Version 7

December, 28 2011
(Word count: 4,989)

Planning your emerging economy supply chains: Insights from India

Jayanth Jayaram1
Moore School of Business
University of South Carolina
Columbia, SC 29208, USA
jayaram@moore.sc.edu
Balram Avittathur
Indian Institute of Management Calcutta
D.H. Road, Joka P.O.
Kolkata 700 104, India
balram@iimcal.ac.in

Author for correspondence

Planning your emerging economy supply chains: Insights from India

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Introduction
The globalized economy of the past ten to fifteen years has raised competition to new levels.

Furthermore, firms were under pressure to deliver enhanced product offerings at the least cost. In
response to these trends, firms have attempted to make improvements in processes along the value chain.
In particular, a major emphasis has been on improving performance through better coordination and
collaboration across geographically dispersed partners. Advanced Information Technology (IT)
capabilities have facilitated efficient and rich information sharing within and across firms. There have
been several exemplars of supply chain success in the developed world. Firms such as Dell Computers,
Tesco and Wal-Mart have enjoyed significant competitive advantage through the adoption of supply chain
practices such as lean manufacturing, Just-In-Time (JIT) and customization which has led to key
performance improvements as well. For instance, Wal-Mart had an inventory equivalent of 35 days of
sales in 2007, which was further reduced to about 29 days of sales in 2010. Also, largely due to advances
in the highway infrastructure, it is common for trucks in the developed world to travel up to 500 miles in
a single day. Similarly, it is routine for companies to track shipments on a real-time basis using Global
Positioning System (GPS) technology. Also, it is becoming common for distribution centres in the
developed world to have cross-docked operations where consignments are tracked, relayed and loaded on
waiting trucks in the bays of high-tech warehouses. Such operations have significantly increased
throughput and speed. A state-of-the-art container port such as the one in Hong Kong can unload and turn
around a container vessel in less than 10 hours. As all of these examples indicate, operating very
quickly has become the norm for supply chains in the developed world. In sharp contrast, it is vital to
understand the gaps and challenges that firms face in managing global supply chains in the emerging
economy context of countries such as India. This is one of the main objectives of this paper.

However, even the fast-paced supply chains of the developed world can be hampered by glitches. For
example, the devastating earthquake and tsunami that struck Japan in March 2011 revealed the extent of
leanness in global supply chains with consumers and producers in distant countries being affected within
a few days of the calamity. A fire in a Phillips semiconductor plant in Albuquerque, New Mexico in 2000
created disruptions in the operations of two of its key customers Nokia and LM Ericsson (Sheffi, 2005).
While Nokia was able to successfully emerge from this disruption by tapping into other global sources,
Ericsson could not react in a timely fashion. These examples serve as an interesting backdrop to compare
against when we examine corresponding trends for supply chains in emerging economies such as India.
The significant economic growth enjoyed by the Indian economy in recent years has drawn
considerable international attention. As most developed countries as well as China age, India appears to
be the only major economy with a significant long-term growth opportunity. In addition to a rapidly
growing market, India also possesses a workforce that is considerably younger and larger. These were
factors that had enabled China to grow into a global manufacturing giant in the last decade or so. For
example, while the manufacturing sector contributes to over 30% of the overall Chinese economy, in
India, the contribution of the manufacturing sector is only about 16% of the overall economy. The Indian
government has recently set a target for its manufacturing sector to be about 25% of the overall economy
in the next ten years.
There are a great number of challenges that the Indian economy faces. Compared to China, the
foremost challenge is the slowness with which democratic India takes decisions regarding economic
issues. This could explain the presence of capacity and infrastructural constraints in the country such as
shortages in electricity and skilled labor force, and congestions in roads and ports. Distances by road that
can normally be covered in three days in a developed economy could take up to nine days in emerging
economies like India. Similarly, ships could wait as long as five days to dock at a port in India.
With respect to supply chains, what could be taken for as granted in developed economies, is often
the exception rather than the rule in India. In India, very few trucks are fitted with a GPS tracking device
thereby preventing any real-time tracking of consignments. On the performance front also, the reported
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results are lower than corresponding developed country firms. For example, Pantaloon Retail, which is a
major Indian retailer, had inventory equivalent of about 100 days sales from 2006 to 2009. Even after
some key improvements that they made in 2010, their inventory levels fell only to about 77 days of 2010
sales, which is still higher than the inventory levels of comparative international retailers such as Tesco
and Wal-Mart. Many supply chain activities that could be considered as organised in the developed
world such as transportation, warehousing and retailing are still very fragmented in India. There are very
few logistics firms in India with a fleet size that is larger than 100 trucks. Organised retailing in India
accounts for only about 10% of the total retail trade.
Given this varied pattern of evolution in developed economies as compared to emerging economies,
this paper attempts to capture key demand side challenges and supply chain challenges in the Indian
context. By linking demand and supply chain challenges, this paper then identifies four viable supply
chain strategies. The paper concludes with some prescriptive suggestions of overcoming these challenges
by summarizing some of the key lessons learned.

Demand Side Challenges

After winning its freedom from British rule in 1947, the young Indian democracy was swayed by

Gandhian values of simple living and socialist ideals while deciding its economic destiny. The policy
makers in the 1950s and 1960s laid greater emphasis on capacity creation in a manner similar to the
model adopted by the Soviet bloc countries. Competition was considered as harmful for a nation that was
very short on capacity and was also discouraged by policy makers. Firms had to obtain government
licenses for creating or expanding upon existing capacities. The public sector was involved in many parts
of the economy including manufacturing, mining and transportation. By the latter part of 1960s, many
banks were also nationalized. Many of these policies favored the producers while consumer interests
received very little importance. A three year lead time from order to delivery of a Bajaj scooter, which
was the leading two-wheeler manufacturer at that time, summarizes the lack of customer orientation that

prevailed in those days. As a consequence, there was a thriving black market for a wide range of imported
goods to cater to the unmet aspirations of the Indian customer.
The sustainability of the earlier economic policies was severely tested by the late 1980s. The oil
shock after Iraqs invasion of Kuwait in 1990, the breaking down of the Soviet bloc and the foreign
exchange crisis faced in 1991 prompted the policy makers to initiate the process of liberalizing and
opening up of the Indian economy. Twenty years of liberalization has boosted competition in many
sectors and India gradually assimilated into the global economy. For instance, competitive strength in
sectors such as software exports and business process outsourcing boosted Indias position to emerge as
one of the leading economies of the world. The economic reforms also brought prosperity to many
segments of the population.
Firms in India are much more customer oriented today and offer a wide choice of goods and services
to its increasingly demanding clientele. The high variety offered by various national and multi-national
fast moving consumer goods (FMCG) firms like Godrej, Hindustan Unilever (HUL), Nestle and Procter
& Gamble illustrates the evolving tastes of the Indian consumer. Thanks to intense competition, firms
have to also ensure that they offer their products and services at very competitive prices. Low-cost
surgeries offered by Narayana Hrudayalaya (a hospital specializing in heart surgeries) and Arvind Eye
Hospital, mobile phone calls at one cent per minute, low-cost products such as the wind powered
generators, mobile solar-powered X-ray machine by Siemens and the $2,200 Nano car by Tata Motors are
all examples that depict India as the epicenter for launching frugal innovations. There is also evidence
from these examples that despite the cost pressures on manufacturers, the Indian markets are profitable
with considerable growth potential if tapped diligently.
As with respect to other emerging economies such as Brazil, China, Indonesia and Malaysia,
multinational firms doing business in India should know that the Indian consumer is still many years
behind customers in developed economies in terms of seeking sophisticated higher end products. India is
still a poor country with cost being the most important order winner criterion for the vast majority of its
consumers. Many firms like Hero MotoCorp (worlds leading two-wheeler manufacturer), HUL, Maruti
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Suzuki (leading car manufacturer) and Big Bazar (leading retailer) are all examples of companies
focusing on rural and semi-urban India, which have considerably poorer than the urban centers like Delhi,
Bangalore and Mumbai. While focusing on these customer segments, popularly known as the Bottom of
the Pyramid (or BOP) segments, firms typically position themselves by launching low-frill standardized
products. They also focus on measures to enhance customer reach and increase efficiency in logistics
costs. Project Shakti is an example of one such initiative by HUL that involves self-help groups through
whom the firm has increased its rural reach. (ADD MORE DETAILS OF THIS PROJECT) Multinational
firms targeting the Indian market may find it difficult to achieve instance success by offering products
that worked well for them in other parts of the world. They may also find it difficult to replicate supply
chain processes and practices that paid them rich dividends in some other part of the world.
On the demand side, we attempt to explain the severity of challenges faced through two factors
namely (i) market penetration and customer reach vis--vis developed economies, and (ii) sophistication
of product and product features. Obviously, a low market penetration and customer reach vis--vis
developed economy indicates big market opportunity that is waiting to be tapped. Passenger cars, laptop
computers, household goods like television, refrigerator and washing machine, and different sorts of
luxury goods are examples of such products. For instance, while the four-wheeler automobiles per
thousand people exceed 500 in most developed countries it is still below 25 in China and India. Of
course, the pace of market expansion for these products is substantial in the emerging economies due to
the rising income levels. However, many manufacturers are missing the market opportunities that exist by
making these products more affordable to the population at lower income levels and by understanding the
operational factors that limit consumption. The frugal design of the $2,200 Nano car by Tata Motors has
ensured that many components have been reduced compared to a conventional car, while ensuring that the
performance is almost on par with other compact cars. Apart from a lower purchase price, the vehicle also
provides very high fuel mileage which is an important factor for users with tighter budgets. Korean
manufacturers such as LG and Samsung have carried out innovations in their products to make
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refrigerators and washing machines more desirable in Indian markets. The washing machines they sell in
India consume lesser electricity and water, which are scarce resources in most Indian households.
Very often, a developed economy firm enters an emerging economy when the products it sells in its
home market are at a sophisticated stage with many features and high levels of customization. Such
products may appeal to a small segment of the emerging economy market. Trying to enter the emerging
economy market with either lower-end products sold in the home market or with simpler designs that
have already been phased out have a limited success factor owing to needs and usage being drastically
different. For instance, even today most refrigerators that are sold in India include a freezer. The lifestyle
with a need for a freezer with an ice maker is still very limited especially among the lower income
segments which have traditionally given more importance to eating freshly cooked food as opposed to
reheating refrigerated food. Nor is popular the concept of having soft drinks spiked with ice as is common
in many western countries. Thus, firms end up selling a bulkier and heavier product with redundant
features at a higher price also resulting in high utility bills for the consumer.

Supply Chain Challenges

Most emerging economies pale in comparison to their developed economy counterparts when it

comes to the infrastructural aspects that are crucial to superior supply chain management practices. For
example, infrastructural aspects pertaining to transportation, warehousing, information technology,
availability of technologically superior supplier clusters and managerial skills are all challenging issues in
emerging economies. Table 1 lists some of the conditions that challenge supply chains severely in India.
Supply chains in an emerging economy vie with developed economy supply chains to maintain supply
reliability without resulting in high costs. The phenomenal success of India in becoming the global
manufacturing hub of gems and jewelry indicates its supply chain potential when the conditions are
favorable.
Perhaps the most critical challenge faced by manufacturing firms in India is the availability of land.
India is a densely populated country with large portions of land devoted to agriculture. Ownership is
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extremely fragmented and acquiring a tract of land more than 100 acres could be extremely timeconsuming and would require firms to interact extensively with government agencies. Large projects of
steel makers such as ArcerlorMittal and POSCO, automobile manufacturer Tata Motors and large scale
power projects have all been delayed by months owing to the bureaucratic mechanisms that are in place
for acquiring land. This challenge often forces firms to locate their factories at places where it is easier to
acquire land, which may not be the best decision from a supply chain view-point of being near to either
the source of raw materials, consumer markets or ports.
The creation of electricity generation capacity in India has not kept pace with the needs of the
burgeoning economy a fact that also has been highlighted by Indias Prime Minister to be a severe
constraint to growth. This sector has been hampered by issues such as a need for large tracts of land for
new projects, constraints in coal production, pollution and other regulatory controls. Power outages are
common in many parts of the country particularly during summer months and peak consumption hours.
Unreliable electric supply can be detrimental to just-in-time and lean manufacturing concepts. Firms that
are concerned with tight time deadlines and delivery delays cannot afford to have disruptions in power
supply, and therefore rely on their own power generation using diesel generator sets which increases their
energy costs. The nuclear deal that India signed with the United States that brings all its civil nuclear
facilities under International Association of Energy Administration (IAEA CHECK THIS) safeguards is
an example of an effort by the government to reduce its reliance on electricity generation through coal
and other non-renewable sources of energy.
Other infrastructural issues that hamper supply chains in India are the scarce availability of express
highways, ports that transact goods quickly and warehouses with modern technology. Though there are
considerable investments in many new projects in these sectors, the time taken to transport goods is
significantly higher in India compared to even many of its emerging economy peers like Brazil and
China.
Apart from the infrastructural challenges described above, supply chains in India could not have
access to the best of supply chain services for a variety of reasons. The low acceptance of the concept of
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integrated third party logistics (3PL) firms in India is one such example. The cost differential between
integrated third party logistics and existing transport firms are so wide that user firms find it difficult to
appreciate the additional technology and skill based services that come with the use of 3PLs for the
additional cost incurred. In addition, the infrastructural challenges mentioned above do not permit
internationally reputed 3PL firms to operate with the same speed as they did in developed economies.
Supply chain services based on Information Technology are also less advanced, particularly ones that
enable manufacturers to share data and information with their suppliers and channel partners. Thus,
supply chain practices such as vendor managed inventory (VMI) or supplier managed inventory (SMI)
are rarely pursued. These too serve as impediments to growth in supply chain management strategies.

Matched Strategies
From our discussions on the demand side and supply chain challenges in India, it is evident that

having one supply chain that fits all sizes would be an unwise strategy for firms desiring to enter the
emerging economy of India. Based on our field experiences with a number of supply chain professionals
in India, we suggest a framework for deciding the ideal supply chain strategy, which combines product
design and supply chain issues, for a given combination of demand side and supply chain side type of
challenges.
When the firm is challenged only on the demand side, it should focus on developing local products
with minimum features, combining various components and inputs, and launching the same with a focus
on high volumes. The frugal design would enable the firm to sell the product at a lower price, which in
turn would attract greater volumes, which is also critical for keeping costs low. The firm should provide
minimum variety and follow a standardization strategy in design. This would enable it to exploit
efficiency and economies of scale not only in procurement and production but also in logistics and
distribution. Any customization in the product should be delayed to as late as possible in the supply chain.
The firm could also target direct marketing, as described in the Hindustan Unilever example earlier, and
easy financing options via the use of mass marketing as opposed to relying heavily on dealers,
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advertisements and brand power. Seimens has a clear cut strategy for entry-level products in India. They
plan to launch close to 30 products in different product categories by 2012 with an estimated market size
of about 21 billion in India. Godrej & Boyce, a leading Indian manufacturer, intends to launch a low cost
battery operated refrigerator, named Chotukool (translated as Little Cool) that would weigh less than 10
kgs and have a capacity of 30 litres. The cooling relies on cooling chips instead of the conventional
energy-hungry compressor.
When the firm is challenged only by the constraints in the supply chain, it should focus on designing
for supply reliability. Petroleum products and FMCG goods are apt examples of products that are
primarily challenged by supply chain issues. Operations in emerging economies are often decided with
highest importance to the low cost criterion. Many of these low cost decisions are also the genesis of
the high fallibility of the supply chain. Before deciding operations in a low cost emerging economy it is
imperative for a firm to evaluate the supply chain reliability associated with that decision. In the long run,
the firm is better placed by investing in a costlier supply chain that is much more reliable. The Reliance
Jamnagar refinery is one illustration of creating a reliable supply chain. As much of the crude oil required
for the refinery is sourced from abroad, the refinery could have been located at any place with a port
facility in the vast coastline of India. The firm chose a barren underdeveloped locality near Jamnagar
town. It created the entire infrastructure including roads, port and township for the employees from
scratch. The shortage of water was addressed through setting up of a desalination plant. It also spent
money on training nearby villagers to become electricians and welders. By planting over two million trees
it also won the support of local residents. Instead of looking at these investments as money drainers, the
firm viewed them as fundamental to creating a reliable supply chain. The saving of cost was achieved by
fast execution of the project. The refinery is one of the most efficient ones in the world and serves
faraway international markets despite being distant from crude oil sources. Nestle and Hindustan Unilever
are interesting examples of multinational firms creating reliable supply chains in India. Instead of an arms
length relationship, Nestle forged strong long term relationships with its principal supplier of raw
material, the farmer. It invested in training and educating farmers, improved irrigation facilities,
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introduced scientifically proven agricultural practices, helped with financing and invested in facilities
such as milk collection centers. As a response to the un-reliable electricity grid as well as energy
conservation, Hindustan Unilever has carried out innovations that have enabled it to reduce its unit energy
consumption by 41% from 2004 to 2010. It has invested in tapping energy from bio-fuel and wind. Now,
renewable energy is 9% of the companys total energy consumption. Hindustan Unilever has worked
immensely in creating a big base of good quality, flexible and reliable suppliers through superior vendor
development activities. The firm identifies the strategic partnerships with them as critical to its fast and
flexible supply chain. In addition, it has invested smartly in a creating a strong Information Technology
infrastructure that enables it to collaborate strongly with its suppliers and distributers.
Moving to the north-east quadrant of our framework for which automobiles are a good example of an
industry tested by both demand and supply chain side challenges. Hyundai and Toyota provide interesting
lessons on strategies adopted to counter the challenges through development of local products and design
of supply chains specific to India. As mentioned earlier, acquisition of land is a very challenging task in
India. The India Infrastructure Report 2009 identifies the land for Hyundai plant as a case of successful
acquisition. Instead of depending solely on government support and intervention to acquire land, Hyundai
also collaborated with the land owners to ensure a smooth and speedy process. Hyundai has also
developed car models like Santro and recently Eon to target the emerging economy markets. The Hyundai
Eon has been developed through an intense R&D effort that would allow the firm to sell it at about
Rupees 250,000 (about $ 5000) while ensuring that the car is not compromised on style and features. The
poor quality of Indian roads and narrow streets has also been factored seriously in the vehicle design.
Toyota Bharat adopted a strategy of entering India through a joint venture with Kirloskar Motors. Though
not successful always, joint venture partnerships are a very effective way of doing business in India.
Many foreign firms are totally unaware of the critical success factors of doing business in India. In
addition, coming from environments with lesser infrastructural constraints, these firms would not be
having adequate managerial skills to manage these challenges. The local partner brings these skills like
managing the government agencies, local community and acquisition of land. It can help strongly in
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identifying the right type of suppliers, distributors and employees required in the Indian context. The local
partner also serves as a quick bridge in assimilating the social and cultural values, which is also critical to
business success. Toyota has recently launched the Etios sedan that targets a broader market by offering a
luxury product at prices starting from just $12,000.
Finally, for the last quadrant in which the demand and supply chain side challenges are low, an
emerging economy becomes a very attractive investment destination because of its inherent cost
advantages. In this scenario, a firm could tap the emerging economy location as a global sourcing hub to
serve its worldwide markets. Some of the examples in the Indian context are products like gems and
jewellery, garments, motor bikes, mobile phones and other electronic products, pharmaceutical drugs,
automobile components, machine tools and components

5. Building on Lessons Learned

A study of supply chains in India has yielded some important lessons learnedlessons that may
well resonate with companies in other emerging economies pursuing their own supply chain initiatives.
Six particular lessons deserve mention here:
1. It is important to consider infrastructural issues such as land acquisition for plant or distribution
center development. The unique challenges with respect to India are:

2. Energy poses another serious challenge that can jeopardize otherwise well thought of supply chain
strategy. Specifically, our interview experiences suggest that:

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3. It is important to consider the acquisition, retaining and development of skilled workforce for
effective supply chain management. In particular, because of the relatively young workforce with a high
desire for career growth, an effective talent deployment strategy is vital. The rising quality of life and
economic wealth of the middle class who constitute a good part of the work force is another vital
consideration.

4. Innovative product design choices that are localized can be effective. The case examples of
Godrejs Chitrakool, Siemens localized pacemakers and other successful products are illustrations of this
vital principle.

5. Effective Product design and Supply chain design should be considered simultaneously. Our
framework offers direction on some choices that are effective based on field work of interviews of top
supply chain management professionals in India.

6. It is importance to choose the right local partner. Although, India has come a long way away from
a hugely bureaucratic economy, to an open market and globally competitive economy, it is important to
tap into the expertise of the local partner in order to maintain seamless supply chain management. It is
particularly pertinent in a scenario involving supply chain disruptions. As companies try to cope with the
disruption, it is the companies with access to local partner expertise who will recover faster from the
disruptive activity to normal operations.
Implications for Supply Chain Management
The context of India as an emerging economy has broader implications for multiple facets of supply
chain management. And as with the lessons learned, these implications extend to companies across
business sectors.
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First and foremost, infrastructural issues such as land and energy are important.
Second, human resource issues such as effective talent identification and deployment strategies are
important. Due to the diverse need in supply chain talent in the areas of global procurement, lean
manufacturing, logistics professional with a deeper insights into working 3PLs, managers with business
analytics background and strategic thinkers, very few companies are able to tap into a wider base of these
specialized talent.
Third, Product design that is localized means product design with basic functional features and few
frills, locally available components, and alignment with existing manufacturing capabilities.
Finaly, supply chain design issues such as overall SC strategy, outsourcing strategy and building
relationships with local partners.

All in all, these lessons learned and implications for supply chain management form an initial
knowledge base which needs to be constantly fine tuned and updated because of the fast pace with which
this important economy is growing. Future work should develop industry specific guidance tools to be
even more useful to global supply chain managers. Based on our initial study, it appears that the sectors
of retailing, automotive, consumer products, pharmaceutical and health care and business process
outsourcing sectors are promising to gain additional insights.

Table 1: Conditions explaining severity of supply challenge

High requirement of land as a share of sales

turnover

High electricity cost as share of total cost

High logistics cost as a share of total cost

Low price/weight ratio (hence, low opportunity of

using higher cost quick transport modes like air)

High process complexity (different types of raw

materials, processes, number of suppliers)

Low share of inputs sourced from nearby suppliers

as a share of total purchases

Limited access to world-class supplier clusters

Limited scope for information sharing and

information integration with supply chain partners
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Comparable to
Product sophistication and features
developed economies

Figure 1: Matched Emerging Economy Supply Chain Strategies

Examples:

Reliance Jamnagar Refinery

Nestle India

Hindustan Unilever

Moderate

Examples:
Products like gems and jewellery,
garments, motor bikes, mobile phones
and other electronic products,
pharmaceutical drugs, automobile
components, machine tools and
components

Low

Severity of Supply Chain Challenges

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High

Appendix: Study Methodology

A brief interview protocol of possible questions were formulated by considering past seminal works
in this area, practitioner magazine articles in India and the domain knowledge expertise of both authors in
the area of supply chain management. Interviewees were selected from the participants in a executive
MBA class in a top business school in India. These participants were registered for a course on Value
Added Leadership in Manufacturing which is a program with a strategic alliance involving five
institutions, a top ranked business school, two top ranked engineering schools (with an emphasis on
industrial engineering), a Japanese industrial consortium (participants in this course had to make a
mandatory trip to visit Japanese manufacturing facilities) and an Indian Professional association for
competitiveness. The average experience of the participants in this study in supply chain management
was roughly 12 years.

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