The mention of the word godam conjures up images of a dusty, decrepit warehouse. They are hot inside and devoid of even basic work conditions. Ironically, the staff, having done the same manual job for years, is extremely efficient, with the ability to pick out a product in the middle of the grime in no time.
This is how clearing and forwarding agents (CFAs) have operated in India for years. It is a key component of a well-established, low-cost supply chain model that has stood the test of time.
This system underwent little change till around 2005, when modern retail made its move. Suddenly, the Big Bazaars, Spencer’s and Shoppers Stops opened outlets that were several times the size of neighbourhood kirana stores. Larger still was the accompanying product range. There were nearly 100,000 items (from 300 for the largest retailer, at the turn of the century) for the startled consumer. The CFA’s existing infrastructure was proving inadequate. Sourcing products directly from the manufacturer was now a smarter way of doing business; the retailer saw little merit in paying distributor margins. The term ‘supply chain’ gained ground on the back of strides that modern retail was taking.
Biting the bullet
Ravi Patil looks a little lost when he is given the new device. Technology is not new to him and over the past three to four years, he has seen it at play in Future Supply Chain’s warehouse in the Multi-modal International Cargo Hub and Airport at Nagpur (MIHAN). The choice of location was deliberate, given that it is in the centre of India, with easy access to most key destinations by rail or road. This 370,000 sq ft warehouse opened in 2013 and in mid-2017, ushered in the cross-belt sortation technology that sorts apparels, parcels and smaller items at high speed. Today, the speed of sorting has increased 3x. At MIHAN, the installed capacity is 3.6 billion pieces per annum. Apparel comes from vendors across India to this facility. Once sorted, they make their way to Future Group outlets such as Big Bazaar, FBB and Brand Factory.
Today, the team from Honeywell is checking the to-be-launched voice-picking device (essentially a headphone with a microphone) with Patil and some of his colleagues on the shop floor. The excitement is palpable since it will free up the worker’s hands, which earlier were used for the handheld device that relayed instructions and scanned barcodes as well.
At the end of the simulation, Patil, who is still in his mid-20s, is a lot more confident. Of the 1,000 people who work in MIHAN, around half have been given a handheld. Each voice pick costs a handy Rs.350,000 and the company still needs to figure out how many will be bought. At present, each worker averages 800 picks per day. With the voice pick, they are expected to pick up at least 30% more.
According to Mayur Toshniwal, the company’s managing director, a few years back, his business team predicted an increase in demand for garments from 100 million to 300 million. “We had almost decided on creating a hub, one in the north and south each, but soon realised it would be an inefficient supply chain model. Instead, we chose to invest in a sorter out of Nagpur and increase capacity at one place,” he says. They invested to the tune of Rs.600 million. Here a telescopic boom conveyor is also at an advanced testing stage. It will go from loading 10 boxes into a truck per minute, to loading 31. It is estimated that the company will save Rs.60,000 per day or Rs.20 million per annum.
“Supply chain in India should have seen more technological intervention. Using old godowns meant our supply chain costs have been at 14% of the GDP, compared to the global level of 7%,” mentions Toshniwal. It is within the warehouse management system (WMS) where technology’s impact is evident.
Recalling the pre-and post-technology scenarios, Vasanth Kumar, managing director, Lifestyle International, says, “2011 as the turning point for his organisation. Till then, almost everything was done manually.”
Among the first things his organisation did was to put in place a WMS, for which Oracle was roped in. Till then, an employee would move around with a piece of paper, ticking off whatever had been picked to dispatch. Kumar estimates accuracy levels to be no more than 70% then, with the mistake detected only when the consignment reached the incorrect destination. Besides, daily stock reconciliation or even inventory management were “painful tasks.”
With a new WMS, a Rs.150 million investment, it is now possible to scan the consignment, assign it a code and map it as it makes its way to the customer. This has resulted in accuracy levels of, as he says, “99.9999%.” However, why did a company such as Lifestyle, whose parent, The Landmark Group owns Max and Home Centre, not adopt technology earlier? “Our low base of business did not justify that. In 2010, we were a Rs.8 billion company with 12 stores,” he explains. Cut to today, where the turnover is Rs.50 billion from 80 stores. “For technology to work, you need scale to get the optimum benefits. Else, the cost of technology will not justify it.”
There have been other benefits too. The head-count in the warehouses across six locations has remained around 1,000, even as volume has increased by over 6x. Starting from the usage of a handheld device, most of the process is automated, including sales being captured live regardless of location. “We can now do same-day replenishment for all our stores located in metros,” points out Kumar. This is against the two to three day turnaround time before. The logic here is that the top eight cities control 65% of Lifestyle’s business, which means the probability of a disappointed customer is substantially reduced.
In the case of Home Centre, a home furnishing retail chain, over 50% of its 42 stores came up in the past five years. “The old system could not have taken this kind of business and technology has helped significantly in our growth,” he says. Just in terms of throughput, Lifestyle and Home Centre do a combined 130 million pieces, from no more than 20 million in 2011. “To get to this level without technology would have meant increasing our workforce by 2.5-3x with absolutely no guarantee of success.”
Proximity to the consumer
It’s close to noon and the Flipkart sortation centre at Soukya Road, about 30 km from central Bengaluru, is buzzing with activity. Over time, the entire sortation system has made a crucial transformation. From a decade ago, when it was all manual, it switched to handhelds, which meant around 400 packages could be sorted hourly. With robots coming in, that story is about to change.
Spread over 15,000 sq ft, the new sortation area houses just six people, who do precious little other than place delivery packages on an orange robot. Called automated guided vehicles (AGVs), there are six of them, each measuring 2x2 ft. They crisscross the enclosed area and drop the package with precision in slots, from where the consignments will be sent to destinations across India. The only time the robots take a break is to recharge their batteries, which lasts for eight hours. There are 100 such AGVs in operation and the number to be deployed depends on the number of packages that need to be delivered. With these robots, said to cost about Rs.2 million apiece, it is now possible to handle 5,000 packages an hour, an increase of over 10x from current levels. Internally code-named Project Minion, the design and integration of the AGVs were done completely in-house.
Krishna Raghavan, senior vice-president, eKart Tech, Flipkart’s supply chain arm, says, “For technology to work in supply chain, it is critical to make a difference between IT and product. IT recognises the complexity of a problem and we want to approach that problem with a product mindset,” he explains. Citing the most common challenge faced in India – locating someone’s address during the early days of Flipkart – Raghavan says they created an automatic beat planner (ABP) or a route plan made for the delivery executive to visit a certain number of homes or stores. Developed in-house, it uses geo-mapping.
“It took about six months to get it right but it saved us the trouble of looking for a Ganesh temple or a paanwallah,” he says laughingly. This breakthrough came in handy when Flipkart got into grocery a little over a year ago. Since the ABP was in place, the process became a lot easier. “Besides, we were dealing with customers who had to get their order on time, which is where it made sense,” he adds. Today, they do about one million shipments daily, using the pan-India ABP.
If modern retail emerged in 2005-06, the e-commerce story took a new shape in 2014 with Flipkart investing in technology and Amazon entering India. What changed the equation was the focus on B2C. Anshuman Singh, chairman and managing director, Stellar Value Chain Solutions, and a supply chain veteran, quietly says these folks changed the rules of the game. “If orders were delivered earlier in seven days, it first came down to four days before next day and same day delivery became a reality,” he explains. Stellar Value, a third-party logistics company, operates with 400 companies, which includes large e-commerce companies and those in electronics, FMCG, pharmaceuticals, automotive and telecom. In 2016, it received $125 million from private equity major, Warburg Pincus.
To get a share of the consumer wallet, Flipkart set up eKart. Amazon, that entered India in mid-2013, initially worked with courier companies before shifting to its own Amazon Transport Service, no different from how they work in the US.
Sitting in BLR7, Amazon’s fulfilment centre (where sellers drop their products) in Attibele, Akhil Saxena, the company’s vice-president - Asia operations, needs a moment to gather his thoughts. He has just taken us through a tour of the 350,000 sq ft facility, which is its fourth in Karnataka, of the 50 across India. Taking the average area of 200,000 sq ft and Rs.400 million per facility, you’re looking at an investment of Rs.20 billion.
Given its strength globally, much of the technology was easily accessible at the time of the India debut, but fine tuning was required. Saxena points to how delivery in the US is largely unattended, something that is inconceivable in India. Cash on delivery is another peculiar problem. “Our delivery app that we brought into India needed to be programmed for cash transactions. Again, the issue of loose change was tackled by moving those consumers to an electronic wallet,” he says. Today, one in three customers use the electronic wallet.
Saxena claims, in terms of infrastructure, a fulfilment centre in India is no different from those in advanced markets such as the US. This includes Wi-Fi across the centre, material handling equipment such as reach trucks that can go up to 12 metres, a cubiscan machine to check the weight and dimensions of the product among others. “It is our investment in technology that allows us to give access to SMEs to sell their products across the country,” he says.
Just to understand the levels of scale, Amazon has five warehouses in Bhiwandi close to Mumbai and an equal number in Delhi. A consumer asking for three different products ideally should have them sourced from one warehouse. Not with Amazon’s WMS. If a product is unavailable in one warehouse, the WMS will not look for it in the adjoining building. This puts pressure on the company’s financials, with them going any length to bag customers.
Just how expensive are these warehouses or fulfilment centres in India? Most companies lease their warehouses. While an archaic godown would have cost Rs.30-40 per sq ft, the modern one costs Rs.100-2,000 per sq ft for a warehouse, depending on what goes into it. The e-commerce warehouses, which Flipkart and Amazon run, need sorting systems, a high level of automation, dense storage systems, shelving, racking, Wi-Fi and CCTVs among others. At Rs.2,000 per sq ft, a 350,000 sq ft warehouse will have a capex of Rs.700 million.
A large chunk of this will be shelving and racking at around Rs.500 per sq ft, while the basic sorting systems start at Rs.200 per sq ft going all the way to Rs.2,000. Material handling equipment is a one-time investment and a standard reach truck costs Rs.3-4 million, while the high-end ones that can manoeuvre narrow areas, cost about Rs.6 million. In all, that adds up to roughly Rs.700 million in fixed costs and around Rs.10 million per month in rent.
The thumb rule for recovering the investment is three to four years depending on volumes. But things changed for the good in 2017 with the advent of GST, bringing in more efficiency in warehousing and logistic operations.
Moving things around
The introduction of the Goods and Services Tax (GST) in July 2017 was a shot in the arm to facilitate easier movement of goods across the country. Earlier, a company could have 32 warehouses, one per state, to deal with the central sales tax. “A supply chain existed merely to cut corners or just reduce taxes since a 4% by way of central sales tax was a huge outgo. Handling that many warehouses was a nuisance,” explains Singh.
GST took away the need for a scattered inventory. It made more practical sense to invest in a central warehouse. Pirojshaw Sarkari, CEO of Mahindra Logistics, e-commerce and GST, says, “Prior to GST, no one except the Food Corporation of India, had a 100,000 sq ft warehouse. What was the maximum then is now the minimum for large players,” he says. His company has an asset-light model and controls a total space of 16 million sq ft, with a clientele that includes the likes of Volkswagen, Gulf Oil and Hindustan Unilever. Mahindra Logistics has its own control room in Goregaon, a suburb in western Mumbai, which tracks the movement of each of its 85,000 trucks.
“We give the driver a route and he follows it through GPS,” says Sarkari. If he is driving to Delhi from Mumbai and has not reached Nashik in four hours, he will get a call. According to him, a huge part of loading optimisation in India is left to the driver, which means 5-7% efficiency is lost just there. “Using routing technology, I can decide which distributor to meet first and at what time. If delivery needs to be avoided in the afternoon, analytics will show that,” he says. The positive of all this is that 40% of e-commerce has now moved to the roads.
“That number will keep increasing with better connectivity. There was a point then when Mumbai to Delhi by road took 41 hours, while it can be done in 28 hours now,” points out Sarkari. Besides, a well-run transportation management system means constantly tracking the driver for irregularity – not just with respect to the route but also his behavioural pattern. “There is a greater level of visibility, which eliminates any chance of pilferage or unscheduled stopping at any place. That is the kind of mapping that technology allows you to do,” he adds. They have invested around Rs.10 million at the higher end to develop this technology.
The big change is still underway as most companies are slowly receptive to the idea of outsourcing their supply chain. Seshagiri Rao MVS, joint managing director and group CFO, JSW Steel, says the accountability levels for companies such as his changed the line of thinking. JSW Steel decided to go with Mahindra Logistics in 2016. “The agreement was that they would get a percentage of what was saved,” he explains. At its peak, JSW spent 15-20% of its revenue on logistics, which Rao describes as being “unacceptably high.” On an average, costs went up by 7-10% each year. But, Rao says, it will decrease as JSW begins to outsource more.
“The travel from Damra in eastern India to Ratnagiri in the west would take 10 days earlier, with no surety. That has reduced to seven days with technology,” he points out. At a time when logistics costs increased each year, Rao says that number remaining stable itself was an achievement. “We are getting a lot more for the same price and it is very likely that costs will drop by 2-3% over the next couple of years. An investment of this nature does take time to pay off.”
In a world that is getting disruptive by the day, it is only natural that companies see merit in putting their warehouses in order.