Any strategic supply chain management. Integrated supply chain for food services industry

Transcription

1 Supply chain Integrated supply chain for food services industry Supply chain companies that can integrate sourcing, inventory management and transportation, and leverage economies of scale in sourcing and ensure distribution to serve multiple clients, will prove to be the game changers for Indian food services industry BY DEEPAK NIGHOSKAR Any strategic supply chain management system leverages scale of purchases, minimises inventory and ensures smooth flow of goods between points of purchase, storage and sale. This leads to a continuity of supply and controls costs. Hub and spoke (HAS) is established as an efficient system of distribution across industries. Global companies have implemented a HAS distribution model and attained a distinct competitive advantage in logistics. It is a centralised and integrated set-up meant to minimise costs. Products sourced from different locations are directed to a centralised location the hub, from where these are channeled to locations (sale outlets) aligned as spokes. Wal-mart is an example of successful HAS model in modern retail supply chain. The company s distribution center (DC) network and logistics expertise give it the competitive advantage and have made it the industry leader in managing supply chain. The same model is also being used in banks and financial services companies, where customer facing branches are only the out- 86 ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER 2013

2 PHOTOS: REUTERS lets for sale of products while the back end processing is centralised at one of the hubs. DISTRIBUTION CENTER IS THE HUB The shelf-life of food requires a management strategy more complex than other industries. It has to drive more frequent inventory turns from supplier to chain operator. The HAS model that has worked successfully in other industries has been replicated in food services business too, where a DC or a Commissary acts as the hub of the spokes that are the restaurant outlets. What better example than McDonald s? Quick-service restaurants (QSRs), as the name suggests are about speed and value for money quality at the lowest cost possi- A Wal-Mart store employee works in one of the company s distribution center in Bentonville, Arkansas ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER

3 Supply chain INDIAN FOOD SERVICES MARKET FEEDING THE ASPIRATIONS In recent times, consumption basket has seen a discernible trend in favour of high protein discretionary items like meat, fish, eggs, chicken, milk etc. Indians are also giving preference to vegetables and fruits over cereals. This is a direct result of higher disposable income brought on by consistently high GDP growth rates clocked in last couple of decades. This change in consumption basket is visible not only in what Indians are eating, but also in, where they are eating. Organised food services market (restaurants and eateries) is estimated at `364 bn, which is ~31 per cent of the total market. This is expected to grow to `860 bn in next five years. Full Service Restaurants (FSR) constitute over 60 per cent of the market. Cafes and QSR segments are the fastest growing segment. Together they will constitute ~47 per cent of the organised sector by Organised sector is driving most of the growth in Indian out-of-home food [ ] CHANGE IN CONSUMPTION BASKET IS VISIBLE NOT ONLY IN WHAT INDIANS ARE EATING, BUT ALSO IN, WHERE THEY ARE EATING 88 ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER 2013

4 WHAT ARE OTHERS DOING? Organised QSR in India, worth INR 80 bn, is expected to explode to over `250 bn by McDonald s peer in QSR segment Domino s Pizza, operates ~525 restaurant outlets in India. It also follows a similar sourcing and distribution model. Processed/ semi-processed raw material flows into retail outlets through its regional commissaries. The pizza dough and other items prepared in commissaries are sent in refrigerated trucks. Processed dough is used up in the retail outlets within specified days of delivery; unused quantity is discarded after the recommended date. The in-sourced model seems to be working fine for QSR chains and restaurants with reasonable number of stores. But does it work for other formats? Fine dining restaurant chain Speciality Restaurants Limited (SRL) serves full course meals across 22 Indian cities and in Bangladesh through 55 company-ownedand-operated, 19 franchisee and 12 confectionary outlets. It has around 10 brands of outlets dishing out colonial, Nawabi, Continental, traditional Bengali, modern Chimarket. Not only is the organised segment growing faster, but it is also cannibalising on the unorganised market. It will grow to 40 per cent of the total market in next Quinquennium. Factors driving this FOOD SERVICES MARKET-INDIA (INR Bn) Organized Unorganized % March-2013 Source:Avizare Report on Food Services Market March-2018 explosive growth are: Population between 15~40 years of age expected to be 42 per cent by 2021 (~550M) Increase in purchasing power of people Share of eating out in food expenses is expected to increase further Middle class is the largest consumer segment of food services industry, driving significant industry growth Urbanisation to grow to 40 per cent by 2031 By 2031 the top 10 cities will have population of 140 Million Increasingly people are adopting the food joints as a place to socialise Increase in urban working female driving growth in eating out segment (Source: Avizare Report on Food Services Industry 2013) ble. In order to minimise costs, emphasis is on maintaining low inventory just sufficient to meet the requirement and not low enough to run out; and a high turnover of inventory to always ensure fresh stock of perishables. Keeping this in mind McDonald s India has implemented a multi layered supply chain, with suppliers at two levels. Tier II suppliers feed the raw produce into Tier I suppliers, who put the processed product into play, supplying them to DCs. DCs are at the core of the McDonald s supply chain process. The perishables are transported through refrigerated trucks. DCs operate as hubs catering to McDonald s restaurants, pan India. These trucks also handle return logistics. The DC is responsible for procurement, quality checks, storage, distribution, deliveries to the restaurants and recording and reporting of what is moving in and out of the system. It also provides value-added services like repacking of promotional items, distribution of uniforms, training material and other consumables. DCs ensure that the supplies flowing in from across the country are absolutely fresh with little or negligible nutrition loss. Dependence on numerous independent suppliers leads to insufficient visibility for restaurants and hotels of their supply chains. McDonald s India has put in place an efficient supply chain with effective monitoring system (spent `650 crore and 4 years to set it up) and centralised the components under one supply chain partner. This leaves them with sufficient time to focus on their core constituency the customer. McDonald s has 4 DCs for its 300 outlets spread across the country. ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER

5 Supply chain [ ] THE CONTROL AND THE SUPERVISION THAT MCDONALD S EXERCISES OVER ITS OUTSOURCED SUPPLY CHAIN MEAN THAT THERE IS NO COMPROMISE OVER CONSISTENCY OF QUALITY AND TIMELINESS OF SUPPLY nese, Bengali sweets and snacks. SRL has a pool of suppliers which are selected through a centrally controlled selection process; this ensures consistency and timely delivery of raw material to restaurants. Recently it has put in place a centralised supply system for perishables. Perishables would be supplied directly to the nearest restaurants from these centralised locations. For this purpose, SRL has set up a commissary in Kolkata for processing the stuff including butchery and all the pre-prep. Cold chain is put into service to supply the processed products to restaurants across Kolkata. A phased rollout is planned for Bangalore, Chennai and at centers with 4-5 restaurants. The space released at the main outlet due to centralised kitchen is being used up more effectively in serving guests. TOO SMALL TO BE INDEPENDENT? Smple highlighted above, the company could afford a commissary to serve a location which had a minimum scale of operations. Would it be feasible for it to create hubs where there are not enough spokes to feed into? What about the smaller chains and single outlet restaurants? How can they afford to have a sourcing and distribution network separate from the retail outlet? Let us return to McDonald s supply model and the DCs set up by it. Suppliers of raw materials and processed goods are identified and selected by the company. Logistics part is taken care of by its supply chain partner Radhakrishna Foodland (P) Ltd. Mc- Donald s has mandated them to run its supply chain. This includes managing the DCs and cold chain for McDonald s restaurants across India. Why and how could McDonald s entrust a vendor to run an operation which directly impacts its bread and butter? The supply chain model itself is the answer. The control and the supervision that McDonald s exercises over its outsourced supply chain mean that there is no compromise over consistency of quality and timeliness of supply. On part of supplier, his job does not end when the product leaves his premises, rather it ends only when the customer consumes it. McDonald s expects its suppliers to personally ensure the quality of their products to skirt the risk factor. 90 ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER 2013

6 McDonald s maintains a simple handshake relationship with its suppliers. Even though it does not have any legally signed agreements, it has mutually agreed Key Performance Indicators (KPIs) to monitor their performance. The DCs are assessed on several factors like administration efficiency, warehouse efficiency, truck utilisation, overtime as a percentage of the total number of hours worked, number of cases handled per trip etc. The model offers a way out for the vast number of single outlet restaurants and restaurants with not enough numbers to have dedicated sourcing and distribution set-up. Sourcing and distribution can be outsourced to a single company by several stand alone and small chain restaurants. Please refer to attached figure. WAY TO GO Even though the key functions are outsourced, restaurants can monitor the performance of the supply chain company through mutually agreed KPIs. Either the supply chain partner or the restaurant company can monitor and control the suppliers of raw/ processed products. Such a model is not entirely new to India, but is still in infancy. It offers immense scope for potential supply chain partners. Some of the responsibilities which these supply chain partners can pick up are (not exhaustive): Supplier identification, procurement, quality checks Storage, inventory management, receivable management, reverse logistics Deliveries to the restaurants, managing cold chain A worker puts a tray of hamburger buns into an oven at a McDonald s distribution center ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER

7 Supply chain A popular Costa Coffee outlet in Mumbai METRO AND TIER 1 CITIES DRIVING FOOD SERVICES SECTOR NCR - `111 Bn MUMBAI - `103 Bn 6% 7% 20% 67% 59% Speciality Cafe QSR FSR 8% 6% 27% Indian food services market is concentrated in metro and tier I cities. Not surprising, since most of the purchasing power is concentrated in these centers. Mumbai and NCR together constitute around 59 per cent of the organised restaurant market. Italian, Chinese and Mughlai are the most popular cuisines in NCR and Mumbai. With high penetration in metros and tier I cities, tier II and tier III cities would emerge as the future engines of growth. The key is to identify and classify the pockets of varying wealth and income distribution for better targeting. (Source: Avizare Report on Food Services Industry 2013) 92 ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER 2013

8 user industry through their cold chain storage and transportation infrastructure. Similar to McDonald s India, which is managing its distribution network in partnership with its suppliers and supply chain partner, is the example of Metro Cash and Carry. Metro Cash & Carry, the largest sales division of the German trade and retail giant METRO AG, is an international self-service wholesaler. Unlike other retail chains, it s a B2B chain where core customer groups are hotels, restaurants, caterers, traders and other business professionals. In India it offers specialised services to food services industry. Farm produce (fruits and vegetables, poultry and meat, fish etc) is sourced directly from farms and production centers, sorted and graded and distributed to the BRINGING TOGETHER SOURCING, INVENTORY MANAGEMENT AND TRANSPORTATION Any product s supply chain has three key elements (besides several others) sourcing, inventory management and transportation (cold chain in case of food services industry). Integrating these functions under one roof is critical for products with limited shelf life. Ownership of these elements by a single entity means the multiple hand-offs are avoided and the consequent non value-adds shaken off the value chain. In the current scenario, the market is splintered with the three elements not necessarily sitting under one roof. Eateries source raw materials feeding their kitchen, from processors, wholesalers or directly from farms, and, manage inventory all by themselves. Supply chain operators like Radhakrishna Foodland and Snowman Logistics Limited work on a 3PL model and provide transportation, including cold chain, and other value-add services like grading, sorting, packaging, and inventory control, in certain cases, to their clients. This still leaves food services industry dealing with multiplicity of players to fill the gaps in the supply chain. Something which is evident in the above example of McDonald s is that all three components i.e. sourcing, inventory management and transportation (cold chain) sit together with the company and are being managed by its supply chain partner. This is also true to a great extent in Metro Cash & Carry model. Future belongs to companies like RK Foodland, Metro Cash & Carry and Snowman Limited, if they are able to integrate the three components, leverage the economies of scale in sourcing and ensure distribution through common DCs effectively servicing multiple clients. This will leave food services industry with lot of time to indulge their customers in the delicacies of their kitchens. Way to go! Deepak Nighoskar is managing partner,avizare Solutions ASIAN MANAGEMENT REVIEW JULY - SEPTEMBER

9 Avizare is a global Management Consulting firm that aids companies in making better business decisions by leveraging facts, information and advanced analytics. We follow a customer-driven approach to develop and deliver unique and customized solutions. OUR SERVICES AND SOLUTIONS Market assessment Competitive intelligence Market entry strategy Vendor & sourcing intelligence Logistics & inventory optimization Growth Consumer insights Distribution excellence Performance Improvement Profit Maximization Supply chain analytics Production optimization Pricing optimization Promotion spend optimization Project management Corporate Governance Avizare Solutions Third Floor, Block B, Vatika Atrium, Sector 53, Golf Course Road, Gurgaon India Tel : contact@avizare.com