Modern Retail versus Traditional Retail – what are the differences in the logistics?

Recently there has been a lot of news about the Retail industry in India. The news mainly revolved around whether FDI (Foreign Direct Investment) should be allowed. Last week there was news on Retailing, but of a different genre. The news was about companies which had assumed that Modern Retailing/Organized Retail will happen in India and had already started operations to use this opportunity.

Future Supply Chain Solutions has setup operations to provide Logistics Services to FMCG brands to service the Modern Retailers.

Why do Organized Retail or Modern Retail require a different distribution network as compared to the Traditional Retail? Why cannot the same distributor who services the regular stores (mom and pop stores) service the Modern Retail or Organized Retail?
To understand this, let us look at the differences in the logistics of a Traditional Retail channel and Modern Retail or Organized Trade channel

Order Acquisition
Traditional Retail: The sales person goes to the outlet, counts the inventory, explains the promotions (if any) and then suggests an order to the store owner. The store owner then agrees or modifies the order.
Modern Retail: The order would be suggested by the IT system of the Modern Retail chain. This order either would flow to the manufacturer/ LSP (Logistics Service Provider) via EDI or email or fax.
Order Execution
Traditional Retail: The distributor would deliver the order 1-2 days after the order was taken. Or if the model of operation is a ready stock unit [ the salesperson who takes orders travels with a van which carries the stocks] , then the stocks are delivered as soon as the order is taken – the salespersonhands over the order to be delivered to the merchandiser/ delivery boy who travels with the van. They pick the stocks from the van and deliver to the store.
Modern Retail: The delivery slots or delivery windows are fixed by manufacturer. The deliveries to the DC (Distribution Centre) or Stores have to be made within the delivery slots or delivery windows. Any miss on the delivery windows or delivery slots would lead to a penalty or/and going back to the last in the queue (your delivery will be scheduled after all deliveries for the day have been completed) or/and delivering directly to the stores.
Some Modern Retailers may require deliveries in pallets (CHEP  or LOSCAM ). If the Modern Retail / Organized Channel does cross-docking, then packing would have to be done storewise [ 1 pallet per store].
In many cases since deliveries to stores has to be done in van/ trucks the deliveries may have to be done at night when there is no NO-ENTRY restriction on heavy vehicles.
In some cases deliveries are scheduled as per the category – food on a particular day, personal care (soaps, shampoos, toothpaste) on another day, staples on another day etc. If a company operates across categories, the company would have to do multiple deliveries in a week.

Promotions
Traditional Retail: Standard company promotions are executed.
Modern Retail: Promotions would be partially led by the Modern Retailers. These promotions would be unique to the Modern Retailer. Any stickering or customization or manipulation that needs to be done will have to be done by the manufacturer or LSP.
New Launch
Traditional Retail: A manufacturer would have a sales launch for Traditional Retailers to introduce a new product to the market. On the day the product is to be launched, the salesperson would take orders for the new product and the new product would be on the shelves.
Modern Retail: The launch of a new product in Modern Retail is more complicated. The new product launch would have to be informed to the Modern Retail months in advance. It would have to be included in the product master of the Modern Retail. The planogram would have to be modified to include the new product. In some cases, a placement fees would also have to be paid.

In-Store
Traditional Retail: Once the stocks are delivered, the store owner or shop assistant arranges the stocks on the shelf or in the back room. When a customer asks for a product, the shop assistant knows where the stock is kept, gives the product to the customer.
Modern Retail: The stocks maybe taken straight to the shelf or taken to the backroom. One of the most important differences between a Traditional Store and Modern Retail store is that in a Modern Retail store the customer picks up the product from the shelf. If the product is not on the shelf, the customer assumes that it is out-of-stock. The product may actually be available in the backroom. So, one of the important logistics activity in a Modern Retail store is to replenish the shelves regularly so that the shelf is always stocked. Many stores maintain merchandisers whose job is to replenish the shelves from the backroom.

Payment
Traditional Retail: Payment is made to the stockist or distributor immediately or on the next visit of the salesperson. So, the credit period is usually equal to the time between 2 visits of the salesperson.
Modern Retail: Modern Retailers usually demand a long credit period from manufacturers and vendors. Sometimes, a Modern Retailer may ask for a special format for their invoices. They would not accept the standard invoice format of the manufacturer.

Metrics/ Scorecard Measures
Traditional Retail: Usually, Traditional channel stores do not have a formal scorecard to measure manufacturers. They have a general approach which would be regularity of coverage, time between order and delivery, and fill rates.
Modern Channel: Modern retail chains have a formal scorecard to measure manufacturers. The logistics measures would be shelf availability, inventory levels, case fill rates, on-time delivery.
Because the logistics process of Traditional Retail channel is different from the Modern Retail/ Organized Retail channel, manufacturers have a different team for the two channels. This is what the big players do. The smaller players outsource the logistics of the Modern Retail/ Organized Retail to LSPs.

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Will National High Speed Rail Authority (NHSRA) give India its equivalent of TGV, Thallys, ICE, Shinkansen?

There has been a lot of talk of recently of high speed rail networks being developed for passengers trafficA National High Speed Railway Authority  (NHSRA) is being setup by the government to study and setup the railway lines.

India has the world’s 4th largest network of railways. India has the largest growth in air travel.  And this is set to grow, given that the economy is growing at ~7%. High speed trains make sense for travel distances upto about 600kms which can be done in about 2.5-3hrs in a high speed train. For these distances, many of the customers who would otherwise have gone by air would convert to the high speed train, because the door-to-door time in trains would be less than by air ( as the airport would be situated outside the city and check-in would have to be done 60 minutes prior to take-off). Some of the passengers who today travel by overnight train on these sectors would also convert to the high speed trains.

High speed trains are already operational in Europe – TGV, Thallys , ICE– Japan – Shinkansen  – China. In fact countries like Turkey and Morocco have introduced high speed trains. So, it seems logical that India should not be left behind.

All this looks good and ambitious. But how can we make this a reality?  And is it feasible?

What are the challaenges?

Land issues: Land acquisition in India is a major bottleneck to any infrastructure project. The Dedicated Freight Corridor also faced issues in land acquisition and hence the project has been delayed.

Indian Railways: The Indian Railways record in creating new railway lines is poor. The Delhi Metro and Konkan Railway projects would never have been executed had it been entrusted to the Indian Railways. And it is for no fault of the Indian Railways; they are meant to run and operate trains that keep this great country moving. And they do a very good job of it. The Indian Railways organization and structure is not geared to infrastructure development.

PPP: The PPP model would be the key factor in the success of this project. There are several good PPP models – Ports, Highways, Airports. These models should be used to create a framework which allows these projects to fructify.

The high speed railway projects are very capital intensive. Any PPP partner will venture into it, only if he is absolutely certain that the government will play the game according to the rules and that the government will not change the rules of the game midway through the concession period.

Pricing:

I was doing some calculations on the costing and pricing of the seats on the high speed trains. It is not cheap.

Infrastructure Capital Cost : Cost of laying a high speed railway line is Rs 100 Cr per kilometre. This includes tracks, overhead traction, signalling and even stations.

Train-set Cost: Cost of a train set is roughly Rs 200 Cr (€ 30 million) for a 600 seat train car.

Maintenance Cost:

Rolling Stock maintenance cost would be about Rs 10 Cr per train set per year.

Track maintenance cost would be about Rs 25 lacs per track kilometre.

Traction Cost:

Electricity costs for traction would be Rs 200 per kilometre [ I have not assumed any regeneration and return to grid due to regenerative braking]

The table below shows the rough calculation of the cost per passenger for two sectors that I took as a sample – Mumbai-Ahmedabad and Chennai-Bangalore. The passenger data is approximate based on the number of flights and Shatabdi trains that run between these cities.

The cost per passenger on the high speed train is higher than flight costs. [ the cost of a one-way Mumbai-Ahmedabad air ticket on a weekday was about Rs 3700 and for Chennai-Bangalore it was about Rs 3500].

How do these costs compare to high speed trains elsewhere in the world. Here is a table on the cost of travel on high speed trains across the world.

The costs that I have calculated seem on the higher side. Some of the costs are approximate costs and that could account for the higher price. Also, the cost is very sensitive to occupancy rate. Any increase in occupancy rate can bring the costs down. I guess that is where the business wizkids will apply their minds and find the optimum price.

The advantages of a high passenger train service are;

Green option: Rail is a much greener option than road or air. Travelling by train versus travelling by air reduces carbon emission by between 85% and 90%!

Instead of spending time and money in bailing out airlines, the Indian government should consider giving that subsidy to a greener and more environmentally friendly option – high speed railways. http://www.thehindu.com/opinion/editorial/article2624710.ece

Let’s hope the National High Speed Railway Authority (NHSRA) does a good job and India get’s its TGV , Thallys, Shinkansen, ICE!

All aboard!!!