utilize it for the success of the company (Holland and Light, 1999).

A new perspective in the supply chain can be seen nowadays due to which companies are opting for ERP systems for the FMCG sector. Due to rising pressure of implementing green systems, and utilizing green resources by increasing on the manufacturers and marketers, the usage of ERP solutions specially designed to support green or eco-friendly supply chain have been launched in the market. Indian FMCG sector took like that of other countries has welcomed this initiative. Though the penetration level of such specific ERP system in the supply chain is less, but it is slowly gaining momentum (Wu and Wang, 2006, p. 882; Leedale, 2010, p. 1-3).

1.6 Outline of the Study

It can be well understood that when the country has such massive establishment of FMCG industry, then supply chain would be surely playing an important role in this sector. Keeping in mind the significance of supply chain in FMCG sector in India and the increasing use of technology in the retail and FMCG sector, this study aims to thoroughly analyze the significant and the challenges of Enterprise Resource Planning (ERP) in the supply chain of the FMCG sector of Lucknow, India. ERP plays an important role in the supply chain of the FMCG sector because the motto of supply chain segment is to deliver the goods at the right time, in the right place and to the right people. The study is designed to include the both the secondary data and the primary data. Secondary data signifies the past research and literature that are available on the usage of technology based ERP solutions in the Indian supply chain segment of the FMCG sector, and primary data on the other hand would be collected through questionnaire survey that would be conducted.

Since the primary research that would be conducted would be specifically based on the FMCG industry and its supply chain in Lucknow, India, the research study begins with an overview of the nuances of the FMCG industry, the role of the supply chain and the significance of the ERP solutions in these sectors in India. This would give the readers a clear view of the country as a whole. The next section would be a literary analysis of the supply networks in India, especially in the northern parts where Lucknow is situated, the penetration of technology, especially solutions like ERP, and also a brief overview of the supply chains of the companies in Lucknow chosen for this research study. Further a research would be conducted and results drawn would be analyzed to suggest recommendations.

1.7 Research Objectives

The objectives of this research study are stated below:

To comprehend the notion of ERP in supply chain management, in the FMCG sector and focus on the significance and relevance.

Analyze the importance of ERP by studying the past literatures available, so as to evaluate the theories of other researchers in this regard.

To scrutinize the activities in supply chain management and understand the operation functions of major FMCG companies of India, which are also based in Lucknow.

To study the activities and functions of ERP in the supply chain of these companies.

To analyze the results of the findings and throw light on the similarities and differences of ERP usages of these companies in their supply chain management.

1.8 Problem Statement

The study would investigate the responsibility and the challenges of ERP in supply chain segment of the FMCG sector in Lucknow, India. The issues which the supply chain companies face due incorrect ERP implementation or inadequate training would also be discussed. Further, instances of breakdown of the supply chain services in the FMCG sector due to ERP problems would also be discussed.

1.9 Research Question

Q1: What role does supply chain play in the FMCG sector of Lucknow, India?

Q2: What improvements can be seen in supply chain after extensive usage of ERP?

Q3: What challenges supply chain departments or companies and the FMCG companies face specially due to ERP?

Q4: How the major FMCG companies in Lucknow, India utilize ERP for their supply chain?

CHAPTER II – LITERATURE REVIEW

2.1 Supply Chain Sector in India

The traditional boundaries are the things of past. The new horizons of technology have introduced an array fresh business opportunities and also infused various challenges that needs to be mastered or trapped. In order to maintain a significant position in market nowadays, companies have to concurrently manage the efficiency of the various business activities, such as distribution, manufacturing, and services, effectively. Competitive advantage is governed by innovation, visibility, customerization, velocity, scalability, and cost governance. The future of business depends on serving the customers properly, and maintaining a trustful relationship with the suppliers, and partners. In order to attain all these criteria and objectives, organisations apply the concepts of supply chain management (SCM) (D. Simchi-Levi, Kaminsky, and E. Simchi-Levi, 2000; Sahay, 2000; Derocher, and Kilpatrick, 2000). The concepts and theories of SCM can be traced back to the ages of Forrester (1958, 1961), who recognized the dynamics of several response to the changing demand in the various situations that arises in supply chain. Forrester had acknowledged that dynamic complexities create distortion in the patterns of demand by shifting the demand from the end users to the manufacturers, and the raw material suppliers. One of the major implications in SCM is that all the participants are interdependent, which is both the strength and the weakness of this system.

The interest in SCM has increased since 1980s after globalisation and free flow of trade and commerce. Organisations started viewing the benefits of collaborative trade relationships. Though management concept has vast scope for growth in India, but the proliferation of the variety of products and the reducing life cycles of the products have forced the Indian companies to think beyond the boundaries of just maintaining collaboration with the supply chain partners (Vrat, 1998, p. 10-24). The dramatically changing environment has made the Indian organisations realise the effect of competing unnecessarily without the assistance of the supply chain associates. The requirements for adaptation of collaborative methods are high because of the recent deregulation in the global economy and also due to globalisation and its effects on the Indian economy. The traditional defensive industrial, organisational and economic boundaries have now been demolished (Saxena and Sahay, 2000). However, new and emerging markets bring in new opportunities, as well as new rivals too. The rules of trading relationships and economy are now ascertained and re-defined by technology and information networks. This is the reason why it has become mandatory for the Indian organisation for look out for such SCM methodologies and process which can maximise their efficiency not only beyond their operation, but also make them eligible to compete with the top FMCG brands of the world (Sahay, 1999). Many Indian companies have not operated in the open economy system. So working with appropriate business partners, developing mutual trust, designing a flawless SCM system, etc are altogether an alien ball-game for them. It has been studied that the Indian industry spends about 14 percent of the GDP on the logistics, and about $25 billion is attached to the inventories or stocks in the supply chain system around the country. Though India is one of the fastest developing countries with more than a billion populations, it should think of integrating highly advanced SCM theories and approaches for sustainable economic growth (Korgaonker, 1999a, 1999b). The significance of supply chain in organisation is being recognised in at the corporate level.

The Indian supply chain plays a significant role for the growth and development of the FMCG sector. With the motive of overcoming the challenges that the retailers face and also to develop new systems and solutions for the organisations in India, the Supply Chain Council was formed (Supply Chain Leadership Council, 2012). Supply chain assist in organising the business activities in the FMCG by establishing a shelf-centric partnership between the manufacturers and the retailers. The nature of the supply chain in India is relatively fragmented because of less availability of fresh produce. This reveals the requirement of more advanced and organised supply chain in the country. The supply chain networks play significant role in India because they assist the customers to purchase variety of products at affordable prices. It is because of the supply chain the customers can get various offering that the company has designed for the customers based on the changing taste and preferences of the customers. The Indian Infrastructure in terms of rails, roads, and air transportation are not sufficient. In these cases warehousing play a very important role in the operations of the supply chain system. In order to overcome these issues the retailers in India are trying their level best to decrease their transportation cost and are also outsourcing their supply chain system to the specialized companies for best logistics. Supply chain is required for the development of cost effective collaboration in order to survive in the competitive environment.

India has a diverse economy which ranges from village farming, handicrafts, agriculture to technologically advance modern industries, and other diverse services. However the major source of economic growth of India is the Services offered to customers. It has been analysed that approximately 60 percent of labours or work force are into the agriculture (Hirway, 2008, p. 1-14). This compels the government of the country to improve the standard of living of the rural citizens of the country by developing the basic infrastructure for them, making available the resources such as education, medicines, health care facilities, or food, etc for the overall development of the country. The reduction of control on FDI is an initiative to welcome foreign investors so as to encourage free flow of trade and commerce and improve the economic condition of the country. The Indian logistics and supply chain had played an important role all through these years and still evolving for the better. Constant improvement of the supply chain framework has made India the global hub for auto ancillaries, manufacturing of sophisticated products like luxury cars, pharmaceuticals, electronics, textiles, food processing, etc. It also has a significant role to play in the service sector through BPOs, tourism, health services, and education facilities. SCM has occupied a value spot in the corporate level. This is the reason it is studied by young entrepreneurs in business schools to implement an organised supply chain framework in the new emerging India. Companies nowadays directly focus on reducing cost and reaching out to the customers in the shortest possible time. For this reason the objective to design and develop the best supply chain system for increasing the profitability is the best solution.

2.2 Role of Supply Chain in the FMCG Sector of India

The FMCG industry follows a simple strategy that is to keep the price margins low, and volume of products high. In order to continue business in this manner FMCG companies in India need to plan the entire operational functions and the different value chain actions to the last details, so as to ensure guaranteed profit. Branding assists in differentiating the products, while supply chain or distribution system would determine the faith of the FMCG companies in the long run. The diversity of the Indian market and the huge opportunities in the vast untapped rural market of India provides opportunities to the FMCG companies to explore these areas and connect them through effective supply chain networks. Though the level of competition, and changing business environment has transformed the significant of each elements in the supply chain, but the major elements remains the same. The activities, level of performances, resources utilised and the approaches of utilising the resources have changed with requirements and time.

There are five specific factors on the basis of which the supply chain of the FMCG sector in India functions. They are stated below:

Combined scheduling, forecasting, offering customer services, and building relationships: The supply chain system has the duty to reduce the lead-time and deliver the goods per performance on time to the customers for building a strong relationship with them. It must possess a strong demand and supply forecasting structure for correct supply chain arrangement and movements. Responsiveness of the supply chain is also necessary towards the customers and is regarded as the most critical factor for success. The forecast for collaboration with the customers is prepared by taking into account the sales figures of the past and a project figure for the future. An effective mechanism for customer care and services is prepared so as to offer customized services to them and provide value based services. Point of sales, inventory and real time demand like concepts are given importance and data related to such approaches are collected from retailers for survey or research in order to improvise the supply chain system (Gentry and Vellenga, 1996, p. 37-44).

Establishment of operational system with the suppliers and formulating provisions for logistics services: The agreements at service level with the transporters assist in providing the reliability and the effectiveness to the logistics framework. The requirements of the customers are analysed and accordingly designs are developed. The feasibility of producing those designs are also checked steps involved in developing a new product is followed to develop the idea into a product and float it in the market. Networking and clustering with the intermediaries and the suppliers for deciding the location of the firm is important, so that the location may act as an advantage for the company. Nowadays outsourcing partial activities of the company proves to a cost and time saving step. After this the selection of a dynamic route for the distribution of the product is selected. The suppliers are selected keeping in mind that the product reaches the customers on time and also large accumulation of stock in the shop is not there. So the approach of Just-in time is preferable in such cases (Mathur, 2010, p. 391-395). Lean approach for operational improvements in the supply chain is also an intelligent initiative. Companies also develop transport rating systems for tracking and enhancing the performance of the distribution system and logistics, while the suppliers evaluate the cost, but not the unit prices of the products or the services.

Cross Functionality through establishing collaborative activities with the dealers and suppliers: The immediate demand is shared and information assists the supply chain to smoothen the flow. Though previously the suppliers were reluctant to use technology or IT services, but now IT is welcomed and deeply integrated in the supply chain system of India. The activities in which the company does not have much experience or competency, is usually outsourced now to save cost and time. Organisation, especially FMCG companies in India have now realized that working in close relationship with the suppliers, intermediaries and the supply chain is critical for the success of the company (Lambert, Stock, and Ellram 1998, p. 3-28).

Strategic Partnership and the practice of outsourcing to survive in the competitive environment: The organisations in FMCG sectors prefer to have strategic partnerships with selected well established suppliers. This is the reason why the competition among the suppliers is also increasing. The suppliers are encouraged by the organisations to offer cost effective and quality services. The modularity of the supply chain system is also beneficial for the successful establishment of SCM. The organisations share the rewards and risks associated with the suppliers and the supply chain as the market is volatile and changes in the market negatively affects the suppliers.

The selection of suppliers strategically, evaluation and development: The preference for selecting the suppliers depends on the flexibility and customization of the volume of goods. It is the suppliers who should involve in the development of new product so as to deliver the new products to the customers in no time. The suppliers’ balanced scorecard should be made so that the performances of the supply chain can be assessed (Lambert, Stock, and Ellram 1998, p. 3-28).

2.3 Usage of Technology in the Supply Chain Segment

Supply chain management (SCM) plays an important role in companies for the creation and maintenance of sustainable relation with the customers and the suppliers. According to the Global Supply Chain Forum (GSCF), SCM is the incorporation of the major business practices to the customers with the help of the suppliers that assist in transfer of goods, services and relevant information and add value to the offerings offered to the customers and other stakeholders. The process of supply chain management involves all the activities from transporting raw materials to manufacturers to supplying finished products to point of purchase and also to the point of storage (Hanfield, and Nichols, 1999, p. 143-156). SCM includes all activities that are associated with the achievement of competitive advantage and sustainability of the business. In this sphere internet is affecting the process in which nowadays goods are distributed and bought. The advent of Internet has changed the ways of conducting business. Companies are injecting technology in various departments of the organization to discover new ways of earning revenue, finding new customers, and managing the supply chain of the company. E-commerce is one of the parts in the technological environment (Bushry, 2005, p.87-88). It enables the marketer to sell the products and services through a virtual marketplace and the payment for the product is also done online through the use of internet services. In large manufacturing companies, the supply chain segment has to manage multiple suppliers and vendors at the same time and also regulate the flow of goods to the different target markets. Technology is now treated as agents who help in solving the major problems of management or information overload. The collaborative information agents play very significant roles in SCM.

The pressure of global competition is increasing day by day, so the requirement for streamlining the supply chain in order to make it responsive and flexible is also increasing. The traditional ways of distributing the product led to the inaccurate assumption of demand and exact supply figures. The suppliers and the marketer also faced problems in the maintenance of records in the warehouses and while production. Due to these issues, the whole supply chain infrastructure started evolving and moving towards the electronic transfer of data, and electronic supply chain systems. There are few characteristics which can be seen in the present day supply chain and its philosophy, such as sharing of information, management of inventory, adopting flexibility readily, cost minimising strategies, coordination of all the intermediaries in the pipeline. The business environment of all the industries is becoming more dynamic, so the product life cycles are becoming shorter, and the demand of products and services are uncertain (Sheth, and Sharma, 2000, p. 55-60). The supply chain environment has changed in the recent times as the warehouses have reduced in number, competition level has increased, third-party services have increased, channel integration, etc. The traditional supply chains are reactive rather than being proactive, uncertain, extensive lead times, deficiency of flexibility in operation, etc. The next generation of supply chain system should be customer centric, have scalability, flexible, open, integrated, capable of functioning autonomously, optimization and negotiation capability, etc. It must have the capability to forecast accurately, and it should be compatible with the manufacturing process (Anderson, and Lee, 199

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