86 ASIAN MANAGEMENT REVIEW � JULY - SEPTEMBER 2013

Supply chain

Any strategic supply chain man-agement system leveragesscale of purchases, minimisesinventory and ensures smoothflow of goods between points of

purchase, storage and sale. This leads to acontinuity of supply and controls costs.

Hub and spoke (HAS) is established as anefficient system of distribution across in-dustries. Global companies have imple-mented a HAS distribution model and at-tained a distinct competitive advantage inlogistics. It is a centralised and integratedset-up meant to minimise costs. Productssourced from different locations are direct-ed to a centralised location – the hub, fromwhere these are channeled to locations (saleoutlets) aligned as spokes.

Wal-mart is an example of successfulHAS model in modern retail supply chain.The company’s distribution center (DC) net-work and logistics expertise give it the com-petitive advantage and have made it the in-dustry leader in managing supply chain.The same model is also being used in banksand financial services companies, wherecustomer facing branches are only the out-

BY DEEPAK NIGHOSKAR

Supply chain companies that can integratesourcing, inventory management andtransportation, and leverage economies of scale in sourcing and ensure distributionto serve multiple clients, will prove to bethe game changers for Indian foodservices industry

Integrated supply chain forfood servicesindustry

lets for sale of products while the back endprocessing is centralised at one of the hubs.

DISTRIBUTION CENTER

IS THE HUB

The shelf-life of food requires a manage-ment strategy more complex than other in-dustries. It has to drive more frequent in-ventory turns from supplier to chain opera-

tor. The HAS model that has worked suc-cessfully in other industries has been repli-cated in food services business too, where aDC or a Commissary acts as the hub of thespokes that are the restaurant outlets. Whatbetter example than McDonald’s?

Quick-service restaurants (QSRs), as thename suggests are about speed and valuefor money – quality at the lowest cost possi-

ASIAN MANAGEMENT REVIEW � JULY - SEPTEMBER 2013 87

A Wal-Mart storeemployee works in one of the company’sdistribution center inBentonville, Arkansas

PHO

TOS: REU

TERS

Supply chain

88 ASIAN MANAGEMENT REVIEW � JULY - SEPTEMBER 2013

In recent times, consumption basket hasseen a discernible trend in favour of highprotein discretionary items like meat, fish,eggs, chicken, milk etc. Indians are alsogiving preference to vegetables and fruitsover cereals. This is a direct result of higherdisposable income brought on byconsistently high GDP growth rates clockedin last couple of decades.

This change in consumption basket isvisible not only in ‘what’ Indians are eating,but also in, ‘where’ they are eating.

Organised food services market(restaurants and eateries) is estimated at`364 bn, which is ~31 per cent of the totalmarket. This is expected to grow to `860 bnin next five years.

Full Service Restaurants (FSR) constituteover 60 per cent of the market. Cafes andQSR segments are the fastest growingsegment. Together they will constitute ~47per cent of the organised sector by 2018.

Organised sector is driving most of thegrowth in Indian ‘out-of-home’ food

CHANGE IN CONSUMPTION BASKET IS VISIBLE NOT

ONLY IN ‘WHAT’ INDIANS ARE EATING, BUT ALSO IN,

‘WHERE’THEY ARE EATING[ ]

INDIAN FOOD SERVICES MARKET — FEEDING THE ASPIRATIONS

ASIAN MANAGEMENT REVIEW � JULY - SEPTEMBER 2013 89

ble. In order to minimise costs, emphasis ison maintaining low inventory – just suffi-cient to meet the requirement and not lowenough to run out; and a high turnover of in-ventory to always ensure fresh stock of per-ishables. Keeping this in mind McDonald’sIndia has implemented a multi layered sup-ply chain, with suppliers at two levels. TierII suppliers feed the raw produce into Tier Isuppliers, who put the processed product in-to play, supplying them to DCs.

DCs are at the core of the McDonald’ssupply chain process. The perishables aretransported through refrigerated trucks.DCs operate as hubs catering to McDon-ald’s restaurants, pan India. These trucksalso handle return logistics.

The DC is responsible for procurement,quality checks, storage, distribution, deliv-eries to the restaurants and recording andreporting of what is moving in and out of thesystem. It also provides value-added ser-vices like repacking of promotional items,distribution of uniforms, training materialand other consumables. DCs ensure thatthe supplies flowing in from across thecountry are absolutely fresh with little ornegligible nutrition loss.

Dependence on numerous independentsuppliers leads to insufficient visibility forrestaurants and hotels of their supplychains. McDonald’s India has put in placean efficient supply chain with effective mon-itoring system (spent `650 crore and 4

years to set it up) and centralised the com-ponents under one supply chain partner.This leaves them with sufficient time to fo-cus on their core constituency – the ‘cus-tomer’. McDonald’s has 4 DCs for its 300outlets spread across the country.

WHAT ARE OTHERS DOING?

Organised QSR in India, worth INR 80 bn, isexpected to explode to over `250 bn by2018. McDonald’s peer in QSR segment –Domino’s Pizza, operates ~525 restaurantoutlets in India. It also follows a similarsourcing and distribution model. Processed/semi-processed raw material flows into re-tail outlets through its regional commis-saries. The pizza dough and other items pre-pared in commissaries are sent in refriger-ated trucks. Processed dough is used up inthe retail outlets within specified days of de-livery; unused quantity is discarded after therecommended date.

The in-sourced model seems to be work-ing fine for QSR chains and restaurants withreasonable number of stores. But does itwork for other formats?

Fine dining restaurant chain SpecialityRestaurants Limited (SRL) serves full coursemeals across 22 Indian cities and inBangladesh through 55 company-owned-and-operated, 19 franchisee and 12 con-fectionary outlets. It has around 10 brandsof outlets dishing out colonial, Nawabi, Con-tinental, traditional Bengali, modern Chi-

market. Not only is the organised segmentgrowing faster, but it is also cannibalisingon the unorganised market. It will grow to40 per cent of the total market in nextQuinquennium. Factors driving this

explosive growth are:■ Population between 15~40 years of age

expected to be 42 per cent by 2021(~550M)

■ Increase in purchasing power of people■ Share of eating out in food expenses is

expected to increase further■ Middle class is the largest consumer

segment of food services industry, drivingsignificant industry growth

■ Urbanisation to grow to 40 per cent by 2031

■ By 2031 the top 10 cities will havepopulation of 140 Million

■ Increasingly people are adopting thefood joints as a place to socialise

■ Increase in urban working femaledriving growth in eating out segment

(Source: Avizare Report on Food ServicesIndustry 2013)

364

819

UnorganizedOrganizedSource:Avizare Report onFood Services Market

364

860

March-2018March-2013

19%

FOOD SERVICES MARKET-INDIA(INR Bn)

90 ASIAN MANAGEMENT REVIEW � JULY - SEPTEMBER 2013

Supply chain

nese, Bengali sweets and snacks.SRL has a pool of suppliers which are se-

lected through a centrally controlled selec-tion process; this ensures consistency andtimely delivery of raw material to restau-rants. Recently it has put in place a cen-tralised supply system for perishables. Per-ishables would be supplied directly to thenearest restaurants from these centralisedlocations. For this purpose, SRL has set up acommissary in Kolkata for processing thestuff including butchery and all the pre-prep.Cold chain is put into service to supply theprocessed products to restaurants acrossKolkata. A phased rollout is planned forBangalore, Chennai and at centers with 4-5restaurants. The space released at the mainoutlet due to centralised kitchen is beingused up more effectively in serving guests.

TOO SMALL TO BE

INDEPENDENT?

Smple highlighted above, the companycould afford a commissary to serve a loca-tion which had a minimum scale of opera-tions. Would it be feasible for it to createhubs where there are not enough spokes tofeed into? What about the smaller chainsand single outlet restaurants? How can theyafford to have a sourcing and distributionnetwork separate from the retail outlet?

Let us return to McDonald’s supply mod-el and the DCs set up by it. Suppliers of rawmaterials and processed goods are identi-fied and selected by the company. Logisticspart is taken care of by its supply chain part-

ner – Radhakrishna Foodland (P) Ltd. Mc-Donald’s has mandated them to run its sup-ply chain. This includes managing the DCsand cold chain for McDonald’s restaurantsacross India.

Why and how could McDonald’s entrusta vendor to run an operation which direct-ly impacts its ‘bread and butter’?

The supply chain model itself is the an-swer. The control and the supervision thatMcDonald’s exercises over its outsourcedsupply chain mean that there is no compro-mise over consistency of quality and timeli-ness of supply. On part of supplier, his jobdoes not end when the product leaves hispremises, rather it ends only when the cus-tomer consumes it. McDonald’s expects itssuppliers to personally ensure the quality oftheir products to skirt the risk factor.

THE CONTROL ANDTHE SUPERVISIONTHAT

MCDONALD’S EXERCISES OVER ITS

OUTSOURCED SUPPLY CHAIN MEANTHAT

THERE IS NO COMPROMISE OVER CONSISTENCY

OF QUALITY ANDTIMELINESS OF SUPPLY

[ ]

ASIAN MANAGEMENT REVIEW � JULY - SEPTEMBER 2013 91

McDonald’s maintains a simple ‘hand-shake’ relationship with its suppliers. Eventhough it does not have any legally signedagreements, it has mutually agreed KeyPerformance Indicators (KPIs) to monitortheir performance. The DCs are assessed onseveral factors like — administration effi-ciency, warehouse efficiency, truck utilisa-tion, overtime as a percentage of the totalnumber of hours worked, number of caseshandled per trip etc.

The model offers a way out for the vastnumber of single outlet restaurants andrestaurants with not enough numbers tohave dedicated sourcing and distributionset-up. Sourcing and distribution can beoutsourced to a single company by severalstand alone and small chain restaurants.Please refer to attached figure.

WAY TO GO

Even though the key functions are out-sourced, restaurants can monitor the per-formance of the supply chain companythrough mutually agreed KPIs. Either thesupply chain partner or the restaurant com-pany can monitor and control the suppliersof raw/ processed products. Such a model isnot entirely new to India, but is still in in-fancy. It offers immense scope for potentialsupply chain partners. Some of the respon-sibilities which these supply chain partnerscan pick up are (not exhaustive):■ Supplier identification, procurement,quality checks ■ Storage, inventory management, receiv-able management, reverse logistics■ Deliveries to the restaurants, managingcold chain

A worker puts atray of hamburgerbuns into an ovenat a McDonald’sdistribution center

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Supply chain

METRO AND TIER 1 CITIES DRIVING FOOD SERVICES SECTOR

NCR - `111 Bn MUMBAI - `103 Bn

6%6%

8%7%

20%27%

67% 59%

Speciality ■ Cafe ■ QSR ■ FSR

A popular CostaCoffee outlet inMumbai

Indian food services market is concentrated inmetro and tier I cities. Not surprising, sincemost of the purchasing power is concentratedin these centers. Mumbai and NCR togetherconstitute around 59 per cent of the organisedrestaurant market. Italian, Chinese andMughlai are the most popular cuisines in NCRand Mumbai. With high penetration in metrosand tier I cities, tier II and tier III cities wouldemerge as the future engines of growth. Thekey is to identify and classify the pockets ofvarying wealth and income distribution forbetter targeting.

(Source: Avizare Report on Food ServicesIndustry 2013)

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Similar to McDonald’s India, which is managing its distribution network in partnership with its suppliers and supply chain partner, is the example ofMetro Cash and Carry.

Metro Cash & Carry, the largest sales di-vision of the German trade and retail giantMETRO AG, is an international self-servicewholesaler. Unlike other retail chains, it’s aB2B chain where core customer groups arehotels, restaurants, caterers, traders andother business professionals. In India it of-fers specialised services to food services in-dustry. Farm produce (fruits and vegeta-bles, poultry and meat, fish etc) is sourceddirectly from farms and production centers,sorted and graded and distributed to the

user industry through their cold chain stor-age and transportation infrastructure.

BRINGING TOGETHER SOURCING,

INVENTORY MANAGEMENT AND

TRANSPORTATION

Any product’s supply chain has three key el-ements (besides several others) — sourcing,inventory management and transportation(cold chain in case of food services indus-try). Integrating these functions under oneroof is critical for products with limited shelflife. Ownership of these elements by a sin-gle entity means the multiple hand-offs areavoided and the consequent non value-addsshaken off the value chain.

In the current scenario, the market issplintered with the three elements not nec-essarily sitting under one roof. Eateriessource raw materials — feeding theirkitchen, from processors, wholesalers or di-rectly from farms, and, manage inventoryall by themselves. Supply chain operatorslike Radhakrishna Foodland and SnowmanLogistics Limited work on a 3PL model andprovide transportation, including coldchain, and other value-add services likegrading, sorting, packaging, and inventorycontrol, in certain cases, to their clients.

This still leaves food services industrydealing with multiplicity of players to fill thegaps in the supply chain. Something whichis evident in the above example of McDon-ald’s is that all three components i.e. sourc-ing, inventory management and trans-portation (cold chain) sit together with thecompany and are being managed by its sup-ply chain partner. This is also true to a greatextent in Metro Cash & Carry model.

Future belongs to companies like RKFoodland, Metro Cash & Carry and Snow-man Limited, if they are able to integrate thethree components, leverage the economiesof scale in sourcing and ensure distributionthrough common DCs – effectively servicingmultiple clients. This will leave food servicesindustry with lot of time to indulge their customers in the delicacies of their kitchens.Way to go! �

Deepak Nighoskar is managing partner,Avizare Solutions

Avizare SolutionsThird Floor, Block B, Vatika Atrium,Sector 53, Golf Course Road, Gurgaon – 122002India

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