Key Words: Smart logistics, 3P, B2B, B2C, Organized retailing, e-retailing, MNCs, distribution, re-distribution, wholesaler, retailers, consumer, Bottom of the pyramid( BOP).

Introduction:   In last decade there are couple of end to end third party logistics ( 3P) providers  offering solution to the businesses but their offering is limited to B2B model. Even multinational logistics companies such as DHL, Fed Express and local competition Gati etc are also active in India offering end to end solutions to the businesses. Of course, at a cost.
 
In India we have about 13 million small retail outlets which cater to the consumers. These retailers are serviced by the distributors and wholesalers who are in turn serviced by the manufacturers from their strategically located stock points or warehouses and depending on the market penetration, businesses can have even over two hundred such stock points. 3P logistic companies deliver company stock to those stock points from company manufacturing locations. The competition has forced manufacturers to decentralize the manufacturing operations and go for contract manufacturing routes. Earlier, MNCs  were having their own manufacturing facilities but many of them including Unilever, Reckitt Benckiser, P&G etc have been increasingly outsourcing their manufacturing operations primarily because it also reduces the logistics cost as contract manufacturing locations can be established closed to distribution point. Company like P&G is sourcing from their Thailand manufacturing plant for their Indian market requirement to optimize on global logistics cost.
 
Bigger is the enterprise, more complex is their logistics issues. Earlier logistics used to mean transportation (freight) and warehousing but now we mean it in more holistic sense. Logistics operators now are required to provide an integrated solution covering raw materials and packaging materials shipment to production plants to warehousing and distribution of finished goods to end consumers. In a dynamic market demand fluctuates which results into inter location transfers and retransfers of goods adding to the complexity.
 
A typical large FMCG company will have about 3 to 4 company owned manufacturing locations, about 10-12 contract manufacturers( co-packers), about 8 to 10 warehouses, over 1000-1200 distributors and wholesalers and 13 million retail universe. Normally through direct distribution about 1 to 1.5 million retail outlets are covered and rest is covered through re-distribution route. Companies like Unilever direct reach can be little higher. The vendors supplying input to the manufacturing locations will be numerous and that will include even imported raw materials and packaging materials. This will explain the complexity of the logistics management task in a country like India with population of over 1.20 billion.
 
Depending on the size of the operation and their geographical spread the distribution will be either, intensive, selective or exclusive. For example, an organic food brand can have selective distribution designed to cover their target segment but for FMCG company manufacturing daily use products like tea and biscuit will have to have intensive distribution network and in Indian context the task is very complex.
 
 India as a Country:  India is a huge country having land mass of 3287240 SqKm ( largest is Rajasthan having land mass of 342239 Sq km  and smallest is Goa having land mass of 3702 Sq km) and 29 states. While Rajasthan is largest in size but population is largest in UttarPradesh ( 200 million). Population of Indian is 1.2 billion ( 2.4% of world’s land area but 17.5% of world’s population)  and over 50 % of the population is having age less than 25 years ( a high spending segment in many markets) and about 31% of the population having age less than 14yrs and  about 25% of the total population falls in the age group of 20 and 35 yrs. India is thus an young country contrary to developed  countries like Europe which has an aging population.
 
The market is so diverse in the sense that demographic and psychographic profile of the consumers in various regions vary widely. Country is so huge that in one part there could be flood when the other part is facing serious drought conditions. In addition, it also offers socio-cultural complexity.
 
72% of the population lives in rural areas in 638000 villages. Rural market is therefore, very large and still untapped. MNCs and large FMCG companies deriving 20-40% revenue from rural market.
 
Life expectancy is 69yrs, literacy rate is 64%, We are a trillion Dollar economy and  GDP growth rate is 5.8 %. In India we have 100 million internet users.  You cannot therefore, ignore India if you want to do business on a global scale.
 
Entry of Organized Retailers and E-Retailers:  Leading global retailers like Wal-Mart and Tesco have already entered the Indian market through joint ventures or on their own. Besides, there are host of domestic retailers such as Big-Bazaar, Reliance and Aditya Birla Group competing with global retailers. Of late, online retailers like Amazon.com have also entered the fray competing with local on-line retailers like Flipkart.com, Snapdeal.com and many others. These companies have been investing heavily in their business hoping to make good sense of their investment in the long run. In wholesale trade in Cash & Carry mode we have global players like Bookers and Metro( Macro) competing with our distributors and wholesalers. The success of these ventures into retail and wholesale operations will depend on how effectively they will be able to manage the logistics cost more effectively in terms of the following parameters :
 Time to deliver the goods to the customers

• Reducing the inventory in the system without losing out on delivery commitment.
• Cost of logistics

 These parameters will essentially provide them competitive advantage as only other parameter that they have to control and manage is procurement efficiency and major suppliers are large global players and organized retailers or even cash & carry operators don’t have any incremental buying power with them.
 
Distribution Challenge for the Base of the Pyramid Population:  According to National Sample Survey Organization’s (NSSO) definition persons spending less than USD 75per month on consumables falls under bottom of the pyramid population and according to that definition about 114 million households or 76% of the rural population actually coming under BOP. Delivering goods and services to this section of population is really a challenge for the marketers in India. There are three major factors that explain the complexity of distribution for Base of the Pyramid. These can be depicted as shown in Figure 1.
 

In the rural market which constitute the BOP segment, only way to reach is through the redistribution route involving wholesalers who have small rural re-distributors to cover rural retail outlets. Very slow moving vehicle including bullock cart , cycle rickshaw, auto rickshaw, or even boat running through water ways ( as in Kerala) are used to manage the logistics issue. Salesmen using by-cycle or even on foot  delivering door to door customers or to village retailers and tobacco shop are also common sight in rural and sometimes even in urban distribution system for fast moving consumer goods such as food or even tobacco products. The unique system is being followed to cover every opportunity to deliver growth in a complex market like India particularly to face challenges of BOP opportunity. For BOP segment of the market, marketers need special product pack and pricing keeping in mind the consumer profile in that segment and also for overcoming the distribution challenges offered by the typical environment as well as incremental cost involved in the distribution reach. To penetrate this market smart logistics is not enough but what is needed to act street smart.  
 

Drivers of  Distribution Complexity: The overall retail market is estimated to be about 300 billion USD growing at an average of about 6%. India has been the host of many consumer products multinationals including giants like Unilever, ITC and Nestle  etc operating in India for several decades. Still for many, India is relatively a new territory with number of interrelated factors which make the task of distribution very challenging. These factors are :

Dispersed Population:  There are thirty cities in India which has over I million population but this constitute only 15% of the total population. The rural market still constitutes 30 to 50 % of the market. The market again is not homogeneous with many income groups and demographic and psychographic variations.

Retail Density: With about 13 million retail outlets India has one of the highest retailing densities in the world. Mom and Pop stores account for about 95% of the total retail universe. The organized retailing has just began to emerge and has about 4 to 5 percent of the total market.

Channel Intermediaries:  As indicated in Fig 2 there are many channel partners or associates which are required to ensure the desired reach of the target market. There are various models of distributions starting from wholesalers route to organized retailing to reach end consumers and each has its own advantages and disadvantages. For example, wholesale route provides wider distribution but control is very low both on trade and market. Distributor model run through appointed distributors is better controlled but cost is higher and too complex to manage efficiently.

Infrastructure complexity:  There are very few full service distribution companies operating in India and they are also not affordable by all businesses. Unless brands can fetch very premium price using the services of such end to end distribution companies will only add to significant cost and therefore, loss of profit. Most of the FMCG businesses therefore, have to depend on multiple agencies who operate as channel partners in this complex logistics management task.

Consider a case of a typical FMCG goods like a biscuit manufactured in northern state in Uttarakhand such as Baddi – a tax free zone where manufacturers will prefer to make new investment in production facilities to get excise and sales tax holidays. When this biscuit has to be sold in a destination in the state like Tamil Nadu in down south- first the stock will be handed over to a local transporter who will keep the stock in his warehouse in Baddi and then this trucker will take almost 15 days to reach the manufacturer’s distributor in the state headquarter Chennai in Tamil Nadu passing through eight states and multiple check points. From the company’s distributor in state headquarter the stock will move to district town distributor in smaller truck or even in three wheelers. This district town distributors will also give stock to local wholesalers from whom rural retailers will buy and these wholesalers will sell stock to rural distributors and the stock in smaller quantity will move either in state transport buses or even by bullock cart. The whole process can take over a month. Only very large companies have been able to reach through their distribution network to markets with say about 50000 in population. The smaller market uses local transport  to reach rural market and efficiency will depend on the pull of the product. Company’s stock moving from say state headquarter to smaller district level distributors and rural distributors in state –owned buses, three wheelers, bullock carts are very popular sights in India. In addition, small orders are also executed by companies through government owned postal system in VPP( value payable parcels) and railways which has much greater reach but time consuming and having no control over their operations and therefore no commitment can be given about the time to reach customers. Still goods for public distribution system ( PDS) such as wheat, rice, Salt largely moves in rail transport just because state controlled railways will have to get business and not for cost or efficiency reasons.

Unorganized markets:  For most of consumer products,  market will be unorganized. Large businesses will work with about 1000 to 1200 appointed distributors. Companies like P&G has made two tier distribution system following 80:20 principle as 20 % of the distributors deliver 80 % of the sales. They thus a decade ago implemented a project called ‘Golden Eye’ and directly sell the goods to company appointed large distributors (20%)who have under them smaller distributors (80%). With this change and consolidation P& G reduced the sales force drastically and also simplified the complexity in the system.

Manufacturers have varying degree of distribution structure designed to meet their objective.

Choosing the right Mix:   Organizing an efficient channel of distribution is thus an enormous task for businesses. One has to therefore, strike a right balance between various models. The evolution of distribution is shown in the following diagram ( Fig 2 ) that indicates the degree of sophistication.

In India we have a mix of all in a typical manufacturing - marketing company of FMCG products.

More sophisticated the market is higher is the control of the marketers in the distribution system but lower is the reach as depicted in the figure 2 shown above.

Current Scenario –a  Mixed  System: In order to reduce the transit inventory of goods, constant en-route and live monitoring of vehicles are being used by incorporating devices like RFID or similar GPS based monitoring technology. With connectivity being available, this on line and real time monitoring is now being done by the select and large 3P logistics providers. However, technology solutions are not offered by all 3P logistics providers and majority of freight and transport  service providers in India are only geared to provide point to point transport service. As market is highly fragmented, the requirement of goods in certain areas are low resulting in not having full load of goods and that adds to the problem and it goes through multiple handling causing delays in delivery and as a result consumers also get relatively older stock compared to high consumption market in metro and mini metros where relatively fresh stock is available. For low shelf life goods and for the goods which require refrigerated storage and transport system, cost of distribution is significantly high and efficiency low. Small towns and villages get stock through redistribution route which is not serviced directly by the manufacturers. The complexity is mounted by multiple tax regime when goods and service are moving from one state to another which includes central sales Tax (CST), state sales tax(VAT), entry tax etc and complexity is more if the goods are excisable such as liquor which has to move in bonded warehouse while even on the move in transport vehicle. Typically fast moving consumer goods (FMCG) companies will have flow of goods as shown in the following diagram. ( Figure 3)
 

 
The diagram above (Fig 3) will explain the complexity of the goods distribution system in a long chain intensive distribution category of products like FMCG like processed foods and daily consumables.
 
The distribution complexity and cost forced businesses to go for contract manufacturing route to set up small third party manufacturing units to cater to  the smaller market  in a highly dispersed and scattered market like India. And if the product is bulky and light weight or heavy or liquid the logistics cost would even be much higher in relation to other products. As per labeling requirement the name and address of manufacturing locations are to be mentioned statutorily in the product label. And if one takes a look at the label of a national brand of tea  Label one can see the manufacturing locations which can run up to even  ten to fifteen locations . Liquid products like bottled water or beverages are also manufactured in multiple locations to save on the distribution and logistics cost.
 
 Developing Efficient Sales and Distribution Structure:  It takes years for the businesses to develop an efficient sales and distribution infrastructure. Successful companies take as much attention to keep the right distributors with appropriate infrastructure and goodwill in the trade to work for them for long as they take in appointing senior employees. Companies that provide training program, coaching and sales support to their distributors perform better in the market place when compared to their competitors. Sales force effectiveness is thus important for the companies to derive competitive advantages.
 
Having efficient  and well entrenched  distribution system in India holds the key to success. Many MNC fail on that ground and many MNCs were seen to acquire local companies simply to get the control over the distribution system. For example, Coca Cola acquired local beverages company Parle Beverages only to get the control and entry into local beverage distribution system which takes years to build and Coca Cola acquired it paying a huge price.
 
Measuring Sales Force Effectiveness:  Constant monitoring of performance of sales and distribution system therefore, is done by most FMCG companies and parameters include tracking the primary , secondary sales and consumer off takes market segment wise with rural –urban focus in addition to sales volume, profit of the sales route and distributor ranking, order fill rate , pack fill rate etc. Other measures including tracking the debtors, cost of operations per unit of or sales, sales growth rate, customer wise sales volume and value, profitability by customer segment or even customer wise, new customer creation and retention of existing customers are some of the key performance indicators.
 
 Conclusions:  The magnitude of the task to manage the logistics in FMCG companies as can be seen is enormous. Only few companies have well entrenched mixed distribution system to get the desired reach are growing faster than others. BOP segment which is a complex segment requiring multiple channels and partners offer considerable growth prospect as their purchasing power is increasing. This is significantly different from the situation in developed world where market is saturated and in some places even shrinking and where distribution system has evolved to reach every prospects. But doing business in India requires different skills and knowledge. Learning that or acquiring that is essential for success. Only having smart logistics solution is not enough. In India, you need to act smarter. Otherwise, you will only scrape through the surface of the total market opportunity and can never be a partner to take advantage of all inclusive growth.
The socio-political including climatic conditions in the various market in India including the consumer buying behavior are so different that each market requires separate attention. The market is thus heterogeneous- there is thus no one uniform solution that will work in all markets. Each market needs separate attention for finding a solution as it will offer different degree of complexity to the business depending on their products profile and target markets requirement.
 
 Reference:

1. Bhalla Vikram, Bhattacharya , Arindam, Singhi , Abheek and Verma Sharad ( 2007); Creating Distribution Advantage in India, Boston Consulting Group Publications.
2. Shukla, Sachin and Bairiganjan, Sreyamsa ( 2011); The Base of Pyramid Distribution Challenge; IFMR Research, Centre For Development Finance
3. Hammond,Allen L. Kramer, William J, Katz , Robert S.Tran, Julia T and Walker, Courtland(2008). The Next 4 Billion- Market Size and Business strategy at the Base of the Pyramid, Washington D.C: World Resource Institute and International Finance Corporation.
4. Huhmann,S.(2004);Tapping India’s Rural Market, Journal of Student Research, p 92-99.

 
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