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India's Supply Chain Is Improving, But Still Has a Long Way to Go

Analyst Insight: India has one of the world's fastest-growing economies. Based on the country's 12th Five-Year Plan, manufacturing in India is expected to grow at a healthy CAGR of 9.5 percent. However, according to a World Bank Survey, India ranks 46th in global trade logistics performance and 13th in GDP growth worldwide. Despite the generally positive economic outlook, estimates indicate that the country's inefficient supply chain results in an approximately $65bn loss per year. - Neelam Singh, Senior Analyst, and Steve Banker, Service Director, Supply Chain Management, both of ARC Advisory Group

Supply chain costs in India represent as much as 13 percent of the GDP. This is almost double the percentage in developed countries: in the U.S., supply chain costs amount to 8.5 percent of the GDP.

ARC Advisory Group categorizes supply chain challenges in India into two groups: demand side challenges and supply side challenges.

Demand side supply chain challenges in India relate to price and variety.  With 28 States and 7 Union Territories, differing considerably in dress, food tastes, customs, traditions and purchasing habits, it's almost impossible for a single manufacturer to address the wide variety of consumer requirements.  Thus, it is important for manufacturers to partner with local distributors and retailers who can help develop products that will appeal to local consumers, at appropriate price points.

Many vendors have been successful in selling "no-frills," standardized products to rural segments.  Big Bazaar, Hindustan Unilever, Maruti, Tata Motors and Hero have offerings relevant to this price-sensitive segment of the population. Other successful examples of localized low-price products include Siemens' pacemakers, Godrej's Chotukool refrigerator, and General Electric's ECG.

Supply side supply chain challenges in India mainly relate to poor infrastructure, complex tax infrastructure, weak distribution system, fragmented market, and lack of technology adoption.  Though India has the second-largest road network in the world, totaling 4.2 million kilometers, most of it is of poor quality. National highways account for less than 2 percent of the total road network, but carry 40 percent of traffic. The government is aware of this problem; the 12th Five-Year Plan targets significant improvements in transportation infrastructure.

India's tax structure is very complex, with products typically being taxed twice: once by central government and then by respective state governments.  Transaction taxes (import/entry, manufacture and sale of goods, provision/receipt of services) have a direct, tangible impact on the cost of goods or services.

Due to the country's weak distribution network, many retailers maintain higher inventories than would otherwise be required. Organized retailing accounts for less than 10 percent of the country's total retail trade, resulting in an extremely fragmented market.  In logistics, a highly fragmented trucking industry makes it difficult for companies to manage the plethora of carriers required to handle shipment volumes.  Although outsourcing of logistic activities to third-party logistics providers is increasing, there are very few organized providers in India. 

Lack of technology adoption also remains a challenge for India's supply chain.  While the sale of supply chain management software is starting to grow at a rapid rate, it is doing so from a very small installed base.  With the potentially long-term effects of the global economic slowdown, organizations in India must continue to invest in IT to improve their competitive advantage.

                                  The Outlook

Companies can meet most challenges noted above with a sound supply chain strategy, with IT as the key enabler.  Though the complexities of India's supply chain may appear overwhelming, understanding and mastering them is a critical success determinant for an organization attempting to serve customers in India. An efficient review of supply chain design will help better position companies in what is becoming an increasingly competitive marketplace.


Keywords: supply chain risk management, Distribution, Economic Growth, GDP, Information Technology, Infrastructure, Manufacturing, Retail, Supply Chain Management

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