The global value chains (GVCs) are being reshaped as a result of the Covid-19 outbreak. Multinational corporations (MNCs) are attempting to develop alternative supply chains to mitigate future production shocks. In this environment, India has emerged as an appealing alternative to the traditional GVCs. Celerity’s recently held webinar, ‘MasterConnect on Global Value Chains and Opportunities for India, hosted in association with CSCO Genie, threw light on India’s stance and strategy to seize the unique opportunity towards becoming a global manufacturing hub. A report…
India aims to reach $2 lakh crore of exports by the end of this decade, equally shared between merchandise and services exports. For India to achieve such an ambitious target, business as usual will not be enough. According to a report by the Asian Infrastructure Investment Bank, GVC exports are accounting for more than 50% of global exports, no country can maintain strong growth in exports without engaging deeper in GVCs. GVCs offer the opportunity to engage in the most advantageous part of the value chain instead of producing a completed product. Elaborating on the changing paradigms and setting the pace of the discussion, our moderator, Balaji Reddipalli, Group Head - Supply Chain, Borosil Ltd., highlighted, “While supply chains have been evolving and the landscape has been changing, the pace of change has accelerated in the last three years. To give you an instance on the shifting paradigms of the global value chain, three decades back, Borosil was manufacturing everything in India and the moment the globalization wave started, we started shifting a fair amount of our manufacturing across the world. Now, thanks to the pandemic and the changing dynamics, we are once again shifting our manufacturing back to India, which will take its own course of time, but this is the journey that we have embarked upon and are excited to be a part of India growth story.”
Akhil Srivastava, Director – Planning & Logistics BU ISEA, AB InBev
Ab InBev has posted stellar results last quarter. How has the supply chain contributed to this and how do you see the global value chains evolving in AB InBev?
We can definitely look at two aspects; one, supply chains have started becoming uncertain, which warrants organizations to have a renewed thrust on supply chain. I am also of the view that now-a-days, supply chains are not being looked upon as a mere cost center, rather has become a competitive advantage, specifically, for certain companies that are product-oriented because our screens, be it smartphones or laptops, have become shelf space of sorts for online shopping as the pandemic forced everyone to shop online. Additionally, this fast-burgeoning omni-channel market has made the sectoral dynamics even more supply-chain centric. In fact, as you all are well aware that over the past 2-3 years after the onset of the pandemic, everyone has been ordering alcoholic beverages too online. I believe, the phenomenal results that we have seen, globally, are on the backs of three factors; one, as humans, we want to experience, we want to have freedom, and Covid definitely had a lot of revenge tourism because we were all locked up in our houses. The moment people started venturing out, they wanted to feel empowered, and our beer gave them the purpose to bring people together again. One fundamental factor on which our business runs is to bring people together, which is when you do ‘Cheers with the Beer’.
Coming to the technical side of the supply chain, we repurposed our entire supply chain as per our consumers’ changing demand patterns. We moved it across global mandates to local mandates. We localised a lot of products. We saw a lot of anticipation and agility, including raw material and finished goods. We also placed a lot of thrust around synergies in operations to keep the costs down because that is another factor of commodity escalations. Otherwise, you can show the top line while your bottom line continues to bleed. In short, the three focal factors that helped us achieve our targets are consumer behaviour, repurposing the supply chain to be more local and, third, and looking at streamlining the entire business contingency and commodity prices to manage escalation of commodities.
How are you dealing with the galloping inflation and the rapidly changing global political situation? How are you grappling with the risks?
That's one of the biggest questions for every business. The biggest concern right now are the 3Cs – Commodity, Conflict, Containers. All these three have been going up constantly. It is a very disturbing scenario for corporates of any size because whatever scale you have is multiplied by the index of inflation. How do you cope with it? There are three ways; One, pass on the price; in certain businesses and commodities that are open and you are free to take a price versus market insight, it's easier. In the case of alcoholic beverages, specifically in some markets like India, it's really difficult to take the price hike as it goes through a channel of government approvals. In that case, the only option is to continue performing better, having better operation excellence and having efficiencies at each step.
There is no way that a company can afford to continue having an excess inefficiency like inventory, cost of carrying inventory, obsolescence, etc., and hence, it's a very tight rope to build on. If you can't pass the price, you will have to absorb the cost, which means it has to either be on the commodity based operation efficiency or on further networking, for example, secondary source of supplier, strategic supplier planning and other routes where strategic procurement comes into the picture. In short, either you pass on the price to the consumer, which is less likely in our industry, so you need to be the best in operations. We are trying to be is to be the best in the operations globally.
Rahul Gupta, Sr VP – Procurement (Europe, India) and Planning (India), Amway
You have experienced a lot of demand surge since the pandemic as you are majorly into the nutritional space and health & wellness, which has been witnessed the sharpest peak of all times. How are you managing your supply chain?
Today there is immense focus on self-care and holistic wellness owing to Covid-19 pandemic. Another fast catching up global trend is the shift towards the plant-based diets. All these factors in unison have worked well for Amway India’s growth graph in the last couple of years. Our company’s focus on supplier relationship management was tested to the core in the days of the pandemic when we could not visit any of these supplier sites. I take immense pride in sharing with you all that the moment many of our suppliers’ factories started functioning in phased manner, we were the first company for which all our suppliers, be it bottle suppliers or the label suppliers, started the production work for. Coming to the differentiating factor, I would like to highlight that 95% of our supply chain is mono-sourced. A lot of people think that being mono-sourced can prove to be adverse and that companies will have difficulty in surviving through tough times. The one thing that stood steadily for us was our partnership with the key suppliers. The results of these phenomenal partnerships have been extremely rewarding with the company witnessing a huge demand uptick to the tune of 4-5 times for some of our traditional herbal products, but we were able to support this demand surge through our proactive partnering approach.
Amway is a Direct Selling FMCG company and your route to market is totally different from a traditional FMCG or a consumer goods company. How is your supply chain different from companies like GSK where you worked earlier? What are the key similarities and differences?
Amway is like any other FMCG company and the only difference being the channel of distribution. Let’s talk about similarities first. Amway’s supply chain is just like any other manufacturing organisation; we have manufacturing, planning, contract manufacturing, procurement and the other functions… So, theoretically speaking, our supply chain is not very different than AB InBev or Subros. Now, let me highlight a couple of very interesting differences between our direct selling industry and a traditional FMCG company. The first biggest difference that I have seen with a direct selling industry is that the feedback mechanism, be it good or bad, is super instant. In our industry, whether it is a new launch or an existing product, for any issue or a concern, the feedback from our distributors, who are passionately selling our products, is super instantaneous. This really keeps us on our toes to deliver the desired product in the best condition to Amway Direct selling Partners and their associated customers every single time. The second difference is that the product has to perform and there can be no two ways about it because the person recommending our product is a friend or a relative or a neighbour and they would not want their relationship to be dented for a product. It’s about building a strong brand equity among each other and that’s how the direct selling industry works and flourishes. In order to ensure that, we really adhere to stringent quality norms and that’s what sets us apart from the rest. Another interesting aspect about Amway is that we offer a 100% money back guarantee on the products we sell, so, anyone not happy with our product, even if they have opened and used up to 30% of the product, can return the product and get the refund. All these factors have ensured Amway India’s return product rate in low single digits.
How are you managing with inflation and the risks?
Inflation, in the last few months, came as a level two measure for us, with the level one measure being availability. We all, by now, are well aware of the fact that inflation is not a short-term tactical thing. It is going to stay for a while and, like most other companies, we are focusing on value engineering. We are looking at our tertiary packaging and if there are ways to reduce the packaging costs. We are even challenging our ordering runs. We looked at some of the commodities where the number of orders per month were significantly high and, if we reduce these runs, is there an opportunity to save money on a little higher production cost from the supplier, or are there ways to lower transportation costs? The last thing that I would like to mention is that gone is the time of focusing only on level one suppliers. A big lesson we learnt from the pandemic and the current geopolitical situation is that we cannot be, as a supply chain or as a procurement team, be just happy about understanding only our level one suppliers. Today we really need to know which input from that supplier is coming from Ukraine or Russia or some other country where we have embargoes in place. Understanding that part of supply chain, understanding your suppliers' suppliers is another recipe of success, which will certainly help in taking care of the inflationary pressures as well.
Can you share your thoughts on what the future holds for Amway India and, supply chains in particular?
A big change that the Covid-19 pandemic has brought to the supply chain is that there is a supply chain thinking pre-covid and there is a supply chain thinking post-covid. The world prior to Covid-19 had only seen regional disasters and regional force majeure issues, such as floods in Thailand, earthquakes in Japan and other such disruptions. All the supply chain people are very happy to have a China (or Asia) plus one strategy. Global organizations had a principal supplier in China (somewhere in Asia) and a backup supplier in, say, for example, say Italy. The one major way in which our thinking was shaken was that we had not anticipated that the whole world order will be in chaos. Whenever there is a crisis, every country is trying to secure their own interest first, which is why we are seeing so many restrictions and stoppages all around the world. We cannot have a static mindset that says, “I have approved a supplier here, I have a second source in this part of the world, and I can simply use the sourcing and make do with a little bit of supplier relationship management and the business can run smoothly.” Every day is a new challenge, and every challenge is a new opportunity. We learned how to live with that uncertainty in the VUCA world. Secondly, the world order is at a very mobile state of affairs. We don't have permanent friends or foes. Some of the things that we have to be ready about, as a supply chain, is more localisation, there is a need for more agility, and working towards ‘Atmanirbhar Bharat’ that the hon’ble PM speaks so passionately about.
My biggest learning in today's environment is that an organisation's ability to be agile to the changing business needs, which can change in the span of minutes or hours, is something we all must be ready about. Stability is not a word that exists in the business any longer. Always being ready and on our toes will differentiate great supply chains from not-so-great supply chains.
Yashpal Singh Negi, COO, Subros Ltd.
The auto industry has been through a rough phase lately with the pandemic suddenly plunging the demand, and now, there is a significant boost happening, once again. How are you dealing with both, the demand drop and the demand revival?
We have a 40% market share in auto air conditioners market in India and we have diversified not only in the passenger car segment, but we also sell air conditioners to trucks, buses and even the railways and home appliances. Considering supply situation to the OEMs, since the last 2.5 years, all of the 5 Cs – starting with the Covid 19 pandemic; the chip shortage, container cost, transit time, high commodity prices and the conflict between Russia-Ukraine, have thrown different challenges in entire value chain. It started from February 2020, with the lockdown announced in China. During that time, along with the key component supplier, we reviewed with our OEMs, including mapping tier II, tier III & raw material suppliers. We could realise that the last supplier of the value chain specially for electronic parts was only in China for everyone. Almost 90% of the suppliers were dependant on China. When lockdown started in various countries, including India, most of semiconductor suppliers reduced the forecast to chip manufacturers. While we don’t have chip in our air conditioner system, but semiconductor suppliers could not supply parts to OEMs. Most of chip makers diverted auto component capacity to the consumer durables as there was a big demand for laptops and smartphones due to work from home. The share of chip market of the auto industry is hardly 10% of the total market. So, after Covid, the new norms of chip lead time became minimum 3-5 months. This was a big challenge as there was no visibility of semiconductors. Around 85% of the total semi-conductors are supplied from three countries viz., Taiwan (holding 65%), South Korea and China. Container cost from China went up to $9,000 for a 40 ft container as compared to $450 at pre-Covid level. Transit time went up to 25 to 40 days, which used to be 15 to 20 days. Commodity prices went up the level of 60% for aluminium, steel, copper and plastic. Due to the Russia-Ukraine conflict, the supply of Nickel and Paradigm was also an issue for the EV market.
At Subros, customer focus is key. We already had ERM (Enterprise Risk Management) system for the last 3-4 years. Our major focus has been on localisation. In the last five years, we have reduced our import content from 30% to 15% and, in the next three years, our target is to make that max. 7%. We have a policy of minimum two suppliers for critical parts. We have structured supplier engagement. We believe in long term relationship, as almost 70% of our suppliers are associated with us for more than 25 years. As most of the constraints are easing out, the next six months are looking positive and most of the OEMs are ready to work at 100% capacity.
How are you dealing with inflation? Some of your components are imported and some are Made in India, how do you balance this out?
This VUCA world has become the new normal, especially for the auto industry. For us, the Total Acquisition cost is key as inflation has a little impact. Most OEMs used to buy complete AC system as a whole. Lately, to become more competitive, they have started buying at a component level instead of complete system. As we know that OEMs are introducing many new models year on year, which mandates every supplier to work on cost optimization for retaining existing business and for new business. We work closely with all suppliers for cost optimisation through Localisation, Yield Improvements, Productivity Improvements, Waste Elimination and Packaging & Logistic Cost.
In order to ensure no production loss at customer end due to fluctuation of demand, we keep balance between Inventory cost Vs airfreight cost. So, if it is a running product and its volume and weight is high, it is always better to keep extra inventory rather than high airfreight cost.
Electric Vehicles are the talk of the town, be it business environments or business circles or the Logistics Industry. How is the shift to electric vehicles affecting you and automotive supply chains in general?
India is set to become the third largest automotive industry globally by 2030. There are four growth drivers for auto industry – growing demand, greater opportunity, rising investment and, government policy support. With respect to growing demand, if we compare the number of cars per thousand individuals, Japan has almost 600, China has 173, whereas India had only 32 cars per thousand individuals. India has the largest youth population and is witnessing a sharp increase in the income of the middle class. Our investment landscape is witnessing a major traction with the constant rise in the FDI flow, and, finally, there is government policy support like PLI Scheme. With all of these growth drivers, we expect almost 6 million cars by 2030. Coming to EV, which is a really high point of discussion, in India, we expect that by 2026, there will be 13-15% EV of 2W, in case of 3-wheelers, it is going to be 30% while passenger cars will be hardly 3%. We expect there will be 15-20% EV passenger cars by 2030.
With respect to Subros, we are lucky to have air conditioning system, be it for EV or IC engine. IC engine still has a big share in the years to come. Coming to EV, we are working closely with our collaborator and customers, but we have to strengthen our designing and process capability along with skilled manpower.
In a crux, this hour-long conversation proved to be an insightful anecdote of leading companies’ out-of-the-box thinking to chart the next growth wave.