Home Common Role of Supply Chain Systems in Addressing Challenges of Organised Retail

Role of Supply Chain Systems in Addressing Challenges of Organised Retail


India’s retail market is expected to grow at a CAGR of 13 per cent to reach around US$950 billion. Currently, organised retail penetration that is estimated at 7.5 per cent, is expected to reach 10 per cent by 2018 clocking 19-20 per cent p.a. growth. This growth in organised retail has not been easy and has come at a significant cost for the retailers. The wave of organised retail that started more than a decade ago saw most players struggle to achieve the desired level of profitability and returns. ROI continues to be a major challenge despite high investment of time and capital.

Ernst & Young and RAI’s survey lists inventory management along with high operating cost and low retail productivity as some of the major concerns of leading organised retail firms. Inventory is a crucial consideration since it impacts both bottom line and top line growth. The challenges in hand for organised retailers when it comes to deciding – ‘how many of these items needs to be stocked’, is not beyond our imagination.

Many of the large multi-brand multi-organised retailers have around 70,000 SKUs for sale in their hypermarts. Not all products sell at the same pace and this varies based on the catchment area and demographics. Typically for any retailer, approximately 70-80 per cent of their revenue comes from 30 per cent of their products. The planned promotional events offered by some of the large format organised retailers like and More adds to existing complexity of retail operations. For example, promotesWednesday Bazaar as ‘Hafte Ka Sabse Sasta Din’ (Cheapest Day of the Week). There are festive seasons where market sentiments are favourable to retailers and majority of retailers strive to make big gains. Diwali seasonal sale alone contributes to 20-40 per cent of retailer’s revenue. Given all these dynamics involved in deciding the right inventory levels at stores, two factors become very significant for retailers – forecasting the right demand; and a strong distribution channel that fulfills the demand.

When we look at forecasting, we see that most retailers rely on Excel worksheets. Whilst this works for the short term, the same will soon not hold good, specifically when most large organised retailers are looking at significant expansion in the next five years.  Organised retailers who are looking at substantial expansion should consider more sophisticated forecasting systems that would allow them to forecast based on historical sales data, while taking into consideration seasonality, planned promotional events and other dynamic parameters that could impact the end demand. For some of the large organised retailers like Big Bazaar and Food Bazaar, what would make sense is to have a joint plan that is inclusive of both trading partners’ (retailers & FMCG manufacturers) networks from the shelf back to the factory. The intent here is to have a common plan for both parties to collaborate, which in turn would allow retailers to make seamless assortment changes and execute better promotions. The bottom line in forecasting demand is how well retailers quickly and profitably respond to the choices that consumers make at the shelf, and key to the shelf-connected supply chain is the practice of intelligent and localised assortments to provide customers with the choices they want.

To drive healthy double-digit growth, most leading organised retailers target penetration into Tier II and Tier III cities. While doing so, they also look to expand their private label brands to meet the demands of the local market. There is proliferation of products in tandem with their significant expansion in distribution network. It is important for their supply chain and distribution network to be geared up to ensure that the right products are delivered at the right time to the right store. Relying on basic systems to scale up to such volumes leads to unaffordable inefficiencies in the supply chain. Now is a good time for retailers to re-look at their supply chain systems in play. Having the right kind of warehouse management systems can help to adeptly manage both inflow and outflow of goods at distributions centers. Systems should be able to suggest optimal routes to pick items while minimising number of trips to do a complete pick of a replenishment or customer order.

Another vital facet in distribution is logistics which is currently managed in an ad-hoc fashion by most retailers. They predominantly rely on small-scale truck suppliers. With increasing scale in operations in both traditional and online retailers, we can soon expect to see bigger and more organised 3PL players venture into this space. As this scenario emerges, retailers can look at systems that would help them optimise the load in a trailer and can optimise the route that trucks take to deliver to multiple stores. Far higher gains in terms of supply chain efficiency for retailers would occur with the synchronisation of these systems. For example, carrier providers can have advance visibility into what needs to be shipped from specific DCs and can have trailers positioned just-in-time at the right dock, for the load to be dispatched.

Increase in real estate cost (costing 10-15 per cent of their revenue), threats posed by well-funded e-Commerce players like and Amazon, and the widespread adoption of internet and smartphones across India, are forcing retailers to looking into other channels for selling.

Retailers need to take a three-pronged approach – primarily, they need to continue to leverage their private label brands. This takes on further significance with their expansion to Tier II and Tier III cities where there are far lesser number of brand conscious purchases. Retailers need to push more of their private label inventory to these locations. However, the underlying success driver to realise higher margins on their self-owned private label inventory is a tightly synchronised back-end supply chain.  Secondly, the key focus area for organised retailers lies in effectively using a combination of their assets like their stores, trained workforce and vendor base to provide a highly differentiated and superior shopping experience for their customers. Thirdly, retailers can either invest in technology for their own exclusive online presence, or piggyback on pure-play etailers’ platform; or use a combination of both. The proposition is that customers should be able to order online and pick-up at store or order at store and get it home delivered and return items at any store irrespective of delivery mode. Click and collect and/or return option is possible only when there is a well-integrated online, store and order management system with a single view of inventory across the enterprise. Having the right IT systems at the store to efficiently manage store operations, ship-from store and store pick-ups would be another essential element to cross-channel selling.

Overall, for organised retailers to thrive in the current market and be part of the growth trend, it is essential for them to have systems and processes that are aligned with changing consumer needs. The winners in this segment will clearly be the one who are quick to anticipate consumers’ expectations and agile in deploying the right kind of technology and systems.