admin
September 12, 2016
Suneera Tandon, Quartz
New Delhi, 12 September
2016
The Platonic ideal
“Efficiency
is doing better what is already being done.” – Peter Drucker,
Innovation & Entrepreneurship: Practices and Principles
The practice
Research
firm Gartner defines supply chain as, “…the processes of creating and
fulfilling demands for goods and services. It encompasses a trading
partner community engaged in the common goal of satisfying end
customers.”
Sounds simple? But it hardly is. In fact, the
supply chain can be one of the most complex structures in a business,
piecing together design, development, sourcing, manufacturing, and
distribution. It gets even more complex when it relies on rural India,
which is scattered over 640,867 villages and are often hard to access.
Fabindia, a chain of retail stores, has spent close to five decades
scoping India’s hinterland to connect rural Indian artisans to urban
shoppers. Here’s how they did it.
Fabindia began its India
sojourn back in 1960 when John Bissell, who was first introduced to the
country in 1958 while on a two-year grant from the Ford Foundation,
decided to set up an export shop to sell home furnishings to overseas
customers. Bissell, whose work at the foundation involved advising
government-based craft organizations on handloom fabrics, spent a lot
of time traversing the length and breadth of the country.
In
1976, the export house diversified into retail through a small store
that sold leftovers from export orders in Delhi’s tony market of
Greater Kailash. It took another two decades for retail to became the
mainstay of the company’s business.
Fifty years later, Fabindia,
managed by John’s son William Bissell, is a widely recognized global
brand, known for handwoven and hand-made goods that connect some 55,000
artisans from the country to consumers worldwide. In the process, it
has achieved two broad goals: to market the handloom tradition of India
to the rest of the world and to provide sustained employment to
artisans in rural areas.
The chain sells everything from
handwoven saris, rugs, apparel, home d�cor, and organic food in its 220
stores across 83 cities in India, including eight stores in overseas
markets such as Dubai, Singapore, Malaysia etc. It also retails its
products online to 33 countries. For the fiscal year 2014-15, Fabindia
had a turnover of Rs1,148 crore (approximately $170 million).
But
behind the red and black Ikat-printed scarves, Kalamkari prints from
south India, and block-printed Bagru fabric from north India is an
extensive and complex supply chain that runs from villages across the
country, covering a third of India’s over 650 districts.
The
retailer has successfully taken its founder’s vision to enable social
change at the grassroots level while engaging in a profit-making
business for urban shoppers. It does this while building systems that
encourage not just fair remuneration to India’s rural artisans, but
also provides infrastructure, access to technology and systems, quality
guidelines, and timely payments to these craftsmen. Fabindia also
offers access to capital and raw materials to artisans working with the
retailer.
As William Bissell puts it in a Harvard Business
School case study: “It seems contradictory that we pursue both a social
goal and a profit, but I believe that is the only way to do it.”
Through most of the ’90s and early 2000s, Fabindia grew as a retail chain expanding modestly in the country’s top metros.
Since
the opening of the Indian economy through the economic reforms of 1991,
Fabindia’s interaction with artisans scattered across the country has
grown significantly (pdf). The complexity of the company’s supply chain
is far different from that of a regular manufacturer that works through
designated factories.
The company’s interaction with these
artisans is very localized since it works with them through multiple
associations. The retailer deals directly with individual artisans who
work out of their homes and also with clusters of crafters and rural
NGOs and organizations that have a crafts supply base.
In
addition, the company uses its 11 production hubs across the country,
which are basically aggregation points, to centralize orders and pair
up vendors with artisans. Each hub has a number of field offices
attached to it.
“The production hubs and field offices act as
nodal points for interaction with the artisans that constitute the
supply chain, which is one of the most unique in the world,” said
Prableen Sabhaney, head of communications and public affairs at
Fabindia Overseas.
While most artists have the skill and the
craft, they don’t have the acumen to decipher fashion trends for the
season. So Fabindia acts like a conduit between their crafts and the
market.
At Fabindia, a large proportion of products carry some
element of the handmade, which requires an ability to communicate with
artisans and institute quality control as most artisans work largely in
India’s hinterland. For instance, an 18-step process is required to
create a simple pattern in Bagru print, a traditional form of
block-printing using natural dyes perfected in the northern state of
Rajasthan.
And the company has spent years putting processes to
ensure newer collections reach the stores on time. Recently, the
product range has become more diversified as well.
As for
remuneration, Fabindia follows a bottom-up structure. It asks artists
what it costs them in terms of—time, energy, skills, and raw material
to hand-make a certain fabric or accessory and pays accordingly.
Analysts
who track the sector believe that Fabindia’s unique model sets it apart
from other domestic or export-focused handicraft companies purely
because of the sheer volume of artisans it works with.
“In
handicraft, there are several companies that have created substantial
export-led supply bases, which tap into craft both from the rural
artisans as well as those based in smaller urban centers,” Devangshu
Dutta, chief executive at consulting firm, Third Eyesight said.
“Among
these, Fabindia has certainly had the most visible success in terms of
size and brand profile domestically. Fabindia has achieved scale by
working through artists, intermediaries and supplier companies who have
acted as anchors in the rural communities,” said Dutta.
Sabhaney
offers that challenges span from co-creating contemporary products
while using traditional techniques to quality issues, since the
products are created in environments that are very different from where
they are finally used. The company also works hard to provide access to
raw material and capital across many hard-to-access areas—and doing all
of this at scale.
“The ability to do this and not lose anything
in translation has been and will continue to be Fabindia’s strength,”
added Sabhaney.
The takeaways
As
the market evolves with e-commerce and the entry of foreign brands,
which has altered consumer preferences and style-cycles, Fabindia knows
it needs to quicken its response to these changes.
Not all of
the innovations the company has tested remain. In a unique ownership
structure created by Bissell, Fabindia set up supplier regional
communities (SRCs), which were community owned companies, self-managed
by a group of artisans, weavers and craft workers in a particular
geography back in 2007. According to a case study by INSEAD (pdf),
these SRC’s “offered artisans joint ownership of resources and access
to common facilities. It also trained artisans and developed new
handicrafts. The SRC allowed Fabindia to consolidate supply capacity
instead of dealing with single-loom weaver units, and to implement a
standard system for production and delivery control.”
The 2010
book, The Fabric of Our Lives reveals how production worked under the
SRC model. A number of dedicated designers and sourcing officers worked
closely with rural artists giving them design inputs in tandem with the
latest trends in the market and order quantities through dedicated
distribution centers in key villages. These designers worked with the
weaver to develop samples. They were then shown by the designers that
refer it to a product selection committee. The fabric was then approved
and the cost price finalized. The quantity of fabric to be produced the
first time was pre-determined by software based on a minimum stock
requirement ratio and an order is given to the weaver to make the
product. The weaver produced the requisite amount of fabric in a month
and brought it into the distribution centers.
But the SRC model has now been diluted as the company looks more innovative ways to engage rural artisans.
In
the company’s next vision plan, it is focusing more on cluster
development that will basically help bring artisans up to speed with
the processes and market trends.
“There are plans for a greater focus on the handloom and hand-craft sector,” Sabhaney said.
“There
is a much bigger focus on the social aspect, there are going to be
significant investments in developing clusters and bringing them up to
what is required around the country,” she added.
(Published in Quartz)
admin
November 6, 2014
India has a rich culture and ecosystem of social enterprises, non-profits and many other social purpose organisations that serve the needs of many segments of society within a vast landscape. However, for a foreign investor looking for impact investing or other philanthropic opportunities in India, it can often prove to be a challenging journey. Devangshu Dutta (Third Eyesight/PVC Partners) and the Audrey Selian (Artha Platform) together provided a landscape overview of India, highlighted key challenges and pitfalls to look out for, and shared an insider view for international investors in this first part of AVPN’s India series.
Devangshu Dutta
October 25, 2014
These are thoughts shared in an emailed interview with the AgriBusiness and Food Industry magazine (published in the November 2014 issue.)
A Perspective on the Indian market:
Our first word of advice to companies that are looking at India as an evolving and large market, is to acknowledge the fact that that it has very diverse cuisines and food cultures.
Both Indian and international companies wishing to enter this market for the first time need to understand and acknowledge that one-size certainly does not fit everyone.
The variety of finished products needed requires food companies to address smaller quantities and to have flexible production.
Therefore, suppliers of capital equipment and technology also need to be able to think about how they can make their solutions more flexible to adapt to changing market needs, and also to price them appropriately for the Indian market. Simply extending solutions that work in large, developed markets such as Western Europe and North America is not the best approach.
I would use the example of one of our clients, a manufacturer of bakery automation equipment, who have approached the market with an open mind. After initial investigations they have gone back to the drawing board and created production lines that have smaller capacity, can produce multiple products including Indian specialities, and which are techno-commercially more feasible for an Indian customer to adopt.
There is no reason to think that India’s food industry should follow exactly the same development curve as the west. The population is much larger, with significantly lower income, and needs that are far more diverse and changing far more rapidly than in most other economies. The technical and technological models for India need to be strongly focussed on four major attributes:
Agricultural, horticultural and animal husbandry practices and technologies, as well as those in the downstream sectors such as food processing, need to perhaps even look at setting new benchmarks for accessibility and long-term sustainability.
Food processing and the Indian consumer market:
Food processing has been part of human history since we learned to transform hunted, gathered and farmed raw products into new foods through curing, cooking, culturing etc. This processing has been driven by mainly two major factors: to make the raw material into a product that is more palatable and easily consumed (for example, from raw grains to bread), or to extend the storage life of the raw material (for example, in the form of cheese, pickles, or sweets, or using cooling and freezing).
However, during the last century, processing has been driven mostly by “convenience” by providing partly or fully cooked options, to reduce the time spent by individuals in cooking and to instead apply that time to activities outside home. Social structures in India are changing, as individuals are migrating out of their home-towns to other locations within the country. The number of households is increasing dramatically, while cooking time and cooking skills are both declining. With this, out-of-home consumption as well as partially or fully-cooked packaged foods are bound to rise, leading to greater need of food processing capacities.
Also, with increasing industrialisation of food manufacturing, standards have become important both for efficiency and for safety. We’re seeing signs of such development happening in recent years in India as well – expectations of both consumers as well as regulatory authorities are higher with each passing year. The industry needs to invest proactively in better technology and processes in all areas – cultivation, handling, processing, packaging, storage and transportation – to raise the standards of hygiene, safety, traceability etc.
Food productivity needs urgent attention:
India is among the largest producers of many agricultural products. However, our yields per head of workforce, per animal, per hectare, or per litre of water consumed can be improved significantly. Not only is the population growing, but per capita consumption of most products will rise as the economic situation of each family unit changes. Better practices, technologies and know-how need to be acquired and applied to dramatically improve Indian agricultural productivity.
An interesting model of development to look at is the “golden triangle” approach followed by the Netherlands – active and intensive cooperation between the government, academic institutions and the private sector.
So far, by and large, academic institutions in India have limited themselves to “teaching” and have stayed away from actively collaborating with industry. Academic institutions and the industry typically connect only for the occasional “lecture” by senior individual from industry, or during the time of recruitment of fresh talent. Government largely limits itself to creating macro-level policies. More effective communication and coordination between these three legs could help to dramatically improve the standards in the agricultural and food sector in India and make the nation not just self-sufficient but significantly more competitive in both cost and quality of the final products.
Similarly, active collaboration within the industry itself is important to achieve combined growth, which can only happen if companies step beyond the usual industry association framework.
Local production and service of food processing equipment is an important factor:
In cases where the market is large enough, local production of the equipment should certainly be investigated because it can help to bring down the initial capital cost for customers, and also provide a quicker service and support base.
A first step that a company takes is to create a local presence, either through a distributor or agent, or by directly opening a sales and service office of its own. However, most international companies need to gain a certain degree of confidence in the market, both in terms of sustained demand and in terms of operating conditions, before they would invest in manufacturing in India, since it takes a whole different level of management commitment as well as financial involvement.
With the announcement of the government’s “Make in India” initiative, hopefully more international companies will come forward to take advantage of the changing operating environment in the country.
Devangshu Dutta
May 17, 2014
(If you’re in a hurry, go to the Slideshare presentation, and bookmark this post for a complete read later.)
These pages usually focus on the consumer and retail sector, its constituents, its problems and the opportunities therein.
The consumer and retail sector is all about choice, and it is worth noting that we’ve just concluded what was possibly the most massive consumer event in the world. I’m referring, of course, to the Indian elections, where more than 500 “consumers” were bombarded with above-the-line and below-the-line marketing by various organisations pushing their brand, product (candidate) and services (ideology and manifesto).
The sum total of analyses of India’s 2014 election results already exceeds what one sane person can read in a lifetime. The BJP and its allies have won a majority of seats unprecedented among non-Congress alliances, in the first-past-the-post system. While opinions may be fractured, the Parliamentary mandate is clear.
In this context and in this spirit, it is also relevant for us to take the big picture view. Retail is a sector that touches the lives of virtually every citizen of this country on a daily basis. So anything that affects their lives and their aspirations have a direct bearing on the retail business as well.
India’s citizens are creative and entrepreneurial. They are hungry for growth. While they are respectful of heritage, they are also devastated by the decline that has come about over decades, centuries, and are determined to change this situation. What they need is the government to shoulder its responsibilities.
If there is one narrative that can pull diverse, divided strands of opinion together, it is “inclusive growth”. Throughout his campaign Narendra Modi has repeated the mantra: “Sabka Saath, Sabka Vikas” (literally “all together, development for all”). In recent weeks, on more than one occasion he has extended this to mean pulling together the efforts of leaders across the political spectrum as well. At the time of this writing, the Prime Minister elect Modi has already set out to manage expectations. He has positioned himself as “mazdoor (labourer) no. 1”, and is asking the electorate for 10-years, making it amply clear that there is no magic broom to remove the dirt of corruption overnight, nor a magic hand that will conjure out ever-increasing incomes out of bottomless magic pockets.
While there are many problems to be tackled at the macro and the micro-level, I think the “business of government” can be captured broadly in an 8-point agenda, and each of these has a significant bearing on the consumers of this country, and the businesses they transact with:
1. Healthcare: While India’s average life-expectancy has improved steadily since Independence it still hangs in the mid-60s while China’s and Brazil’s is over 73. India offers less than one bed for every thousand of its citizens, while both China and Brazil are well over 2. The United Kingdom, whose National Health Service is constantly lambasted as being “overstretched”, offers about 4 hospital beds per 1000 people, and the average for former British colonies is also around 4. Public healthcare infrastructure in India – from primary to speciality – remains critically under-funded, and the public hospitals that exist are chronically under-equipped and under-staffed. Where equipment exists, it is underutilised, as commission-seeking individuals refer patients to the burgeoning private clinics and hospitals. Over the last decade or so private healthcare providers have achieved prominence in the media and among investors, and concessional access to public infrastructure and assets such as land, but they have proved to be consistently out of reach of the general public. Livelihoods and family savings are routinely destroyed in the search for better-quality healthcare in the new, profit-maximising business models. Health should be every citizen’s fundamental right, as one of the foundation stones of a strong nation. It is a right that is denied daily to hundreds of millions. Providing health support is the core business of the government, and needs urgent attention and substantial investment dispersed nationally.
2. Power: India’s power consumption average is about one-third of the Chinese average and less than a tenth of the USA, and this is not only because Indians have smaller homes or live more frugally, but because hundreds of millions of Indians spend most of their days and nights without electricity. If you think you can get a sense of the deprivation from a household that gets power a few hours a day, you actually have to visit one where power availability has improved due to grid power or micro or off-grid availability through solar or biomass units – the enormous impact that the improved power availability has on the lifestyle, livelihood and quality of life can only be truly gauged then. Across the nation, private participation has been invited into the power sector at different times, but the execution has been mixed. Private companies would also like to serve those areas where population concentration and decent financials allow the private provider to create a profitable business. Large swathes of the Indian population lie outside of such areas, and the onus is upon the government to provide the required electricity for households to live a fuller life, for students to complete their lessons, for healthcare and administrative facilities to run effectively, for small entrepreneurs to be able to grow their businesses.
3. Clean water: Imagine one train crash every day of the year, each killing all passengers on board. Sounds catastrophic, doesn’t it? Wouldn’t that get some serious attention? Well, it is estimated that around 1600 deaths are caused every day by diarrhoea alone (higher than the train wreck fatalities), and that 21% of communicable diseases in India are related to unsafe water. The problem is not only in far flung villages, but acute even in the largest cities of the country. Both those numbers are shamefully high for a nation that wants to see itself as a global superpower. There are no technological gaps for effectively harnessing the existing water resources, and for maintaining cleaning, distribution and recovery systems – only management gaps.
4. Transportation infrastructure: While India has one of the largest rail networks in the world, at about 20 kilometres per 1,000 sq km of land area it compares unfavourably to highly industrialised European countries (Germany: 115 km per thousand sq. km., UK: 65, France: 53) or even the large less densely populated USA (26 km per thousand sq. km.). On road development India’s picture has improved in the last 15 years, but it still trails world-leading economies in terms of length as well as quality. Poor transportation systems cut people off from economic opportunities, and force them to migrate to already overloaded cities, perpetuating problems in both urban and rural areas. Historically, all strong nations, democratic or otherwise, have flourished due to extensive, superior transportation networks. Where people and goods can move quickly and freely, both trade and culture flourish, and build the strongest ties that bind people together.
5. Education: This is another area which has systematically been under-invested in by the government. From pre-schools to universities, the growth of educational institutions for the last 30-40 years has predominantly been in private hands, where affordability is not the prime driver. The number of seats in government-run institutions has not grown in proportion with the population, let alone in correlation with the demand. Access remains a problem, as does the quality. There is no reason why government-run educational institutions need to be bad – there are enough examples around the country within government schools and colleges, where organisational systems and individual intent produces excellence. Without immediate and adequate government focus on education, the massive young population of India will go waste, at worst it would be a ticking time-bomb of under-skilled frustrated underachievers.
6. Environment: This might seem like a strange inclusion in this “development-oriented” list. However, it is essential that the environment should be on a list of core items that the government needs to manage well. The government is usually in the news for either not doing enough (such as not monitoring the systematic encroachment in and destruction of the Aravalli Hills) or, at the other extreme, getting in the way by holding back environmental approvals to development projects. Another term for the environment is “the commons”, reflecting that the natural resources belong to the people, together. The commons need not just protection, but regeneration, resurgence. Defence and political experts around the world list climate change and clashes over natural resources as among the highest conflict risks in coming years, and the evidence is frequently visible. When “growth” is measured only by those activities that extract and deplete the common resources, support and encouragement is provided for those individuals and companies that do this the “best”. It is short-termism and selfishness of the worst sort. Evidence of large scale climate-related changes and the debilitating impact on civilisations exists around the world and across the span of history; the closest might be the Ganga-Saraswati civilisation that is said to have dispersed due to the depletion of one of its greatest rivers. We don’t even need to forecast huge impacts far into the future. Millions of Indians increasingly are born and live with chronic diseases that are related to deteriorating air quality, depleted water resources, polluted soils and disappearing vegetation. Indigenous natural species of plants and animals are declining, mostly invisible to the nation at large. A comprehensive, evolving framework is needed that goes beyond short-term planning and management by knee-jerk reactions.
7. Competition: This is an area which requires little investment, relative to the other items on this list, but a huge amount of intent and follow-through. No economic system is perfect and, indeed, it is the imperfections and discontinuities that provide business opportunities. When the imperfections are exploited by many, competitive forces balance each other out. The need to diversify is well-understood by people who care to think about risks. Concentration of efforts, resources, power behind a few initiatives or organisations can bring about disproportionately good results, but also creates the risk of wipeout. Diversity is a challenge because it creates fragmentation, but it is also an essential source of innovation, combating not just present risks but future threats as well. Self-moderation is too much to expect from even the most enlightened of large business leaders and even the most progressive of industries. Anti-competitive and customer protection frameworks have improved in recent years, but are still understaffed and underequipped. As the economy grows, so does the need to provide oversight against unethical behaviour by large organisations.
8. Accountability: None of the above can truly happen without transparency in governance, and productivity in public service i.e. respect for schedules, budgets and commitments. Measures such as Right to Information (RTI) have moved the country several steps up the transparency ladder, but accountability to “service deliverables” is still missing in a vast number of people employed in government departments. Entry into “government service” is seen as a ticket to a reasonably comfortable employment if you are inclined to not rock the boat. The idea is to not question the status quo as far as possible, and to ensure that the outcomes for the “overclass” are taken care of. This attitude needs to change. In fact a small start could be made by replacing the phrase “government service” with “public service” – the business of government is to serve the public at large, and this needs to be recognised and acknowledged by everyone involved in it. Efforts in all the other areas will fall flat if accountability and productivity are not embedded into the money and efforts invested. (Imagine if we could sign SLAs – service level agreements – with each and every individual hired for public service roles!) The roles that accountability brings with it include “upholding the law” and “enabling an environment where each citizen has a fair chance of success”.
Someone else might come up with a slightly different list – this is mine, the seven pillars and the overarching beam. I’ve not listed the areas in any specific order of priority. Some of them need more government intervention, some need less private intervention, a few (such as education) need both. These are all areas that are the foundation on which everything else is built. These are the areas which, to a very large extent, determine the levels of dignity with which a country’s citizens lead their lives.
In this day and age, the government is not needed to run steel mills, airlines or even handicraft retail stores. But without high quality and high availability ensured by the government in the above areas, even the most capable individual will find it easier to build a life and even the best private enterprise will find it more profitable to do business elsewhere in the world.
A much-followed new-generation business leader recently rhetorically asked in a social media post that, if we have an economy swinging towards services with a large chunk of it being technology, “Why do we need government?”
The reasons above, my friend, are why and where we need government, because business is not delivering on these areas in an equitable manner, and these are areas where technology will not necessarily provide all the answers. We have years of evidence of this, in some cases decades, and it is time we choose to move.
By and large, most people would rather choose to move something, than move somewhere (else). And the retail business will be one of the first to benefit.
Devangshu Dutta
July 30, 2012
(Published in “BusinessWorld SME Handbook 2012-13”, released on Oct. 29, 2012 in New Delhi, and “Indian Management”, the journal of the All India Management Association in January 2013, published by Business Standard.)
There are parallels between Christmas and the growth of modern retail. At Christmas much of the attention is fixed on Santa Claus, while the elves labouring away behind the scenes barely get any air-time. So also in the retail business, the focus very much is on the retailer; the bigger the better.
The Indian retail sector’s sales are estimated at about Rs. 26 lakh crores. Of this, more than 80% of the product requirements are estimated to be met by small or mid-sized businesses. We don’t usually think about these myriad manufacturing and trading companies that make up the retailer’s supply chain. Large branded suppliers – multinational or domestic corporate groups – are still able to make their presence known, but most others remain largely invisible. Many of these fall not just into the small-medium enterprise (SME) classification, but in micro-enterprises, even cottage-scale. Not only do the large retailers source from SMEs directly, those small suppliers in turn work with other upstream SME manufacturers.
Chicken or Egg?
Most of us are inclined to view the growth of modern retail as a precursor to the growth of the SME sector. Actually the reverse is equally true, perhaps even more so. Without a robust base of suppliers having taken the initial risk of setting up better-organised manufacturing facilities and supply chains, modern retailers would not be able to set up their businesses in the first place. We may view modern retailers as the catalyst for this development; however, they are first beneficiaries of SMEs, and only after they achieve critical mass can they catalyse further SME growth.
For instance, through the 1950s and 1960s, as the American and western European economies grew with the baby boom, it was the growth of manufacturing entities and brands – most of them SMEs – that led the charge. As these SMEs consolidated their growth, modern retail chains actually rode upon this. Subsequently, of course, retail chains have put most of their suppliers in the shade in terms of overall size and profitability. Japan in the 1960s and 1970s, Taiwan and Korea during the 1970s and 1980s, and China during the 1990s and 2000s also saw similar manufacturing-led prosperity and consumption, although their growth was driven initially by exports to the west.
In India, too, the tremendous social and economic changes in the last two decades have encouraged a resurgence of the entrepreneurial spirit. The consumer sector is specifically attractive to entrepreneurs as something that is tangible, provides visibility of the business fairly quickly and can be communicated and positioned well within the entrepreneur’s family and social circle, an important driver.
The Rationale for Supporting SMEs
We tend to ignore the fact that India has a workforce estimated at over 750 million, and which is growing annually by 9-10 million. Most of these people will not be employed by the government, or in large organisations or in the much-feted service sector. Allowing for a declining active employment in agriculture, it is manufacturing, trading and retail by small businesses that is needed to keep the economic engine running.
It is also important to remember that growth of SMEs raises prosperity rather more equitably than other sectors. Widespread growing incomes lead to growth in consumption, supporting retail growth, which in turn can feed back into further growth of SMEs. There are enough significant examples of such economic growth worldwide, whether we look at economies such as Western Europe and Japan recovering from the ravages of war, or at the Asian tigers, China and others emerging countries who’s GDPs are not overly dependent on extractive natural resources.
Innovation is another reason to nurture SMEs. Consumer needs are changing more rapidly than ever before in India’s history, with rising incomes, and evolution of life styles and social structures. Small companies are better at foreseeing or at least reacting to rapid changes. Large companies compete on the basis of their sheer scale and aim to maximise returns from every investment made, but small businesses have no choice but to be innovative in some way simply to enter the market or to stay in business. Experimentation with products, business models, service level and commercial practices is what SMEs thrive on. Differentiation is what makes small suppliers attractive to retailers. With the technology and tools available today, we should expect ever increasing amount of innovation to emerge from small rather than large companies in the consumer sector.
Small suppliers also provide diversification of supply risk for individual retailers, as well as for the market overall. Concentrating on a few large sources has, time and again, proven to be a risky approach, whether it is due to the balance of power tilting unduly towards a specific supplier, or simply the risk of product not being available in case the dominant large supplier’s business is affected. A mix of small suppliers is more like a supporting cushion – a bean bag, if you like – which can be adapted and moulded more easily to changing customer needs.
The Role of Modern Retail
There are three areas in which modern retail can be a significantly more important partner for SMEs than traditional channels.
Firstly, modern retail stores are possibly the most effective route to launch new products, or even entirely new categories. As a platform they offer a more consolidated and effective way to reach a new product to consumers, and to gain visibility and acceptability quicker.
As a follow-on to this, due to their innate need to scale-up successful initiatives, a product and or a service proven in one store or region would typically get included in buying plans for the retailer’s stores across the country. This provides a quicker and more efficient scaling up opportunity than the small brand or supplier trying to reach myriad stores across the country on its own.
Third, whether it is quintessentially Indian brands such as Fabindia, or Indian products through international brands and retailers such as Monsoon, Gap, Mothercare, Ikea, Marks & Spencer, these are but a few examples of the access route for small Indian companies to major world markets. In fact, B. Narayanaswamy suggested in an article titled “Opportunity Lost is Gone for Good” (July 2012), that the Indian government should negotiate hard with retailers interested in investing in India to open supply opportunities to the retailers’ businesses globally, rather than putting minimum sourcing requirements for the small Indian business alone which only act more as a constraint than an enabler. The government has, in the past, used such opportunities to allow investment in the consumer sector while enlarging the playing field for Indian businesses – Pepsi is a case in point.
For some companies, modern retail is in fact a launch pad for wider ambitions, as they evolve into building brands themselves. Mrs. Bector’s has grown from a contract supplier to the likes of McDonald’s to launching its branded products not only in India but also in international markets targeting Indian expatriates. Genesis Colors went from being a Satya Paul licensee for ties to being the owner of the brand, and then further to being a partner for many internationally established premium and luxury brands who want to be part of the India growth story. Others become growth vehicles for larger businesses after being acquired by them, such as ColorPlus by Raymond, Fun Foods by Dr. Oetker (Germany) or Anchor by Panasonic (Japan).
Making Business Easier
India is one of the few countries to have a Ministry dedicated to SMEs. However, India’s SME sector is very far from competing effectively with SMEs in other countries.
The German Mittelstand employs more than 70% of Germany’s workforce and is acknowledged to be at the leading edge of technology and efficient business management. Other western European countries such as the UK and Italy also have vibrant SME sectors. All these countries have not only been competitive globally as exporters, but have also co-opted into the growth of industries elsewhere including the BRICs.
Three enormous obstacles stand in the way of the growth of India’s SMEs, as a huge amount of entrepreneurial energy is wasted tackling these areas. The government certainly has a large role to play in all, but one of these is also the responsibility of large corporate groups.
The lack of adequate infrastructure is arguably the most recognised obstacle, followed by compliances that can hold SME operations hostage under outdated laws, many of which have not been reviewed since India had an Empress! Entrepreneurs and businesses lose millions of manhours annually managing these two areas.
However, the one area in which not just the government but large retailers can play a role is in ensuring that SMEs are funded adequately. Bank sources in the form of term loans and working capital limits is only the start. The rest comprises of actual cash flow, much of which are limited by the long credit period demanded by retailers. Payment can stretch as far as 6-8 months, and include sale-or-return terms which squarely place the burden of funding the retailer’s business on the SME supplier. Unless we can mandate better payment practices, the boom of retail giants will be created using millions of dead or barely alive SMEs as building blocks. And what we don’t realise is that the retailers’ own health is also at stake, because lazy payment terms create a maze of poor practices, from product planning at head office all the way to the retail store. For instance, products that will not sell get stocked for short-term margin through placement fees, and block shelf-space and cash flow that affects other suppliers. Promptness of payment to SMEs must become a metric to measure the health of retail companies – after all, what gets measured gets tackled. And for the proponents of “Corporate Social Responsibility” – what better way to promote CSR and wide-ranging economic well-being than by ensuring the the smaller businesses in the ecosystem are not starved of the funds that are rightfully theirs!
SMEs are not just the foundation, but also the beams and pillars on which the glass and steel cathedrals of modern retail are built, and a vital indicator of the economy’s overall health. The sector needs to be tended to proactively and holistically, both by government and by large businesses, as an investment in India’s economic future. Perhaps we will even create some world-beating companies along the way.
