Today’s Wall Street Journal printed a great story on the challenges that Wal-mart faces as it grows its logistics network in India. The article notes how India is the second-largest producer of fruits and vegetables in the world, but that one-third of the produce rots because of its horrendous logistics infrastructure.
The story highlights some of the findings of our recent global logistics study,which found that logistics infrastructure is one of the most challenging issues, particularly for retailers who are expanding into BRIC countries such as India. This is certainly the case illustrated by Walmart’s exploits in India, as a world-class supply chain confronts the realities of roads and transport conditions in India. Last fall, following a relaxation in India’s foreign-investment rules, the company said it was planning to open its first stores in the country in the next two years, tapping into a prized $490 billion retail sector. But to cash in, Wal-Mart and other foreign retailers will have to solve the problem of moving goods efficiently in a country that offers big retailers little in the way of modern logistics and is plagued by dilapidated infrastructure.
What types of conditions? Consider the following:
- A critical lack of proper storage facilities, refrigerated trucks and adequate highways, the world’s second-largest fruit-and-vegetable producer loses about one-third of its produce each year to spoilage, the government says, roughly $10 billion worth.
- Middlemen, tiny farming plots and bad road conditions aren’t unique to India. But retail experts say the scale of the problems is unlike any it has faced in the 27 countries it operates in.
- State laws (there are 28 states) that are different, and which mandate that farmers must take their harvest to government-run wholesale markets and generally can’t sell directly to retailers. Food goes on circuitous journeys through multiple government markets and middlemen before reaching consumers.
- This level of bureaucracy alone represents a substantial burden for Wal-Mart or any other big retailer. There are now more than 7,000 government-approved markets nationwide with over 413,000 licensed traders and 214,000 licensed “commission agents” who hawk farmers’ goods on their behalf and take a cut of the transactions. Produce often goes through several of these markets, being touched by five or six middlemen before reaching a retailer. Critics say the setup—the U.S. and most nations have no equivalent—is steeped in inefficiency and is a major contributor to India’s persistently high food-price inflation
- Many of those trips are taken on highways so poor that trucks can manage only about 186 miles a day, compared with roughly 500 miles in the U.S., according to a 2010 report by McKinsey & Co. Improper food storage, meanwhile, occurs throughout the journey from field to store, whether it is vegetables left out on flatbed trucks for hours or in storage facilities that typically date to the Cold War.
- According to drivers, the trip may include a visit from local thugs demanding bribes for safe passage. The thugs, burly villagers armed with wooden canes called lathis, set up barricades on the road. They pose as legitimate local officials, even handing out receipts to victims, the drivers say. Local police say they haven’t heard of the problem. Drivers say they don’t think reporting it would help.
How will retailers like Wal-mart conceivably manage these barriers? In our study, we found that companies are organizing differently using multi-local operations, moving away from centralized approaches to regional capabilities, but with global planning. This requires close communication between third party LSP’s and all parties in the customer’s supply chain. Technology will also play an important role. For instance, one LSP noted the following:
“We installed GPS in most of our vehicles. So all the data taken out of the tracking system is processed so that a lot of information can be provided to the customers. Basically all the information about total lead times, waiting and loading times at the suppliers, driving times and delays can be quickly provided to the customers. Like this we can also identify troublesome roads and/or roads with high traffic. In this context we are also developing and using optimization models. We use the IT to provide large amounts of information about supply chain performance to our customers. This also includes information from our warehouses like inventory levels, e.g. which parts are getting out of stock or aged. However, we are not into automated warehousing systems yet, maybe we will offer it as a value-added service in the future though.”
The lack of logistics competence will continue to be a major barrier to economic growth in India. The Indian government is making a strong effort to transforming its logistics infrastructure through a $4.2 billion investment to upgrade the food supply- chain, but government investment in the past has not worked due to diversion of funds and corruption. For companies such as Wal-Mart, they may need to “build their own supply chain” solutions, working with local LSP’s who understand the market and can mitigate the risks using innovative technologies.