SYMBIOSIS INSTITUTE OF BUSINESS MANAGEMENT, PUNE

Project for course of Manufacturing Resource Planning

Industry Sector - FMCG
Alhad Khisti | MBA II Operations | Roll No 33263 Shivtej Shinde | MBA II Operations | Roll No 33181 Rupesh Sonawane | MBA II Operations | Roll No 33140 10/5/2011

Contents
Industry Sector ........................................................................................................................................ 2 Companies .............................................................................................................................................. 2 Attributes Of The Industry ...................................................................................................................... 2 Traditional Strategy Cost strategy........................................................................................................ 4 Evolving strategy Sustainable Competitive Advantage with Green Supply Chain ............................... 5 Key Levers for Optimizing Supply Chain Performance............................................................................ 6 Planning Best Practices ........................................................................................................................... 6 Advanced Planning and Optimization ..................................................................................................... 7 Collaborative Planning, Forecasting and Replenishment ....................................................................... 7 Best Practices in HUL .............................................................................................................................. 9 Not so good practices at Emami ............................................................................................................. 9 Key Financial Metrics & Linkage to Operational Metrics ...................................................................... 10 References ............................................................................................................................................ 11

Industry Sector
Fast moving consumer goods (FMCG)

Companies
1. Hindustan Unilever (HUL) 2. Marico 3. Emami

Attributes Of The Industry

1. Market Size: The Indian FMCG industry at INR 1300 billion (in FY2010) accounts for 2.2 per cent of the GDP of the country. 2. Consistent Growth Rate: Given the inherently essential nature of the products, the sector is more or less immune to recessionary pressures. The last decade has seen the sector grow by 11 per cent annually. 3. Accelerating Premiumization: Continuous income growth coupled with an increased willingness to spend push consumer up-trading and demand for higher priced, better quality (real or perceived) products. 4. Evolving Categories: Many consumers with rising economic status shift from basic need to want based products. In addition, evolving lifestyle behaviour and emphasis on beauty, health, and wellness see increased requirements for customized and more relevant products. 5. Fortune at Bottom of Pyramid: A significant majority of the population in the country, especially in the rural markets, become an important source of consumption by moving beyond the survival mode. This bottom-of-the-pyramid (BOP) segment requires tailored products at highly affordable prices with the potential of very large volume supplies. 6. Rapid Globalization: While many leading foreign multinational companies (MNCs) have operated in the country for years, given liberal policies, the next decade will witness increased competition from Tier 2 and 3 global players. In addition, larger Indian companies will continue to seek opportunities internationally and also gain access to more global brands, products, and operating practices. 7. Many Indias: Despite the complexities of our language, culture, and distances, the Indian market has largely been seen as a homogenous market. Increased scale and spending power will demand more fragmented and customized business models (across products, branding and operating structures). 8. Growing Modern Trade: The share of modern trade will increase and may be expected to account for nearly 30 per cent of the total trade by 2020. This channel will compete with existing traditional trade (approximately 8 million stores which will continue to grow) and offer both a distribution channel through its cash & carry model as well as other avenues to interact with the consumer.

9. Eco-consciousness: Global climatic changes, dwindling natural resources, and growing ecological awareness of consumers are increasing emphasis on environmental concerns. The pressure on companies to go green is growing due to the involvement of various stakeholdersthe government (through policy), the consumers (through brand choice) and NGOs (through awareness and advocacy). 10. Game-changing Technologies: Increased relevant functionality coupled with lower costs will enable technology deployment to drive significant benefits and allow companies to deal with complex business environments. This will be seen both in terms of efficiencies in the back-end processes (for example, supply chain and distribution) as well as in the front-end (for example, consumer marketing). 11. Enabling Policies: Many government policies under consideration, if executed, can help create a more suitable operating environment. This will help boost both demand and supply. Demand will go up because of increase in income levels and spread of education and supply will be augmented by removal of process bottlenecks and boost in infrastructure investments.

Traditional Strategy Cost strategy

FMCG companies have traditionally played on the cost driver for achieving competitive advantage. The reasons were: Indian consumers were more sensitive about price in their buying behaviour, coming from an era of limited economic liberation Income levels of more than 60% of the Indian population was moderate to low and a significant % of the population were poor, who never the less needed to use some of the products for health and hygiene Indian consumers were grappling more with basic necessities and passing on the cost advantage was perceived attractive The cost strategy looked at minimizing costs wherever possible along the supply chain: o Low cost sourcing options o Efficient manufacturing in the factories o Mass distribution mechanisms with moderate reach o Uniform ATL marketing communication o Lesser number of SKUs and variants o Competitive pricing

The low cost advantage was expected to spur demand for the products and the company would expect to gain in terms of volumes (and market share) and thus gain competitive advantage.

Cost Advantage Low Supply Chain Cost Aggresive Pricing

Greater Market Spur Demand Higher Volumes Fast Movement

More market share

Greater competitive advantage

Evolving strategy Sustainable Competitive Advantage with Green Supply Chain

Green supply chain management recognizes the disproportionate impact of supply chain processes of an organization and attempts to balance the contradicting forces

Environtmental Management with its focus on sustaining the environment and protecting it for future Supply Chain Management with its focus on ruthless efficiency for creating value for stakeholders

Green supply chain management leverages the role of the environment in supply chain value creation. Organizations may define and undertake various green initiatives and programs within its boundaries and across its extended supply chain partners resulting in: Adoption of technology with lesser counter-impact Improved strategic alliances for downstream and upstream activities Better sustainability of the immediate environment Reputation of business practices being socially responsible Satisfied customers

This will in turn result into: Greater stakeholder satisfaction Enhance environmental sustainability Ensuring comparable quality of life for future generations

Key Levers for Optimizing Supply Chain Performance

Reduction of waste / Lean

Strategic procurement to save cost

Super Efficient Supply Chain

Higher utilization of capacity

Distribution at low margin

Planning Best Practices

One-Number Planning

Performance management

Promotion Planning

Marketing and Sales Involvement

Upstream Collaborative Planning

New Product Introduction

Capacity bottleneck resolution

One-number planning: It means integration of planning over different entities and different functions. One-number planning ignores the different requirements of different business functions. Promotion Planning: Promotion planning involves anticipate and manage each promotion in the most effective way. It is very difficult to predict promotional sales accurately. In an attempt to improve forecast accuracy, companies should clearly differentiate in their forecasting process between so called base volume and promotional volumes. Upstream Collaborative Planning: Collaboration between suppliers, manufacturers and packers will create win/win situations. Capacity bottleneck resolution: Advanced planning system should be used and central planning at headquarters rather than local production unit planning is best practice. New product introduction: With the shortening product life cycles and decreasing margins the introduction of new products becomes more critical. As a best practice, product introduction teams in place should have people from all functional areas. Marketing and Sales Involvement: Involving marketing and sales in forecasting process is a prerequisite to generate high quality forecasts. As a best practice, companies can guarantee marketing & sales involvement in forecasting when its part of their targets and incentives. Performance Management: A closed loop of measuring key performance indicators (KPIs) for forecasting and planning, analysing root causes between reality and targets and taking actions to structurally deal with those root causes is a best practice.

Advanced Planning and Optimization

For improving forecasting accuracy, advanced modules can be used which provide basis for an endto-end supply chain management solution, seamlessly linking all key processes - from order generation to production planning to transportation. The key processes include: Demand planning Supply network planning Production planning Detailed scheduling Available to promise

Collaborative Planning, Forecasting and Replenishment

Collaborative Planning, Forecasting and Replenishment is a cross-industry initiative designed to improve the supplier/manufacturer/retailer relationship through co-managed planning processes and shared information. It is an integrated supply chain method to improve efficiency through direct collaboration between all trading partners with the ultimate focus on the consumer.

A key factor for excellence in CPFR is the ability and willingness to share data. Shared data enables CPFR participants to act on opportunities, issues and misunderstandings. It facilitates also a fast and thorough understanding of the challenges amongst partners.

Best Practices in HUL

HUL has an internet-based supply chain management system which connects it to the redistribution stockists. This focuses on primary sales (HUL to stockists) and secondary sales (stockists to retailers) along with enhanced communication and has enabled release of inventory reduced field force time by 50 per cent, and ensured full time availability at retail outlet

Effective and attractive product packaging Thorough focus on new product development with perfect time-to-market HUL has been focusing on ensuring sustainable practices in business HUL focuses on load mode considerations for transportation cost optimization Cross Docking Ensures continuous replenishment of HULs products in retail stores Operational ownership instead of financial ownership Out of 58 manufacturing facilities across India, 11 are owned by HUL and rest are contract manufacturers for HUL Project Shakti Effective use of women self-help groups for last mile distribution of products in inaccessible regions of India Retail outlets HUL reaches 50,000 villages through 6,000 stockists apart from 3.5 lac direct selling agents and distributes products to 6.5 million retail outlets

Not so good practices at Emami

Distribution network is not as strong as HUL: Emami products are available across 4.25 lac retail outlets whereas Marico reaches 16 lac retail outlets. New product development is not so strong

Key Financial Metrics & Linkage to Operational Metrics

In Rs Crores Net Sales Net Profit Fixed Assets EBIT as % of Sales Fixed Assets Turnover (No. of times) PAT / Sales (%) Return on Capital Employed (%) Return on Net Worth (%) Economic Value Added (EVA)(Rs Crores) Inventory Turnover HUL 19401 2306 2,468.24 12.2 8.2 10.6 87.5 74 1750 7.91 Marico 3128 286 489.74 13.1 6.4 9.1 22 36.5 201 5.98 Emami 1221.15 227.49 482.44 11.16 3.87 18.45 18.54 16.53 NA 10.52

HUL has high return on capital employed and fixed asset turnover ratio as compared to others because of less legal ownership of manufacturing plants and more operational ownership. It means that HUL outsources manufacturing operations to contract manufacturers.

References
1. 2. 3. 4. FMCG Roadmap to 2020, Confederation of Indian Industry, Booz & Co A guide to CPFR implementation, Accenture Forecasting and Planning in FMCG Industry, An EyeOn white paper Green Supply Chain as a competitive advantage enabler in the FMCG sector, Subhajit Mazumder & Anand Chatterjee 5. Balance Sheets and Profit and Loss Statements of HUL, Marico and Emami.