Supply Chain View

Today I’m continuing my analysis of supply chain management in India with some discussion of the economic context. India’s economy is growing very quickly – recently we’ve begun to worry that it’s growing too quickly, running the risk of overheating . But it would be odd if such a rapid transformation of the economy didn’t hit a few bumps along the way, and my feeling is that over the long term India will experience sustained and considerable growth.

Shoppers in Delhi's M-Block Market

Where is this growth coming from? Partly it comes from exports, both of goods and services (most notably BPO and IT services). But significantly it comes from a growing domestic consumer market, driven by a broadening of the middle classes and an increase in disposable income across the population. Rajev Pal noted recently that 3PLs are experiencing growth from the Indian FMCG sector. I think growth of the domestic consumer market has profound implications for supply chain management in India.

Again I’ll point you in the direction of the McKinsey India website and their report The ‘Bird of Gold’: The Rise of India’s Consumer Market. This paper originally came out in May 2007, but it’s conclusions have not been countered by the evidence of the last 4 years. (McKinsey based their models on compound growth rates of 7.3%, which turns out to be very close to reality even during the period of global financial crisis. This sustained growth reinforces the conclusion that domestic consumption has become the most important economic driver.)

McKinsey forecast that by 2025 India will be the 5^th largest consumer economy in the world (in 2007 it was in 12^th place). Now this won’t make Indians rich – 2025 per capita consumer spending will still only be just over $1000 a year in today’s money – but it does represent a sizeable shift and will pull huge numbers of people out of poverty. In fact they expect the proportion of people they classify as “deprived” (household incomes of less than Rs 90,000 p.a. at year 2000 prices) to more than halve by 2025 (54% of population in 2005 down to 22%). This is not wishful thinking – in 1985 this section of society represented 93% of the population, so growth in the last 25 years has been effective in lifting large numbers of people out of desperate conditions.

They also see the middle class growing from about 50 million people to 583 million, and with this not only a massive increase in spending, but a shift in the pattern of consumption from largely subsistence purchases to discretionary spending. Already today we can see this middle class consumption pattern in places such as Delhi (where I was living), Mumbai (where I was working this month) and Bangalore. But the forecast is for this growth to spread significantly outside the top-tier cities, to mid-sized urban centres such as Chandigarh and Amritsar. (Note for non-Indian readers: both these cities have populations of over a million, so mid-sized in this context is rather larger than it might be in, say, Europe. Also, middle class here has been defined as those with annual incomes of over Rs 200,000 in year 2000 money, or let’s say 6-7000 US dollars in 2011 prices. This may sound modest, but $1 in India will buy on average what $4 will in the US, so onion inflation notwithstanding that is a relatively comfortable income.)

Here are some of the conclusions I draw from this for supply chain management.

1. Volume of material moving around the country will explode

Some of this increase in spending will be in services (e.g. forecasts for 2011 show the telecoms sector expected to grow by 40% in the year, driven by greater penetration especially in rural areas). But a large proportion will be in goods, and even in services there is usually a significant material component (e.g. in telecoms, there is infrastructure construction and maintenance, and handset sale and repair). As we have already seen, logistics infrastructure in India already lags requirements in terms of capacity, capability and efficiency. Consumer growth requires a revolution in logistics processes and infrastructure.

2. Quality and delivery dimensions will be increasingly important

What I mean by this is that lowest cost supply chains will not be where most of the competitive pressure will come from. The rising middle class will want quality products, they will want choice, they will want service and in their increasingly stressful lives they will want convenience. They will have new reserves of disposable income to pay for these things. Competitive supply chains will be those that deliver these things. Even with wage inflation, labour costs in semi-skilled roles are likely to remain low as the un- and under-employment in the economy is taken up by growth in jobs. In a low-wage environment, operational efficiency will continue to be less important than effective delivery capability.

3. There will be a huge requirement for skilled SCM professionals

I am thinking not only of the 100,000 warehouse managers I mentioned last time, but outside logistics there will be a scarcely imaginable increase in the amount of planning and forecasting, procurement, supplier relationship management, etc etc that will be needed to make all of this happen. All of this will require new people, competent, properly trained – and no doubt there will be a lot of mistakes along the way as people learn by doing. For those of us in the developed economies, this means transferring a lot of knowledge to India, and I see there being some interesting business opportunities there for companies that can present the right kind of offer to the Indian market.