Importance Of Responsive Replenishment In Consumer Products And Retail Industries

Introduction

It has been said that the only thing more difficult than being indifferent to India is to attempt to describe or understand India completely. Most retail and consumer products companies are no longer indifferent to India. It is the fourth largest economy in the world, in terms of Purchasing Power Parity (PPP) and is expected to rank third in 2010, just behind the United States and China. Moreover, recent liberalization of Foreign Direct Investments (FDI) policies for retail trading has reduced barriers to entry for single-brand retailers and for the first time allowed them to control their operations in India. It, thus, comes as no surprise that retail and consumer products are the fastest growing sectors in the Indian market today.

As competitive pressures mount, consumer products (CP) companies as well as retail set-ups, coping up with increasing consumer expectations, more demanding retailers, and maintaining efficiencies is made possible through new technologies such as radio frequency identification (RFID). However, existing strategies to deal with these continuing problems, like making existing processes more efficient, and optimizing the cycle of planning and forecasting, are approaching a limit beyond which improvements will be hard to come by.

The need of the hour for retail and consumer product companies is to build their entire supply chains around their specific business; and to do this, the supply chains need to be tailored to be adaptable and flexible i.e. responsive to fluctuations in consumer demand. The new-age supply chains should be able to sense the variations in consumer demand and buying patterns and respond with managing the production schedules to meet these changing needs.

The heart of such a supply chain would be the "Responsive Replenishment" function, which helps integrate data across various platforms, such that consumer demand data can be used directly to control other functions in a supply chain like distribution, transportation and manufacturing schedules.

In this paper, we first undertake a study of the Consumer Products Industry (specifically FMCG Sector) and Retail Industry in India, following which we look at the typical processes in each of these industries. We then look at the current trends in the supply chain domain with a specific focus on the FMCG and retail sectors. Next the concept of a consumer-driven supply chain is introduced followed by how the implementation of a responsive replenishment solution would help improve processes detailed earlier.

Industry Study - FMCG (Fast Moving Consumer Goods)

The FMCG sector has been the cornerstone of the Indian economy. The consumer products industry consists of a range of products from soap to automobiles - consisting of two sub-categories: durable and non-durable goods. The FMCG sector specifically refers to consumer non-durable goods required for daily or frequent use.

In India, the Rs. 80,000 crore FMCG sector consists mainly of 3 sub-segments viz. personal care, oral care and household products. Since the industry caters to goods that are used regularly in every household, volumes hold a key here. Traditionally, margins are low, hence maximum emphasis is placed on the marketing and distribution functions in FMCG organizations.

The sector, as such, consists of both organized as well as unorganized players. However, recent trends in consumer behavior seem to indicate that there is increasing brand awareness in both the rural as well as urban markets, with over 65% branded goods sold in the rural markets of India.

Some of the salient features of the FMCG sector can be summarized as follows:

* Heavy launch costs

The cycle for launching a new product is often long-drawn consisting of intensive market research, product development, test marketing. Further, the actual launch in the market is characterized by capital intensive activities like advertising, promotions and free sampling. Launch costs ca go up to 50-100% of the revenue of the first year and costs reduce as the brand gains awareness and acceptance.

* Less capital intensive

The industry is not very capital intensive since most of the products require low investment in fixed assets.

* Contract Manufacturing

Contract manufacturing to control costs and increase affordability of products is quite common.

* Marketing Drive

The marketing function plays a major role in the brand building process of FMCG products, and hence even well established brands rely on marketing for their existence and well-being.

* Market Research

Market research plays an important role in this industry since understanding the needs and requirements of the customer is paramount for making the topline.

* Presence of a large unorganized market

Factors like low-entry barriers, low capital investment, and low brand awareness in the rural regions have led to a thriving unorganized market

According to industry experts, the key to doing well in the Indian FMCG sector is to keep costs low, building a strong distribution network aggressive pricing and build better brands through innovative marketing campaigns and promotions.

Major players in the FMCG industry in India are: Proctor & Gamble, Hindustan Lever Ltd. (a subsidiary of global FMCG leader Unilever), Cadbury's, Britannia CavinKare and Smithkline Beecham

Industry Study - Retail

The Indian retail market is estimated at US$350 billion of which organized retail is just about US$8 billion. Given this unbalanced existence of organized and unorganized players, and India's vast middle class, the Indian retail market is poised to be the most wanted market for global retail giants wanting to enter new markets.

According to industry reports, retail is one of India's fastest growing industries with a 5 per cent compounded annual growth rate and expected revenues of US$ 320 billion in 20072. Rising incomes, increasing consumerism in urban areas and an upswing in rural consumption will fuel this growth to around 7-8 per cent. In addition to the interest of global retail chains like

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