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STRATEGIC

NETWORK DESIGN
FOR CPG SECTOR






Anurag Tewari, Associate Consultant
Mayank Singh, Associate Consultant
Business Consulting Group
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Contents
CURRENT CPG LANDSCAPE .............................................................................................................................. 2
RISKS IN MANAGING A SUPPLY CHAIN ............................................................................................................. 2
INTERNAL FACTORS .................................................................................................................................................. 2
EXTERNAL FACTORS ................................................................................................................................................. 3
INTRODUCTION OF GST: OPPORTUNITY FOR SUPPLY CHAIN OPTIMISATION ................................................... 4
CURRENT STATE ...................................................................................................................................................... 4
POST GST SITUATION .............................................................................................................................................. 5
BENEFITS ............................................................................................................................................................... 6
KEY SUPPLY CHAIN IMPROVEMENT RECOMMENDATIONS .............................................................................. 7
SUPPLY CHAIN NETWORK DESIGN .............................................................................................................................. 7
NETWORK OPTIMIZATION ............................................................................................................................... 8
Funnel Approach ............................................................................................................................................ 8
Sensitivity Analysis ......................................................................................................................................... 9
How Network optimisation helps? ................................................................................................................. 9
SAVE - A FRAMEWORK TO BRING ABOUT SUPPLY CHAIN OPTIMIZATION...................................................... 10



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Current CPG Landscape

Times are always challenging for Fast Moving Consumer Goods (FMCG) and Consumer Packaged
Goods (CPG) companies. Not only the industry has to deal with a slow economic recovery, but also
companies find themselves dealing with long-running shifts in the dynamics of the industry – retail
consolidation, increased private label competition, and reduced brand loyalty, just to name a few.
CPG industries are trying to meet the ever increasing expectations through diversifying their
product offerings as well as exploring new channels. The product life cycle has reduced and
frequency of new product launches has increasing many fold in the last decade. The customers
today are highly empowered and find themselves with plethora of choices in front of them.
This trend has had its impact across the value chain. The marketing, manufacturing and supply chain
departments all have to bear the pressure of this changing environment.
The pressure on supply chain is two folds:
 As consumers come to expect a greater assortment of product options, retailers are
responding with greater product differentiation all available whenever the customer wants
it, driving up service level expectations.
 Cash requirements are creating pressure for shorter order-to-delivery cycles and a move
towards flow-through distribution networks. These trends are already beginning to eliminate
the safety stocks that used to be held in reserve in the retail supply network.

So, basically the requirement for a CPG industry is to provide the customer with the product that he
wants at the time and place he wants, readily available with incurring minimum cost. Translated into
acronym form, this mandate becomes: Quality, on-Time, least-Cost Delivery of products. QTCD is
the goal for companies Optimised management of supply chain network is the key to handling this
trade-off.

Risks in managing a Supply Chain

Internal Factors
Often, individual (function-specific) objectives and company objectives are not well defined or
aligned. Different functions work on their individual objectives, often achieving local optimization
while adversely impacting the overall value chain performance. As a result the costs associated with
certain service levels could become a concern. Conflicting and decentralized optimization objectives
by functions lead to a sub-optimal supply chain performance and non optimal solution overall.
Organizational Risk
Organizations can undergo massive changes in structure, leadership, culture, processes,
technologies and people. Each change poses its own risk and needs to be mitigated in its own way
Risks from the Decision Maker
The decision maker in each activity in a supply chain is an important link in a chain. His decision
making capabilities and decisions have tremendous impact on the performance of the supply chain
and the overall performance of the firm.
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External Factors
Traditionally, businesses have established supply chains and different facilities across the network to
gain tax benefits, trade concessions, labor arbitrage, capital subsidies, reduced logistics cost and
customer proximity. Many of these factors can be impacted by political and economic policy
changes, calling into question the relevance/optimality of the supply network. In many cases, the
impact of these changes is large enough to drive strategic structural supply chain changes. Preparing
for such changes is important through use of strategic modeling and network design exercises.
Environmental Risk
All firms work in an environment. Changes to the environmental factors like competition, political
and legal framework or even in national cultures (trade unions) may pose a threat to the firm.
Industry Risk
These risks arise due to changes which may affect the entire industry structure. Say a development
of a cheap alternative substitute may pose an extreme challenge to a certain product. Technology
changes often create industry risk.





Depending on these, the supply chain decisions need to be taken at all the three levels viz. Strategic,
tactical and operational.










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Introduction of GST: Opportunity for supply chain optimisation

A change that is proposed is the introduction of Goods and Services Tax (GST) in India which would
rationalize the current, complex tax structure.
Though a final agreement on GST is yet to be reached, two aspects of GST hold special significance
from supply chain perspective:

1. Elimination of Central Sales Tax (CST) for interstate movement of goods
2. Uniform taxes in most parts of the country
The implication of this:

 The Supply Chain network would be Tax neutral as far as GST goes. ( On a case basis, there
would be other taxes such as Entry tax/Octroi that would still be levied)
 The efficiency of Supply Chain would fundamentally only depend on the minimization of
Supply Chain cost such as Primary Freight, Secondary Freight, CFA charges, Warehouse Fixed
and Variable Cost, Depot Fixed and Variable Cost etc.

Current State

Scenario A: Stock transfer Sale
Let us assume a firm operates a warehouse in another state and does a stock transfer to its
warehouse in another state before selling it to distributer in that state . According to current
taxation laws no CST shall be applied as no sale has been done. VAT is applied only after sale has
been made to the distributer from the warehouse .This VAT is taken as an “input tax credit” lowering
the price before tax which in turn is useful for the retailer.

Location in
supply chain
Landed
Cost (₨)
Margin
(₨)
Input VAT
Credit (₨)
Price
before Tax
(₨)
VAT
(%)
CST (%)
Total
Tax(₨)
Final
Price(₨)
Factory 100 20 0 120 0 0 0 120.00
Warehouse 120 0 0 120 4 0 4.80 124.80
Distributer 124.8 20 4.80 140 4 0 5.60 145.60
Retailer 145.6 15 5.60 155 4 0 6.20 161.20
Values used for illustrative purpose only








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Scenario B: CST Sales to Distributor
In case the firm decides to directly sell to a distributor in another state. In this case the firm pays CST
on the interstate sale.

Location in
supply chain
Landed
Cost (₨)
Margin
(₨)
Input VAT
Credit (₨)
Price
before Tax
(₨)
VAT
(%)
CST (%)
Total
Tax(₨)
Final
Price(₨)
Factory 100 20 0 120 0 2 2.4 122.40
Warehouse 0 0 0 0 0 0 0 0
Distributer 122.40 20 0.00 142.40 4 0 5.70 148.10
Retailer 148.10 15 5.70 157.40 4 0 6.30 163.70
Values used for illustrative purpose only

We can see that the final cost consumer pays is around 2.50 Rs extra in this case. So in order to keep
prices same for the final customer the FMCG/CPG company needs to take a hit in its profits. This is
because unlike VAT, CST cannot be taken as a credit.

Post GST Situation

GST would have significant impact on the Supply Chain Network of companies. This is because the
Tax Structure would fundamentally move away from taxes that cannot be set off (and hybrid
situation) to one where on an All India basis, Tax Structure would be based on value add.

This would mean that so long as there is no values add, there would be no taxation. The impact of
this would be creation of a Supply Chain Network that would be Tax Neutral. Hence a product that
moves from a Plant in Delhi to a Warehouse in Ahmadabad to a depot in Andheri (Mumbai) would
be charged the same total quantum of GST irrespective of the length and location of the transfers
(assuming there is no value add in the transfers). Hence the same product flows from Delhi Plant to
Jaipur Warehouse to Andheri Depot; the GST would be the same, though the Supply Chain cost
would obviously be higher.

Scenario: No CST on Interstate Sales

Location in
supply chain
Landed
Cost (₨)
Margin
(₨)
Input VAT
Credit (₨)
Price
before Tax
(₨)
GST(%) CST (%)
Total
Tax
Final
Price
Factory 100 20 0 120 0 0 0 120.00
Warehouse 0 0 0 0 0 0 0.00 0.00
Distributer 120.00 20 0.00 140.00 4 0 5.60 145.60
Retailer 145.60 15 5.60 155.00 4 0 6.20 161.20
Values used for illustrative purpose only

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With the advent of GST, having a warehouse in every state where a firm does business will no longer
remain a necessity. The supply chain can be designed purely on logistics costs and customer service
considerations and not on tax considerations.
The following considerations (not limited to these choices) for the Supply Chain Design would be
key:
 Choice of Warehouse Locations, Depot Locations with respect to the Plants and the
Markets
 Design of the Supply Chain such as Meshed Design vs. Hub and Spoke vs. combinations
thereof
 Choice of the Warehouse Capacity and Depot Capacity
 Choice of Mode of transport such as Road (9 tonner vs. 15 tonner vs. 20 tonner) and Rail
(Half Rake, Full Rake, 2 Point Rake) for the different linkages
 Choice of Inventory and Transportation strategies such as Replenishment cycle,
 Safety Stock, Milk Runs etc.



Warehouse Landscape of any CPG Company

Benefits

The following functions of supply chain will have to improve their key performance metrics to incur
benefit of GST implementation.
Sourcing
1. Contract renegotiation
2. Inter vs. Intra state sourcing options
3. Process redesign
4. Price renegotiation
5. Reliability &Quality consideration

Manufacturing
1. Capacity expansion/closing
2. Capability realignment
3. Flexible manufacturing
4. Manufacturing process redesign
5. Role finalization

Distribution
1. Increase responsiveness by reducing
number of echelons
Other Areas
1. Improve forecasting process
2. Improve inventory management
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2. Warehouse opening/closing
3. Shared roles of warehouse with mfg unit
4. Maximum utilization of multi modal &
multi-tier

3. Trade off between customer
serviceability and cost associated
Improve Pricing &Promotion Strategy

Key Supply Chain Improvement recommendations

Levers for improving value through network design



Supply Chain Network Design

1. Long Term Planning
This involves decisions based on Corporate Strategy, Business Plans and Investment Window
to bring about long term strategic changes such as Agile supply chain framework, Facility,
process & product related investment decisions. This is done keeping at least 10 years’ time
frame in mind to show the results.
Some features of this are:
• Decisions involve high level of cost involvement, high lead times to realize benefits and
return on investment involves a bigger horizon
• Majorly involves Resource acquisition/divestments and supply chain structural decisions
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• Lot of What-if scenario testing basis demand size and shape, cost inflation and deflation,
fiscal policy etc.
• Constraints involved in decision making are policy constraints which constrains structural
definitions. Doesn’t involve day to day operational constraints and variability.




2. Medium Term Planning
This involves strategies based on supply chain framework (Time based Facility/Product and
process framework) and Firm business plan (Medium Term) for Cost benefit decisions
Structural decisions & Operating policy in medium term .
• Decisions based on strategic message (supply chain framework) from Long term planning
• Focus change from investment to cost benefit decisions
• Set of assumptions are less compared to long term planning. Business conditions and
possible changes are more firmly known
• What if analysis done on possible changes which are more firm, e.g. Forecasting data and
variations in it.


3. Short Term Planning
In these decisions which are cost efficient and which help in day to day operations are taken
based on Defined supply chain framework, structural decisions & operating policy and Real
time inputs.
• Takes the message from long term and medium term planning. Facility, process and product
wise supply chain model is firm. Minor exceptions are handled in this planning exercise
• Frequency of such type of planning is high and time for execution is small. At such small lead
times structural decisions can't be made as supply chain will not be able to align so quickly
• What if analysis are done using simulations so as to see fill rate, out of stock, line utilization
etc to finalize the best operating decisions


Network Optimization

A two-stage approach works well while carrying out a supply chain network optimization and design
exercise. This is true across all parts of the decision hierarchy.
Funnel Approach
Most companies have to work with a multitude of product-, process- and facilities-related
investment/divestment options in order to achieve the designed future target. This complexity leads
to multiple scenarios being created. For faster results, it is important that the first stage of the
network optimization exercise is targeted at limiting the number of scenarios to enable optimization.
This can be done by using the KPIs set for a strategic network design exercise, such as investment
cost, cost of ownership, return on investment etc.

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Sensitivity Analysis
Once we hit the zone of optimality, detailed what-if analyses should be done before finalizing the
strategic recommendations, through multiple scenario analyses based on possible changes in
demand size and shape, cost inflation and deflation, fiscal policy, and so on.

How Network optimisation helps?
 Logistics Network: In this traditional network definition, the key economic metric is
logistics cost - specifically, the cost of inbound and outbound freight and distribution
expenses. In this optimization method, service is optimized vs. logistics costs, which
are roughly 8% to 15% of the business unit sales. Typical savings potential is 10% to
20% of logistics costs, which is equivalent to over 1% of sales. The “cost-to-serve”
model is defined at numerous levels within the business unit including category,
region, customer, and product family
 Supply Chain Network: This analysis takes a much more comprehensive view of
business unit economics. In addition to the costs of the logistics network, the
economic metric is profit or contribution, which includes sales revenue, raw material
sourcing costs and plant operating costs. In this type of modelling, the economic
potential impact is well over 2% of sales. Inventory reductions of over 20% are not
uncommon. The “service vs. profit” model is defined at numerous levels within the
business unit, including category, region, customer, and product family.
 The Business Unit –In the post-2008 (new world) operating environment, many
companies are focused on optimizing Service vs. Profit and Cash. Optimizing cash,
which includes higher working capital costs and constrained availability of cash
(from operations and financing), is essential in the new world. In this type of
modelling, the potential economic impact is well over 3% of sales. Overall working
capital reductions of over 30% are common. The “service vs. profit and cash” model
is defined at numerous levels within the business unit, including category, region,
customer, and product family







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SAVE - A framework to bring about Supply Chain optimization

The companies need to redesign supply chain to take advantage of the new Tax regime. The
warehouses would certainly be consolidated to take benefit of aggregation. A SAVE framework is
proposed to help firms navigate through such challenges and redesign their distribution networks.
This framework helps in qualitative as well as quantitative analysis of the distribution network. At
each step the business objective should be satisfied.

The major objectives of these phases are as follows:

 Sourcing Information
This is all about understanding the business of the firm, the environment in which it operates
and its readiness for bringing about a change. Since each company is different and works under
different environment this step is very essential to understand what changes would be beneficial
to the company and which changes would not work. Also this is the stage where you can get to
know about the operations and supply chain strategy of the company.

 Analysis
The objective here is to create a blueprint of the future distribution network while keeping in
mind factors such as efficiency, scalability and flexibility. It’s about identifying achievable goals
through the optimization process and which are in lines with the mission and vision of the
company.

 Validation
This step is all about optimization and putting the analysis done in previous steps into achievable
and practical format. A realizable roadmap is created to achieve the ultimate aim of the
transformation process.

 Execution
The intention here is to bring new business processes in practice and redesign the distribution
network according to the implementation road map. This phase may involve shadowed phase-
out, upgrade or replacement of current distribution network pieces. This phase also
characterizes testing of “what-if” scenarios, measuring various KPIs and executing change
management processes. Transformation is accompanied by the creation of a continuous
feedback mechanism that.
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