Wednesday, September 4, 2013

Roadways – A backbone for Supply Chain Management

The discussion on the US highway network in the last week’s class left me thinking how India is doing on this front. US has the words second longest roadway system, after China, having a total highway length of approximately 46,602 miles.  India, on the other hand has a highway length of approximately 6213 miles and stands third. Initially, it was the stringent regulations by the Indian government that restricted foreign retailers to step into the country.  This was an effort to safeguard local retailers. With a relaxation in India’s foreign trade rules, the question now is if foreign retailers can sustain their supply chain operations in a country with a dilapidated infrastructure to support the same. Although Wal-Mart, known for its efficient and low-cost delivery system, has initiated its efforts to venture into India, there is still some skepticism about its ability to handle the logistical knots. A major criterion for Global retailers to flourish is to pick the right product for the right market. Although Wal-Mart can succeed in this, the major hurdle is to get the product to the point of sale.

India still stands as an ideal market for global retailers to invest in. With 1.2 billion customers and rapid expansion of middle–class, global retailers stand a good chance of profiting. The Indian government has called for a $1 trillion dollar investment to modernize infrastructure in five years. However, a majority of the farms in India are between 1-3 acres in size. Bulk production is hardly an option. Augmenting this problem is the fact that food industry is highly regulated by the government, in a way that the initial produce must first go to government-run wholesalers and not directly to the retailers, makes it all the more difficult. Due to this, the produce goes through multiple middlemen before it can reach retailers, multi-folding the costs to about 500% of what the farmers are paid.

The supply from farms is transported on trucks, bullocks through dirt roads and then on highways, which are in a very poor state. India has 24-foot long trucks as opposed to the 53-foot long trailers present in the US, mainly due to the narrow and crowded roads. Moreover, there will be scheduling conflicts on the arrival of goods due to these conditions. Indian government has mandated that any global retailer must invest a minimum capital of $100 million with 50% being used for transportation and storage. Considering all these, a global retailer can expect at least five years to gain profitable revenue.

That said, would global retailers take the risk of investing humongously in a country with rugged infrastructure and poor logistics? If yes, would they prefer a centralized warehouse and save on infrastructure costs or decentralized warehouse to save on transporting costs?

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