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by EOS Intelligence EOS Intelligence No Comments

COVID-19 Unmasks Global Supply Chains’ Reliance on China. Is There a Way Out?

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Dubbed as the factory to the world, China is an integral part of the supply chain of a host of products and brands. From manufacturers of simple products such as toys to complex good such as automobiles, all are dependent on China for either end products or components. However, China’s ongoing trade war with the USA and the COVID pandemic have made several brands question their supply chain dependence on this country, especially in some industries such as pharmaceuticals. Moreover, aggressive investment incentives offered by countries such as India and Japan have further cajoled companies to reassess their global supply chains and reconsider their dependence on China. However, with years of investment in the supply chain ecosystem, a shift such as this seems easier said than done.

China emerged as the manufacturing hub of the world in the 1990’s and hasn’t looked back since. Owing to vast availability of land and labor, technological advancements, and overall low cost of production, China became synonymous to manufacturing. Over the past decade, increasing labor and utility costs, and growing competition from neighboring low-cost countries such as India, Vietnam, Thailand, etc., have resulted in some companies shifting out from China. However, so far this has been limited to a few low-skilled labor intensive industries such as apparel.

The year 2020 has changed this drastically. The COVID pandemic along with the ongoing trade war between the USA and China made companies realize and question their dependency on China. In the beginning of last year, COVD-19 brought China to a halt, which in turn impacted the supply chain for all companies producing in China. Moreover, several pharmaceutical companies also realized that they are highly dependent on China for few basic medicines and medical supplies and equipment, which were in a considerable shortage throughout 2020. This pushed several companies across sectors such as pharmaceuticals, automobiles, and electronic goods, to reconsider their global supply chains to ensure reduced dependence on any one region, especially China.

Currently, several companies such as Apple, Google, and Microsoft are looking to shift their production from China to other South Asian countries, such as Vietnam and Thailand.

Some of the companies looking to reduce dependence on China:

Apple

In November 2020, Apple, along with its supplier Foxconn, expressed plans to shift assembly of some iPad and MacBook to Vietnam from China. The facility is expected to come online in the first half of 2021. Moreover, Apple is also considering shifting production of some of its Air Pods to Vietnam as well. In addition, it has invested US$1 billion in setting up a plant in Tamil Nadu, India to assemble iPhones that are to be sold in India. Apple and Foxconn are consciously trying to reduce their reliance on China due to the ongoing USA-China trade war.

Samsung

In July 2020, Samsung announced plans to shift most of its computer monitor manufacturing plants from China to Vietnam. The move is its response to hedge the supply chain disruptions it faced due to factories being shut in China during the early phase of the pandemic. In addition, in December 2020, the company shared its plans to shift its mobile and IT display plants from China to India. Samsung plans to invest about US$660 million (INR 48 billion) to set up the new facility in Uttar Pradesh (India).

Hasbro

Hasbro has been moving its production out of China into Mexico, India and Vietnam over the past year. It aimed to have only 50% of its products to be coming out of China by the end of 2020 and only 33% of its production to remain in China by the end of 2023. In 2019, about 66% of its toys were produced in China, while in 2012, 90% of its toys were manufactured in the country. The key reason behind the consistent switch is the souring trade relations between the USA and China.

Hyundai

During the past year, Hyundai Motors has been looking at developing India into its global sourcing hub instead of China in order to reduce its over-reliance on the latter. It has been encouraging its vendors, such as Continental, Aptiv, and Bosch, to ramp up production in India so as to move their supply chain away from China. It plans to source its auto parts from India (instead of China) for its existing factories in India, South America, Eastern Europe as well as planned facility in Indonesia.

Google

Google is looking to manufacture its new low-cost smartphone, Pixel4A, and its flagship smartphone, Pixel5A in Vietnam instead of China. In addition, in 2020, it also planned to shift production of its smart home products to Thailand. This move has been a part of an ongoing effort to reduce reliance on China, which in fact gained momentum post supply chain disruptions faced due to the coronavirus outbreak.

Microsoft

In early 2020, Microsoft expressed plans to shift the production base of its Surface range of notebooks and desktops into Vietnam. While the initial volume being produced in Vietnam is expected to be low, the company intends to ramp it up steadily to shift volumes away from China.

Steve Madden

In 2019, Steve Madden expressed plans to shift parts of its production out of China in 2020, given growing trade-based tensions between the USA and China. However, due to the COVID pandemic, it could not make planned changes to its supply chain. In October 2020, it again expressed plans to start shifting part of its production away from China by spring 2021. It plans to procure raw materials from Mexico, Cambodia, Brazil, and Vietnam to reduce reliance on China.

Iris Ohyama

The Japanese consumer goods player expressed plans to open a factory in northeastern Japan to diversify its manufacturing base, which is based primarily in China. The company made this move on the back of increasing labor cost in China, rising import tariffs to the USA, along with the supply disruptions it faced for procuring masks for the Japanese market. In 2020, it also set up a mask factory in the USA. In addition, the company plans to open additional plants in the USA and France for plastic containers and small electrical goods to cater to the local demand in these markets.

Nations using this opportunity to promote domestic production

In August 2020, about 24 electronic goods companies, including Samsung and Apple, have shown interest in moving out of China and into India. These companies together have pledged to invest about US$1.5 billion to setup mobile phone factories in the country in order to diversify their supply chains. This move is a result of the Indian government offering incentives to companies looking to shift their production facilities to India.

In April 2020, the Indian government announced a production linked incentive (PLI) scheme to attract companies looking to move out of China and set up large scale manufacturing units in the electronics space. Under the scheme, the government is offering an incentive of 4-6% on incremental sales (over base year FY 2019-20) of goods manufactured in India. The scheme, which is applicable for five years, plans to give an incentive worth US$6 billion (INR 409.51 billion) over the time frame of the scheme.

In November 2020, the Indian government subsequently expanded the scheme to other sectors such as pharma, auto, textiles, and food processing. In addition, it is expected to provide a production-linked incentive of US$950 million (INR 70 billion) to domestic drug manufacturers in order to push domestic manufacturing and reduce dependence on Chinese imports. Apart from incentives, India is developing a land pool of about 461,589 hectares to offer to companies looking to move out of China. The identified land, which is spread across Gujarat, Maharashtra, Tamil Nadu, and Andhra Pradesh, makes it easy for companies looking to set shop in India, as acquiring land has been one of the biggest challenges when it came to setting up production units in India.

On similar lines, the Japanese government is providing incentives to companies to shift their production lines out of China and to Japan. In May 2020, Japan announced an initiative to set up a US$2.2 billion stimulus package to encourage Japanese companies to shift production out of China. About JNY 220 billion (~US$2 billion) of the stimulus will be directed towards companies shifting production back to Japan, while JNY 23.5 billion (~US$200 million) will be given to companies seeking to move production to Vietnam, Myanmar, Thailand, and other Southeast Asian countries.

In the first round of subsidies, the Japanese government announced a list of 57 companies in July 2020, which will receive a total of US$535 million to open factories in Japan, while another 30 companies will be given subsidies to expand production in other countries such as Vietnam and Thailand. The move is a combination of Japan looking to shift manufacturing of high value-added products back to the country and the initial disruptions caused to the supply chain of Japanese automobiles and durable goods manufacturers.

Similarly, the USA, which has been at odds with China regarding trade for a couple of years now, is also encouraging its companies to limit their exposure in China and shift their production back home. In May 2020, the government proposed a US$25 billion ‘reshoring fund’ to enable manufacturers to move their production bases and complete supply chain from China preferably back to the USA and in turn reduce their reliance of China-made goods. The bill included primarily tax incentives and reshoring subsidies. However, the bill has not been passed in Congress yet and now with the leadership change in the USA, it is expected that president Biden may follow a more diplomatic strategic route with regards to China in comparison to his predecessor.

In addition to individual country efforts, in September 2020, Japan, India, and Australia together launched an initiative to achieve supply chain resilience in the Indo-Pacific region and reduce their trade dependence on China. The partnership aims at achieving regional cooperation to build a stable supply chain from the raw material to finished goods stage in 10 key sectors, namely petroleum and petrochemicals, automobiles, steel, pharmaceuticals, textiles and garments, marine products, financial services, IT services, tourism and travel services, and skill development.

Similarly, the USA is pushing to create an alliance called the ‘Economic Prosperity Network’, wherein it aims to work with Australia, India, Japan, New Zealand, Vietnam, and South Korea to restructure global supply chains to reduce dependence on China.

COVID-19 Unmasks Global Supply Chains’ Reliance on China by EOS Intelligence

Is it feasible?

While these efforts are sure to help companies move part(s) of their supply chain out of China, the extent to which it is feasible is yet to be assessed. Although the coronavirus outbreak has highlighted and exposed several supply chain vulnerabilities for companies across sectors and countries, despite government support and incentives, it will be very difficult for them to wean off their dependence on China.

Companies have spent decades building their manufacturing ecosystems, which in many cases, are highly reliant on China. These companies not only have their end products assembled or manufactured in the country, but also engage Chinese suppliers for their raw materials, who in turn use further Chinese suppliers for their inputs. Therefore, moving out of China is not a simple process and will take tremendous amount of time as well as financial resources.

While companies such as Google or Microsoft are looking to shift their assembling plants out of China, they are still dependent on China for parts. This is all the more relevant in case of high-technology products, such as automobiles and telecommunication infrastructure, where companies have made significant investments in China for their supply chain and are dependent on the nation’s manufacturing capabilities for small, intricate, but technologically advanced parts and components.

Moreover, despite significant efforts and reforms from countries such as India, Vietnam, and Thailand, they still cannot match China in terms of availability of skilled labor, infrastructure, and scale, which is required by many companies especially with regards to technologically advanced products. That being said, more companies are looking at a strategy where they are maintaining their presence in China, while also developing relatively smaller operations outside the country to have a fallback and to reduce total dependency on China. This is also dubbed as the China + 1 strategy.

Another reason going in China’s favor has been its capability to bounce back from the pandemic and resume production in a short span of time. While production had been halted in January to March 2020, it ramped up April onwards and was back to normal standards within no time. This reinforced the faith of many companies on Chinese capabilities. Therefore, as some companies are already cash-strapped due to the pandemic, they are not interested in investing in modifying their supply chains when in most cases normalcy resumed in a relatively short span of time.

EOS Perspective

Companies have been looking to diversify their supply chains and reduce dependence on China for a couple of years now, however, the trend has gained momentum post the coronavirus pandemic and growing US-China trade tensions. The onset of the COVID-19 outbreak exposed several vulnerabilities in the supply chain of global manufacturers, who realized the extent of their dependence on China. Moreover, several countries realized that they relied on China for key medicines and medical supplies, which cost them heavily during the pandemic.

Given this situation, several nations such as Japan, India, and the USA – together and individually, have started giving incentives to companies to shift production from China into their own borders. While this has resulted in several companies, such as Apple, Microsoft, Sanofi, Samsung, etc., to expand their manufacturing operations out of China, it does not necessarily mean that they are moving out of China. This is primarily due to heavy investments (in terms of both time and money) that they have already made into developing their intricate supply chains as well as the inherent benefits that China provides – technologically skilled labor, sophisticated production facilities, and quick revamping of production after a calamity.

That being said, it has come into the conscience of companies to reduce their over-reliance on China and while it may not impact the scale and extent of operations in the country in the short run, it is quite likely that companies will phase out their presence (at least part of it) in China over the coming decade.

A lot depends on the level of incentives and facilities provided by other nations. While countries such as India, Vietnam, and Thailand can offer low cost production with regards to labor and utilities, they currently do not have the technological sophistication possessed and developed by China. Alternatively, while Japan and the USA are technologically advanced, without recurring incentives and tax breaks, cost of production would be much higher than that in China. Thus, until there is a worthy alternative, most companies will follow the China +1 strategy. However, with growing trade tensions between China and other nations, and ongoing efforts by other nations to encourage and support domestic production, China may risk losing its positioning as the ‘factory of the world’ in the long run.

by EOS Intelligence EOS Intelligence No Comments

Blockchain: a Frontline Warrior in Battling Coronavirus Pandemic

SARS-COV-2 has brought the world to a standstill. Technology and its creative uses have been playing a pivotal role in sustaining lives during the pandemic as well as combating the crisis. One such technology that has been in the forefront of the pandemic is blockchain. From mitigating supply chain issues with medicines and protection gear to facilitating transparency in donations to effectively tracking the spread of the virus and protecting patient privacy, blockchain technology is being applied across the spectrum to contain and manage the outbreak.

The current pandemic has brought to light many inefficiencies and limitations of the existing global healthcare systems, wherein governments across the globe are grappling to control the outbreak, challenged by the lack of a unified interconnected and trusted network to share data and track cases. Blockchain has several inherent properties, such as decentralized ledger, transparency, immutability, that make it suitable for handling and managing various aspects of containing the pandemic.

Outbreak tracking

Global health authorities and governments across the globe are having a hard time gathering authentic data regarding tests and patient numbers, hospital beds, recoveries, etc. Currently, most of the data circulating is disparate, and comes from multiple sources, such as hospitals, labs, public, and media, instead of one authorized source. This is extremely damaging since this results in the creation of a great amount of inaccurate and duplicate data, which if trusted, makes the process of tracking and containment both time consuming and ineffective. This is counter-productive to the management of a disease that is as fast spreading as COVID-19.

Blockchain technology can come to play in effectively tackling this issue. Owing to its distributed and immutable nature, blockchain can provide a feasible solution for tracking the outbreak. Blockchain-based apps facilitate organizations across the globe to form a single connected network where data can be shared in real time and securely. Moreover, since data stored in blockchain is immutable, it is protected against unauthorized changes and its distributed nature ensures protection against fraudulent data (since each entry requires consensus algorithms and smart contracts). Lastly, blockchain efficiently manages high volumes of data (as in the cases of the COVID pandemic) in a real time basis, which cannot be managed using human resources.

However, in addition to these factors, the aspect that stands out the most and makes blockchain technology ideal for monitoring and managing outbreak-related information is the level of privacy it offers. People do not wish for their information to be shared publicly or be used for other purposes. Thus it is a challenge to get patients to collaborate with governments and healthcare institutions to share information regarding their condition and wellness. For instance, the Israel government recently permitted healthcare institutions to track citizens’ mobile phones to control the spread of coronavirus. This has raised concerns from human rights organizations as citizens are not comfortable with sharing their personal information.

Since blockchain uses a distributed ledger, which ensures accountability and transparency with regards to access to its stored data, the information shared through blockchain cannot be extracted or misused. Moreover, information stored in a blockchain cannot be hacked. This encourages patients to share information regarding their condition, symptoms, location, and underlying health conditions without fear of the information being misused or shared with any third-party.

Furthermore, information shared by patients in a blockchain network may not only be used for tracking the outbreak but also facilitate health centers study the disease characteristics and patterns to develop treatment and solutions.

For instance, WHO has been using a blockchain-based data streaming platform, called MiPasa, which facilitates the sharing of information amongst need-to-know organizations such as state authorities and health officials. The platform is built on top of Hyperledger Fabric and partners with IBM for blockchain and cloud platforms. The application cross-references siloed location data with health information to track and prevent the spread of the outbreak, all while protecting patient privacy.

In another example, Atlanta-based developer of blockchain-enabled healthcare applications, Acoer, developed an application called HashLog, which allows real time logging and data visualization of the spread of the infection. HashLog provides real-time updates on the spread of the disease by tracking movement of infected people to identify potential outbreaks and prevent further spread. The application uses the Hedera Hashgraph distributed ledger technology and each entry is recorded through a verified hash reference on the ledger, ensuring that the data is correct.

Donations

In addition to tracking and preventing outbreaks, blockchain also plays an important role in securing donations. From hospitals and state authorities with insufficient funds for medical supplies to economically-weaker sections of the populations losing source of income due to lockdown, the current pandemic has displaced a huge number of people across the globe. Thus in such times, donations play a critical role in sustaining livelihoods and providing healthcare supplies to the affected people. However, given fraud associated with donations in recent times, lack of trust is a common factor affecting success of donations. Several individuals want to help and donate, however, are discouraged due to fear of their money being misused.

For instance in India, the government and police warned citizens against several fake relief schemes that have been floating in the name of COVID-19 relief, some even mirroring the Prime Ministers Relief Fund. These kind of activities deter willing people from donating.

Blockchain technology can be used to effectively combat this issue. Since all transactions in blockchain are secure, transparent, and traceable, donors can track their funds and see where they are utilized. This gives confidence to donors that their funds are being used for the exact purpose that they intended.

One such example is Hangzhou-based blockchain startup Hyperchain, which built a blockchain-based donation tracking platform for supporting government and hospitals (such as Tangshan People’s Hospital, Jiayu People’s Hospital and Xiantao No. 1 People’s Hospital) in the donation process. The platform has attracted more than US$2 million in donations.

 

Blockchain a Frontline Warrior in Battling Coronavirus Pandemic by EOS Intelligence

Supply chain tracking

Blockchain technology has been deemed extremely useful in managing and tracing the supply chain in several sectors as retail (for more insights on this read our article Blockchain Paving Its Way into Retail Industry). However, given the current pandemic, the technology can also utilize similar functionalities and play a significant role in tracking of medical supplies.

Given the pace of spread of COVID-19, authorities and healthcare organizations across the globe have faced a shortage of medical supplies, such as masks, sanitizers, PPE kits, ventilators, testing equipment, as well as some medicines. This drastic increase in demand has resulted in distribution of large number of counterfeit and faulty products. Blockchain technology can play a significant role to combat this. Given the data provenance in blockchain and its immutable nature, it is possible to identify and trace back every touchpoint of the medical supplies to ensure its authenticity.

In addition to filtering counterfeit products, blockchain also helps streamline the supply chain process to ensure hospitals and doctors secure timely supplies to treat patients. Blockchain can provide real-time updates regarding demand so that medical manufacturers can adjust production levels accordingly. In addition, it can help fast-track supply chain contracts through the use of smart contracts, and facilitate faster payments, thereby improving the overall efficiency.

In February 2020, China-based AliPay, along with the Zhejiang Provincial Health Commission and the Economy and Information Technology Department, launched a blockchain-based platform to facilitate the tracking of medical supplies required for fighting SARS-COV-2. The platform has improved trust within the medical supply chain since it records and tracks the entire provenance of preventive supplies including masks, gloves, and PPE kits.

Apart from medical supply chain, blockchain can also help limit supply chain disruptions faced by several other industries due to lockdown in several parts of the world. However, companies that are using blockchain for managing their supply chain have an advantage as they have better visibility into their complete supply chain and thereby can identify points of disruption in a timely manner.

Avoiding future pandemics

Blockchain is on the front line for fighting the current pandemic, but it also has the potential to prevent future disease outbreaks. Most of current healthcare surveillance systems across the globe are outdated and lack the required timeliness and efficiency in sharing information with local as well as international health enforcement organizations. Moreover, sometimes there is a question of deliberate delay in sharing of critical information.

To this effect, blockchain-based health surveillance systems can help mitigate future outbreaks. Since they operate on a decentralized ledger, the surveillance data is transparently available to health organizations across the globe in a real-time manner, without the fear of any political disruptions. Timely knowledge of a potential outbreak is the first and most critical step in preventing a similar situation in the future.

In addition to the above mentioned applications, blockchain companies along with institutions are developing creative solutions that help reduce challenges faced by people due to COVID in their day to day living. For instance, Toronto-based blockchain company, Emerge, launched a public safety app called Civitas, which assists the citizens and local authorities across Latin America. This app matches one’s official ID to confidential medical records stored in the blockchain to identify whether the person is allowed to leave the house or not. Thus the app allows police to verify if the person has a travel permission just on the basis of their government ID and without gaining access to the person’s medical records. The app also determines the safest time and day for going out for essentials for people who are experiencing COVID-like symptoms.

Moreover, as discussed in our previous article (Blockchain Scores Well in the Education Sector) blockchain also is extremely useful in the virtual education scenario, which is now the new way of schooling for large part of students across the globe.

EOS Perspective

Blockchain technology has several inherent properties that make it ideal for helping to manage and combat the current pandemic. Its decentralized, traceable, and immutable properties make is especially desirable for managing contact tracing and outbreak tracking, which are critical in handling a pandemic efficiently. Moreover, the benefits of blockchain are further amplified when used alongside other technologies, such as artificial intelligence, cloud computing, and big data.

However, despite its several uses, the issue of scalability plagues blockchain adaption at a larger scale. Blockchain is still a nascent technology and lacks high-level scalability. With COVID affecting most of the world, the current blockchain companies do not have that level of scalability to provide all-encompassing global level solutions.

Furthermore, blockchain technology does not operate alone and it needs to be configured with the operating legacy system at companies and other stakeholders. However, most legacy systems are relatively old and therefore do not support blockchain technology. Updating or reconfiguring a legacy system is a tedious process (both in terms of time and money) and companies may not want to tie up resources for that at the current time.

Given these drawbacks, blockchain may not be deployed at a global-scale level during this pandemic, however, its inherent benefits have made companies, authorities, and global health organizations ponder, explore, and evaluate its potential in managing such situations in the future. While the COVID-19 pandemic has caught the world largely unprepared, organizations and companies across the globe are gearing up to ensure this history is not repeated and blockchain technology has emerged as a critical part of the solution.

by EOS Intelligence EOS Intelligence No Comments

Is Sustainability Just Another Buzzword in Food Packaging Industry?

Sustainable food packaging has recently received an increased attention within the food & beverage sector. Most players try to make sure not to miss any chance of communicating their concern over plastic waste to the general public, showcasing their initiatives taken to curb the waste. Are such initiatives taken out of actual concern or are they just a move to position the brands right in the ‘environmentally-concerned’ market?

It is assumed that packaging is considered sustainable, if it meets three criteria of sustainability. First, it should be economically viable for the consumers as well as the manufacturers. Second, it should be socially acceptable in terms of ease of use, transporting, sorting, and storing. Most importantly, third, the packaging must be eco-friendly through the use of materials that are responsibly-sourced and reusable/recyclable, to reduce the environmental impact of the packaging.

Change fueled by multiple triggers                 

Food and beverage (F&B) and related packaging industry players have been under a growing pressure to be more transparent and to introduce changes to the way food products are packaged. Considering that a significant share of non-sustainable, non-biodegradable waste, especially plastic, comes from food industry, improving the packaging and transitioning to more eco-friendly solutions is becoming imperative, rather than optional, for increasing number of F&B companies.

At the same time, the pressure to reduce waste and protect the environment from non-biodegradable substances is creating new opportunities for the packaging materials producers and for F&B companies with regards to more relevant brand positioning in this highly competitive industry.

While a lot has been changing in the packaging sphere under the heat from environmentalists and legal requirements introduced by regulators, the role of an aware consumer exerting pressure through product scrutiny and shopping choices should not be underestimated in this process.

According to a report published in April 2019 by Globalwebindex, a market research company, there has been a rise in the number of consumers globally who are willing to pay more for eco-friendly/sustainable products (including their packaging), from 49% in 2011 to 57% in 2018. Consumer awareness is growing fast thanks to governments’ initiatives, educational media, and activists’ social media efforts, all of which have triggered an increased sense of responsibility amongst many consumers, who start to understand the importance of switching to eco-friendly and sustainable packaging.

Increasingly, consumer awareness is going beyond just passive understanding and translates into actions which have a real power to change F&B sector’s approach to food packaging. Consumers vote with their spending dollars and exert pressure by switching their loyalty to other brands, both of which approaches appear to be quite effective. According to the same survey by Globalwebindex, 61% of consumers are likely to switch from their currently-used brands to more environmentally-friendly ones if the latter score better on the environmental friendliness front. This shows that F&B companies really do need to re-think their product and packaging choices and start putting money and effort in sustainable solutions, if not from real concern over the environment, then for retaining consumer trust and maintaining brand values.

Big F&B brands appear to show initiative

The increased scrutiny over F&B companies’ packaging choices has already started bringing some results. Several major players are looking to invest in transforming their packaging materials to sustainable ones. Despite the challenges in bringing innovations into packaging materials and designs, and altering their supply chain, several F&B players are claiming to strive for their sustainability goals. Some claims may surely be genuine but some could possibly be a strategy to get the ‘sustainable company’ tag to stand out from the competition in the F&B industry.

Understandably, players are very vocal about their initiatives targeted at improving their eco-friendly standing to appeal to the environmentally-concerned consumers. F&B brands such as Coca-Cola, PepsiCo, Unilever, Nestle, to name a few, have already announced time-bound plans to revolutionize their packaging models.

For example, in January 2018, the beverage giant Coca-Cola announced a goal to collect and recycle the equivalent of every bottle it sells globally by 2030. The company with its bottling partners started an initiative with a plan called “World Without Waste” that is focused on entire packaging cycle from designing and manufacturing of bottles to their recycling. For the execution of this plan, the company plans to educate the public on what, how, and where to recycle, teaming up with local communities, NGOs, industry peers, and consumers. Furthermore, under the plan of “World Without Waste”, the company aspires to create packaging from at least 50% recycled materials by 2030 and continue pursuing the goal to make all consumer packaging 100% recyclable by 2025.

Is Sustainability Just Another Buzzword in Food Packaging Industry? by EOS Intelligence

In addition to this, in October 2019, Coca-Cola European Partners (CCEP), the largest independent Coca-Cola bottler, announced it would switch the carriers on its multipacks from shrink wrap to paperboard to reduce packaging waste. The company claims that with this switch it will remove about 4,000 metric tons of single-use plastic per year from its current supply chain. The paperboard packaging is planned to be certified from either the Forest Stewardship Council (FSC) or the Program for the Endorsement of Forest Certification (PEFC). Similarly, in January 2019, Coca-Cola packaging partner, Coca-Cola Amatil Australia, announced to cease the distribution of single-use plastic straws and stirrers, and distribute biodegradable Forest Stewardship Council accredited recyclable paper straws.

According to a report by Packaging Gateway, Coca-Cola claims to have made 88% of the consumer packaging recyclable, while its packaging used 30% of recycled material by the end of 2018. Also, about 58% of the equivalent of bottles and cans introduced by the company into the developed markets were refilled, collected, or recycled during 2018. Overall, the company’s recover and recycle rate was said to be 56% in 2018 as compared to 59% during 2017 or 61% in 2014. This proves that with growing sales, Coca-Cola’s efforts might not make as much impact as the company would want the public to think.

Nevertheless, the company is undertaking further initiatives to improve its environmental score. It committed to invest US$15 million in Circulate Capital, an investment management firm dedicated to incubating and financing companies and infrastructure that work upon curbing the plastic waste thrown into the oceans. Further plans of the company include increasing the use of recycled plastic in Australia by 2020.

In another example, PepsiCo also talks about becoming an environment-friendly company, announcing to use 25% of recycled content in its plastic packaging by 2025. In order to meet its target, in September 2018, the company announced its participation in the World Economic Forum’s Global Plastic Action Partnership (GPAP). The partnership focuses on stakeholders located in coastal economies, such as those in Southeast Asia, and its purpose is to help businesses, communities, and local governments redesign waste management to create circular models that include collecting waste and recycling or composting it to reduce waste streams to the oceans or landfills.

PepsiCo also announced other targets for improved sustainability to be achieved by 2025. These include to re-design all of its packaging to be recyclable, compostable, or biodegradable, to reduce virgin plastic content by 35% across its beverage portfolio, and to amp up investment to increase recycling rates in key markets.

Apart from individual targets, another initiative was also launched in October 2019 jointly by a few beverage players. As reported by a publishing firm, William Reed, three beverage companies, Coca-Cola, PepsiCo, and Keurig Dr Pepper, announced their partnership with World Wildlife Fund, The Recycling Partnership, and Closed Loop Partners under the “Every Bottle Back” initiative. This initiative, starting in late 2020, will include investment of US$100 million and will focus on sorting, processing, and collecting discarded plastic bottles in four US regions. The initiative also targets to educate consumers that PET bottles are 100% recyclable, easily remade into new plastic, bottles, shirts, shoes, coats, park benches, and playground equipment, by introducing pack label messaging.

Smaller players are emerging with packaging innovations

The pressure to embrace sustainable packaging is even greater for smaller and mid-size F&B companies, if they want to stay relevant to the customers, grasp their attention, and grow own market share. Smaller players in the industry seem to understand this and have proven to be more agile in introducing new products that focus on organic ingredients with sustainable packaging, while challenging big brands’ prices.

For example, in March 2016, Alter Eco Foods, a San Francisco-based chocolate-centric, healthy indulgence, and sustainability-oriented food brand, launched the first stand-up pouch made from renewable plant-based materials, designed for storing quinoa grain. This innovative pouch named “Gone 4 Good”, is not meant to be recycled but to be thrown in a composting bin where it will disintegrate within three to six months. Made from eucalyptus and breech trees for the exterior and compostable resin called “Matter-Bi” for the interior, the pouch has several green certifications. Apart from this, in early 2019, the company also transitioned its chocolate truffles packaging from non-recyclable plastic pouch to a recyclable paper box and claims to be looking for solutions to replace its current plastic Coconut Cluster pouch, since it is yet not recyclable or compostable. The company is determined to make all its products packed in 100% recyclable or compostable packaging by December 2020.

Another player, B.O.S.S. Food, a Texas-based nutrition bar company, started selling its premium nutrition bars in compostable wrappers made by TIPA (an Israel-based compostable packaging company) in 2017, focusing on ensuring the products’ packaging is environmentally safe. TIPA’s packaging is a bio-based blend with all the properties of normal plastic but is certified for both home and industrial composting through OK Compost mark by the TUV institute. The packaging also complies with food contact regulations in Europe and the USA.

Similarly, a UK-based beverage company named Earlybirds launched a 100% plant-based packaging for its breakfast drinks – bottles and lids made from sustainable sugarcane, over the span of two months of September and October 2019. The launch made the packaging 100% compostable as per EU biodegradability standards. The company’s advertisements claim that, under the right conditions, the bottle will breakdown in twelve weeks and it can be thrown in food waste bin and then composted at an industrial composter, reducing it back to soil. The company is the first in the UK to launch sustainable packaging for beverages.

These are just a few of several smaller F&B companies, which are focusing on bringing new packaging solutions to improve their rating as environment-friendly companies in the eyes of consumers. The initiatives are worth the effort, even though players face quite a few challenges in embracing sustainable packaging over traditional packaging.

Such challenges include higher costs, choosing the right material for packaging that must comply with the standards of environmental safety, as well sustaining the quality of the food product. It is estimated that the companies are required to spend nearly 25% more on the sustainable packaging than on the traditional packaging. This higher cost is attributed to major shifts in supply chain, including (but not limited to) procuring the raw material for packaging to collecting the used packaging for recycling. Another major factor contributing to higher costs of sustainable packaging is the R&D expenses that must be borne by the companies. The solutions still require a lot of research, as there are still very few commonly-used technologies and packaging products, thus a lot of players need to invent them. The companies need to invest considerable sums in developing an environment-friendly packaging material that is viable for their food product to sustain throughout the supply chain as well as shelf life, and (equally importantly) has the aesthetic appeal to grab the consumer’s attention.

But despite being smaller in size and having to deal with challenges, companies such as Alter Eco, B.O.S.S. Food, or Earlybirds have been investing extensively in R&D, a fact that resulted in several of them coming out with better and innovative packaging solutions. In fact, at times, smaller scale of operations works to these players’ advantage, as they do not have the constraint of having to convert the existing large-scale traditional packaging lines to ones suited to deliver new format or feature of packaging. Therefore, many efforts undertaken by smaller players seem to be converted into tangible solutions and launched more quickly and easily, also giving the companies a great marketing advantage over large F&B brands.

EOS Perspective

With the rise in awareness about plastic waste and environment safety among consumers, along with regulations formulated by governments across many countries to curb plastic waste, it has become paramount for F&B companies to enter the path of sustainability. At the same time, sustainability is becoming an important element of many companies’ marketing strategy to get ahead of the competition (or, increasingly, not to stay behind other players). The latter reason alone makes it no longer a matter of choice for F&B companies whether to keep assuring the public about efforts undertaken towards improving own sustainability rating across the supply chain.

Certainly, it is doubtful whether all these F&B companies are capable of actually achieving the claimed sustainability. On the one hand, there is a doubt if the scale of their efforts is relevant enough to bring about an actual change and not remain just a PR tool. On the other hand, the doubts seem to be really justified considering the challenges associated with achieving true sustainability goals.

The challenges range across many aspects. These include the complexity of the required changes in the supply chain, which involve both radical and incremental change, from manufacturers to users, owing to alterations in packaging materials and designs.

Another major challenge is the higher cost associated with changing the packaging materials from plastics to renewable or compostable materials. This starts with the development of the right product’s packaging material to ensure stable and long shelf life, and safe transportation with minimal waste, all of which is particularly challenging when dealing with food products. The costs and complexity of the task is further increased by the responsibility of creating an infrastructure for recycling of the packaging materials and taking the onus of collecting and recycling the packaging of own products, if not directly then through well-planned network of third-party entities.

Considering the complexity of these challenges and the high cost of going up the sustainability ladder, many F&B companies are likely to not be able (or to not want to) work towards full sustainability across their supply chain. In the midst of the growing pressure to meet the sustainability criterion, it is possible that some of the players might quietly opt for less sustainable solutions or stick to only those changes that are most visible to the consumer’s eye.

by EOS Intelligence EOS Intelligence No Comments

Blockchain Paving Its Way into Retail Industry

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Blockchain technology, which initially became popular with cryptocurrency (especially bitcoin), is now making its way into many other industries, including retail. Though still in its infancy, blockchain holds tremendous potential for retailers and has applications across supply chain data management, customer retention through loyalty programs, digital advertising, among many others. While several industry experts have proclaimed blockchain to be the next revolutionary technology in the retail sector, it is yet to be seen if these applications gain commercial acceptability (or remain niche solutions for niche products).

While the financial services industry has been one of the early adopters of blockchain technology, other sectors are also increasingly realizing the potential that blockchain can unlock for their businesses.

One such sector is retail, which is increasingly going digital – shedding its paper-based and centralized way of doing business. With an increasingly demanding customer and growing need for transparency, blockchain technology is expected to play a big role in the retail sector.

In addition to its inherent application as a payment-medium supporter (i.e. increasing acceptance of cryptocurrencies as a payment mode by retailers), blockchain has several other applications in the retail space – encompassing supply chain management, customer loyalty programs, and digital advertising.

Blockchain in supply chain

Blockchain helps improve transparency

Blockchain technology makes it possible to record every touchpoint of the product’s life as it moves through the supply chain – from manufacturer to shipper to supplier to seller – adding blocks of verifiable record to the product’s heritage.

For instance, if a supermarket is selling a box of cookies, blockchain data would record exactly when, where, and by whom the cookies were made, as well as what ingredients were used during manufacturing. By placing the cookies supply chain on the blockchain, the process becomes more transparent through inerasable tracking of how cookies have been handled at each node all the way up to the store shelves. This makes any affected ingredient traceable faster. For instance, if milk or eggs used in the cookies were affected due to poor storage, the affected ingredient (or its batch) could be traced back to the storage location and could be withdrawn from the warehouse without the tedious and error-prone process of checking each supply chain node. This ensures greater food safety and helps hold suppliers accountable throughout the chain. This is also useful in case of tracing of organic products where it is particularly important to trace whether each ingredient used to make a product is organic and matches the claims made by the producer.

There are several players in the industry who are already taking advantage of the benefits brought to their operations by blockchain. One of the largest retail giants, Walmart, has partnered with IBM and has been working together since October 2016 to develop a food safety blockchain technology called, IBMs Food Trust, to facilitate the digitization of the food supply chain process. The technology, which was previously in its testing phase, was launched for commercial use in October 2018. With the help of this technology, the source of the product can be tracked in 2.2 seconds, which previously could take up to seven days (with the use of paper-based ledgers).

In September 2018, Walmart announced a Food Trust Initiative, under which it has requested all its greens suppliers to upload data about their produce on the blockchain and ensure end-to-end traceability by September 2019. It is likely that the company extends the use of this technology to other fresh foods and vegetable suppliers in future.

Post the commercial launch of the IBM Food Trust platform in October 2018, France-based retail giant, Carrefour, also announced that it will be using IBM’s blockchain technology to track animal and vegetable product lines. Furthermore, it expects to expand this technology to other fresh products by 2022.

Blockchain Paving Its Way into the Retail Industry

Blockchain effectively combats food-related fraud

Another issue that blockchain helps combat in the retail space is food-related fraud, i.e. the misrepresentation of product contents by substituting the ingredients with cheaper alternatives. It is estimated that the global food industry suffers losses of about US$40 billion annually due to food fraud. An example of such a fraud was the Tesco horsemeat scandal in 2013, where some of Tesco’s packaged beef meals were found to include 60% horsemeat (undeclared on the label).

To fight such frauds, one of the world’s largest e-commerce players, Alibaba, has partnered with four Australian and New-Zealand-based companies, among whom are Blackmores (an Australian health supplement company) and Fonterra (a multinational dairy co-operative) to create a food tracing system built on blockchain technology. The project entered into its pilot phase in 2018. Through this system, Tmall Global’s (Alibaba’s international online marketplace) customers in China will be able to trace the goods that they order online (from partnering companies) across each node of the supply chain before the goods are finally delivered. The partnership is not only expected to help customers track the supply chain of food ordered online but also to prevent food fraud thanks to greater visibility and traceability of such fraudulent actions potentially attempted by producers.

Blockchain helps bring down the counterfeit luxury goods market

As a digital ledger where multiple stakeholders share and authenticate the same information, blockchain also makes counterfeiting more difficult. Counterfeiting is a big issue in the luxury and premium goods market owing to high prices and limited availability. The scale of counterfeiting in the luxury retail segment is overwhelming and it is sometimes nearly impossible to distinguish legitimate goods from the counterfeit ones. Forbes estimated the counterfeit luxury goods market in 2018 to be worth approximately US$1.2 trillion.

However, the use of blockchain technology can help luxury brands fight against the menace of counterfeiting. By using blockchain, companies can track every link in their supply chain and customers can access information to ensure the origins of the product and its authenticity.

Greats, a US-based premium sneaker brand, has been using blockchain and embedding smart tags in its footwear since 2016. Customers can use their smartphones to scan the tags to verify the authenticity of the sneakers.

The use of blockchain technology can help luxury brands (and other retail companies) fight against the menace of counterfeiting. By using blockchain, companies can track every link in their supply chain and customers can access this information through smartphones to ensure the origins of the product and its authenticity.

In 2018, a Paris-based blockchain company, Arianee, announced that it will be building a registry to combat counterfeiting of luxury brands, where every product will be classified with a unique token that differentiates it from the rest of the products.

Another example of this is De Beers, one of the world’s largest diamond producers, which along with five other diamond players (Diacore, Diarough, KGK Group, Rosy Blue NV, and Venus Jewel) has developed a blockchain platform, called Tracr in 2017. Through this platform, a diamond can be tracked from miner to end customer, i.e. throughout its complete value chain, using ethereum blockchain technology. In 2018, De Beers announced that it has successfully tracked 100 high-value diamonds along the value chain during the pilot run of its blockchain platform. The platform is expected to bring transparency in the diamond trade through physical identification of diamonds. A diamond could be tracked through its unique number from mining to cutting to polishing and to retail, which will ensure its purity.

Owing to its ability to empower companies to track, trace, and authenticate their products from the point of origin to the retail shelf, blockchain is likely to become the standard in supply chain tracking for the retail sector. However, this application is currently in its nascent stage of development and is being experimented on by only few large and niche players before it reaches industry-wide adoption.

Blockchain in customer loyalty programs

Customer loyalty points is another area where blockchain could be considered very useful. Loyalty programs generally work by awarding points to customer account for each purchase, which later can be redeemed for discounts on future purchases. While it follows the principle that retaining existing customers is less expensive than attracting new customers, loyalty programs are not always successful.

Most loyalty programs are centralized, where the customer could only redeem its value with the same retailer (or in some cases a small group of retailers), thereby limiting their use and appeal. Moreover, in many cases, loyalty programs also have stipulations that further restrict the use of the points and reduce the program’s perceived value, which in turn results in lower loyalty of the customer. According to Colloquy Loyalty Census 2017, there were approximately 3,000 loyalty programs in North America, where 6.7 trillion points were issued every year and about 21 trillion points were dormant or not used. This suggests that more often than not, customers find loyalty programs more exhausting than benefitting, defeating the entire purpose of having loyalty programs.

Blockchain technology allows customers the flexibility to use their loyalty points when and how they please. Blockchain-based loyalty programs award customers with tokens or cryptocurrencies instead of points, which could be redeemed by customers during future retail purchases and could even be redeemed for fiat currency (as the value of tokens grow overtime and do not expire).

This can be seen in the case of Rakutan’s loyalty program. In 2018, Rakutan, one of Japan’s largest retailers, announced an alt-coin, called Rakutan Coin, with which customers could redeem reward points for gifts at all Rakutan Group companies and also for other cryptocurrencies. The company has moved US$9 billion worth of existing Super Points (customer loyalty program points) into the blockchain to provide a boost to the Rakutan Coin.

Blockchain-based loyalty programs award customers with tokens or cryptocurrencies instead of points, which could be redeemed by customers during future retail purchases and could even be redeemed for fiat currency.

In another example, in 2017, University of New South Wales in Australia partnered with LoyaltyX, an experimental loyalty agency for a blockchain loyalty research project, wherein students and staff earned US$5 of ether (cryptocurrency ethereum) for every ten transactions made at any of the eleven campus retailers including Boost Juice (Australian fruit juice and smoothie retail outlet) and IGA (Australian chain of supermarkets). It was found that 86% of the participants were more attracted to earn cryptocurrencies where they had the option to redeem them for fiat currency.

Thus, blockchain-powered programs seem to encourage customers to engage in the loyalty programs as they not only curb the problem of set expiration of traditional loyalty points but also give the power to the customer to use the tokens as and when they require with any retailer. This is likely to help retailers renew customer interest in their loyalty programs, which in turn is likely to improve brand loyalty.

In addition to adoption in the retail space, players from other related industries are also experimenting with blockchain-based loyalty programs. In 2018, American Express (an American financial services company) partnered with Boxed (an American online wholesale retailer) to make its membership rewards program more versatile by integrating blockchain. With blockchain, merchants will be able to create custom membership rewards program for American Express card holders. The power to structure the offers will be with the merchants, whereas American Express will have the right to regulate the products or brands being promoted.

Also in the same year, Singapore Airlines partnered with KPMG and Microsoft and created a blockchain-based digital wallet KrisPay, where customers can turn travel miles into units of payment that can be used with partner merchants such as eateries, beauty parlors, gas stations, and some retailers, including LEGO store outlets within Singapore. This shows that some large brands are experimenting with this technology for their loyalty programs.

While integration of blockchain seems to be the ideal solution to invigorate the fading customer loyalty programs, it is still in its embryonic stage. Such applications need mass adaption to be successful and this will require significant time and investments.

Moreover, the adoption and success of blockchain-based loyalty programs to an extent also depend on the overall sentiment towards cryptocurrencies – their value and ease of transactions.

Lastly, scalability is also an extremely critical point for the smooth running of such loyalty programs. With numerous retail transactions happening every second, it is yet to be seen if blockchain can cater to these huge numbers without a slag time.

Blockchain in digital advertising

Another space where blockchain technology is likely to have significant potential is digital advertising, which is used by numerous retailers as a medium to reach their prospective customers. However, the process of buying online advertising is susceptible to fraud, especially with the increasing use of automated real-time bidding through ad-exchanges (programmatic advertising).

Under real-time programmatic advertising, publishers (themselves or through ad vendors) showcase their inventory along with details about the kind of visitors that their site targets. The advertisers then bid for these ad impressions and the highest bidder gets to display their ad on the site.

The entire process and ad marketplace lacks a sufficient level of transparency. Sometimes vendors misrepresent remnant inventory for a publisher as premium inventory, thereby charging higher fees from advertisers. In other cases, fraudulent sellers enter the exchange, claiming to represent publishers and having access to their inventory, in turn selling fake inventory to advertisers.

Blockchain has the potential to make the online ad marketplace more robust and legitimate by providing transparency, which is currently missing. Since blockchain is a peer-to-peer online ledger where all transactions between the participating parties are recorded (and cannot be deleted or changed), the advertisers can see for themselves where the inventory that they are bidding for has originated and who has access/authority to sell it.

Some examples of implementations are already found in the market. In June 2017, MetaX, a blockchain technology company, along with DMA (The Data and Marketing Association) launched adChain, an open protocol built on the public ethereum. adChain is an open access ledger that tracks and reports the origin, sale, resale, and publishing of an online ad.


Explore our other Perspectives on blockchain


In December 2017, MetaX also launched a blockchain-based solution ‘Ads.txt Plus’ to improve transparency in the digital advertising space. Ads.txt Plus is based on a technology by IAB Tech Lab, called Ads.txt, which helps prevent fraud in the industry by allowing publishers to broadcast a list of authorized sellers of their ad inventory. By bringing this technology to ethereum blockchain, MetaX aims to further improve efficiency and transparency for its users.

If blockchain is adopted successfully in the digital advertising space, the advertisers can see exactly where their ad dollars are being spent, which players made commission, and how much of the total amount paid by them for the ad reached the site publisher.

Further, with the help of blockchain, buyers and sellers (advertisers and publishers) can enter into smart contracts for the sale and purchase of digital ads without the need for intermediaries, eliminating them from the ad bidding process.

Alternatively, buyers and sellers can choose to add other verifying parties/service providers to the smart contracts, such as measurement provider, ratings provider, payment provider, and arbitrator. In 2017, Kochava Labs (the R&D subsidiary of Kochava Inc.) launched XCHNG, an open and unified blockchain-based framework for the digital advertising ecosystem. Through the use of smart contacts, XCHNG aims at reducing the number of middlemen in the digital advertising ecosystem by facilitating transactions between the buyer and the seller and measurement providers.

While blockchain-based solutions fit perfectly in the digital advertising space on paper, the practicality and adaptability are yet to be seen.

One of the key issues challenging the adoption of blockchain in the digital ad space is scalability. The process of chaining and verifying on a blockchain takes much longer, especially, when compared with the current speed of real-time bidding transactions. It is yet to be seen if blockchain technology can evolve to offer faster processing speed, which is critical for industry-wide adoption.

While blockchain-based solutions fit perfectly in the digital advertising space on paper, the practicality and adaptability are yet to be seen. One of the key issues challenging the adoption of blockchain in the digital ad space is scalability.

While few blockchain solutions, such as XCHNG (which claims it can handle 180,000 transactions per second per smart contract composed of multiple insertion orders), refute this challenge, the other challenge in this area is that of intent. Since blockchain is expected to make transactions more transparent and also reduce the number of intermediaries, industry players may not fully embrace the technology and despite its inherent benefits, blockchain may take time to gain ground in the digital advertising industry.

EOS Perspective

In an era where businesses are becoming more customer centric, blockchain helps bring the customer and retailer together on the same platform and promises a future with more transparency. It is clear that blockchain technology has the ability to transform the retail sector just as it is likely to transform several other industries (such as healthcare, car rental and leasing, or aviation).

However, despite holding immense potential and promise, most applications in this space are still to move beyond just being proof-of-concepts. Several issues, such as high investment requirements, scalability, and to an extent, willingness to change, remain to be addressed before there is an industry-wide acceptance for these solutions.

That being said, executives are definitely keeping an eye open for the latest developments in this space and several of them are open to testing and investing in blockchain-based solutions, hoping for them to be the key differentiator/value-proposition that attract the customers towards them. While most investments currently are being seen in the supply chain space (since its benefits seem most achievable and tangible), solutions in the space of loyalty programs and digital advertising may take a little more time to gain traction.

It is safe to say that retailers cannot afford to ignore the benefits of blockchain technology anymore. Many retailers lack specific understanding of this concept and its potential across different areas of their operations. This could cost them dearly in terms of customers. Technological innovations are happening at light-speed in today’s day and age and while blockchain technology currently may lack commercial acceptability and scalability, it is expected to seep into the operations of the real sector in a significant way in the coming future.

by EOS Intelligence EOS Intelligence No Comments

Online Grocery Retailing In India: Will Clicks Replace Bricks?

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India is the sixth largest grocery market worldwide buzzing with plethora of opportunities for the development of online grocery retailing. Gone are the days when Indian consumers were reluctant to shop online – studies have revealed that Indian consumers are overcoming biases against purchasing products without the touch and feel factor and are widely accepting online shopping. However, shopping for grocery online is at a very nascent stage and is still overcoming operational and economical hurdles. Over the years, multiple online grocery sites have shutdown, though there are a few survivors and presently the market is bustling with new entrants including e-commerce giants such as Amazon, Snapdeal, Flipkart, etc. Players are constantly implementing innovative marketing strategies, expanding operations, and experimenting with business models to find the best fit for e-grocery market.

Online grocery retailing is a tough segment to crack largely due to the perishable nature of products it offers, coupled with several operational impediments such as logistics, supply chain management, and low margins. Also, players face major challenges in training and retaining employees as well as attracting investment to grow operations.

1-Challenges

Despite the challenges, online grocery retail is witnessing rapid growth driven by increasing internet connectivity, use of smartphones, and changing lifestyles with increasing number of working women demanding convenience. Consumers pressed for time are continuously looking for less cumbersome options in their fast-paced lives and online grocery shopping is increasingly the best solution for them.

Out of the 40 online sites that initially ventured into the grocery retailing market, only a few have survived and BigBasket has emerged as the most successful e-retailer. Other survivors include ZopNow and Localbanya, while there are several new entrants such as Grofers, Jugnoo, etc. Traditional brick and mortar retailers have also realized potential of the market and have slowly started selling groceries digitally – for example, Reliance launched ‘fresh direct’ while Tata sells through ‘My247market’.

2-BigBasket

Successful e-grocers such as BigBasket, ZopNow, Nature’s Basket, and Reliance Fresh Direct, among others started formulating strategies to succeed in the e-grocery market. For instance, BigBasket started selling private label brands to improve margins while ZopNow offers cashbacks, discount coupons, and grocery deals to attract customers. Other strategies include implementing quality assurance programs and offering niche products, among others.

3-Success4-Success

EOS Perspective

E-grocers face various obstacles, hence a robust strategy is the need of the hour to survive and succeed in the market. It is imperative for any player to first understand the local nuances of the market – this includes establishing local relationships, developing local logistics, and building business according to unique scenarios in different cities. India is an extremely diverse country and a complex market to survive, hence effectiveness and efficiency of players to adapt to the market defines how any company will succeed in the industry. Factors such as target segment, operating costs, competitive landscape, and consumer preferences vary greatly across India, therefore, aligning business with domestic market and following ‘localization’ of operations is the key to success.

For long-term sustainability in the market, it is essential for players to differentiate through innovation and to improve business scalability. Innovation can be achieved in the form of targeting specific customer segment, selling niche products, or offering tailored services. Attracting investment can help players to expand and scale up their businesses.

Further, it is crucial for e-retailers to prioritize customer experience — across technology, delivery, and service platforms — as convenience is the primary factor that influences people to buy digitally.

Nevertheless, the question still remains if clicks can replace bricks. Online grocery market has potential and is expected to grow but it is unlikely that it will dominate or replace the brick and mortar stores in the near future. Online retailing definitely have the potential to grab a substantial portion of grocery sales in a long-term horizon, however, physical stores will long continue to have an edge, particularly in case of FMCG goods.

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CPG Companies – Facing the Load

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For companies operating in the consumer packaged goods (CPG) industry, 2014 marked the start of a difficult time, especially with growing supply chain challenges that have been augmented by greater uncertainty around the state of OTR transportation. Due to this, the industry has witnessed several hard-earned supply chain gains being washed away by external factors. Moreover, rising expectations and demand from consumers are translating into SKU proliferation as well as growing number of retail channels. This has further lead to operational complexity. While these issues are real and should be dealt with now, only very few companies have managed to overcome these supply chain pressures and emerge with solutions that balance supply chain costs as well as service levels. Some of the measures adopted by companies managing to successfully handle these supply chain issues include consolidating shipments and shifting towards drop trailers. Moreover, companies are also making more strategic shifts, such as adopting intermodal transportation at a greater rate and cutting down on distribution centers (to ship directly from plants) to improve supply chain efficiencies.

CPG companies are witnessing intense pressure throughout their supply chain, from raw-material supply to shipping finished products to distribution centers, wholesalers, as well as retailers. While some of these pressures accrue from the customer end, others arise from intensified inorganic growth in the industry, as well as the ongoing transportation shortage (especially in case of ‘over the road’ (OTR) transportation). This has further resulted in higher freight costs for shipments and is also forcing companies to maintain higher inventory levels (especially to outweigh the transportation crunch).

1-CPG Industry – Supply Chain Challenges

2-Challenges

3-Challenges

4-Overcoming Supply Chain Challenges

5-Overcoming Supply Chain Challenges

Case Studies

EOS Perspective

As the CPG supply chains have been shedding many of their gains owing to ongoing complexities, companies must come up with long-term strategic solutions to handle supply chain pressures. While short-term solutions may help companies overcome cost pressures temporarily, they may not provide companies with a holistic solution that helps balance supply chain costs and service levels. Therefore, companies may need to commit to long-term strategic solutions such as collaborative supply-chain approach and network redesign to unlock supply chain efficiencies.

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Mexico: The Next Manufacturing Powerhouse?

As China’s cost advantages continue to erode with its increasing wages and fuel costs, the trend of nearshoring surges in popularity. North American manufacturers have started to include Mexico in their supply chains to achieve operational efficiencies such as speed to market, lower inventory costs, and fewer supply disruptions. As a result, Mexico’s manufacturing industry has gained tremendous momentum in recent times and industry experts often cite Mexico as ‘China of the West’.

The Changing Global Manufacturing Landscape

“There is always a better strategy than the one you have; you just haven’t thought of it yet” – this quote from Sir Brian Pitman, former CEO of Lloyds TSB, captures the dire need for companies seeking to gain competitive edge. In the current business environment with shrinking profits and increased competition, companies are under tremendous pressure to gain operational efficiencies.

More than a decade ago, when in 2001 China joined the World Trade Organization, it changed the dynamics of the global manufacturing industry. It became the safe haven for manufacturers across many industries and geographies due to significantly lower wages it offered as well as the abundant workforce. However, more recently, with sharp wage and energy cost increases, declining productivity, as well as unfavorable currency swings in China, the global manufacturing industry is witnessing another paradigm shift, as outsourcing production near home has gained popularity amongst North American companies. The economic growth, skilled labor force, proximity to the US market has allured firms to open up their manufacturing operations in Latin America region. Companies are investing billions of dollars into new production capacities in Latin America to serve their North American markets. In 2011, Gartner predicted that by 2014, 20% of Asia-sourced finished goods and assemblies consumed in the USA would shift to the Americas. Although, the entire Latin American region has witnessed an influx of investments, Mexico seems to have outperformed its peers.

Why Mexico? Why Now?

Mexico received a record US$35.2 billion in foreign direct investment (FDI) in 2013 from various countries, of which 74% was directed towards the manufacturing sector. According to a 2014 AlixPartners study, Mexico continues to be the top-choice for North American senior executives from manufacturing-oriented companies to outsource. So what has suddenly attracted manufacturers towards Mexico?

On the one hand, labor costs have seen a sharp rise in China over the past 7 years. Wage inflation has been running at about 15-20% per year and this trend is expected to continue in the coming years. The tax incentives offered by the Chinese government for foreign companies are diminishing, while local energy costs and costs of shipping goods back to the USA continue to increase. As per AlixPartners’ 2013 estimates, by 2015, manufacturing in China is expected to cost the same as manufacturing in the USA. Additionally, going forward, China is set to be more focused on catering to the rising domestic demand, as its domestic businesses grow and consumers are strengthening their purchasing power. These factors have made North American companies to re-think their outsourcing strategies, previously heavily linked to China-based manufacturing. Mexico seems to have seized this opportunity and started to reap the rewards by establishing itself as a lucrative manufacturing hub.

On the other hand, a dramatic improvement in cost competitiveness is driving Mexico’s manufacturing industry growth. Mexico government’s economic reforms, sound policy framework, and investments in infrastructure have boosted investor confidence and attracted several corporations to open their manufacturing operations in Mexico. According to BCG’s Global Manufacturing Cost-Competitiveness Index of 2014, Mexico has positioned itself as a rising star of global manufacturing. Besides having a growing aerospace industry, the country now has positioned itself as a major exporter of motor vehicles, electronic goods, medical devices, power systems, and a variety of consumer products.

Including North America Free Trade Agreement (NAFTA), Mexico has more free-trade agreements than any other country in Latin America. For manufacturers, this results in ease of doing business as well as a range of tax and financial benefits. Additionally, lower wages and energy costs offered by Mexico, strengthens its prospects as an outsourcing destination for North American manufacturers. Mexico is US’ third largest trade partner and has seen its exports to the USA increasing from US$51.6 billion in 1994 to US$280.5 billion in 2013, an increase of a whopping 444%.

US Imports from Mexico

 

The mass consumerization of IT, increased competition, and changes in consumer behavior are forcing companies to develop and deliver products at a faster pace than ever before. Manufacturers need to streamline their supply-chain operations in order to be more agile and customer-centric. Mexico’s proximity to the US market makes it compelling for North American companies to nearshore their manufacturing as this can drive transport costs down, increase their speed to market, and reduce inventory cost. Besides, it helps them to avoid supply-chain disruptions and serve the markets better by reducing shipping lead times, ensuring on-time deliveries to customers, and responding faster to customer issues.

In the past few years, North American aerospace companies such as Bombardier, Cessna Aircraft, Honeywell, General Electric, Hawker Beechcraft, and Gulfstream Aerospace have all developed major operations in Mexico. In the electronics industry, 2014 figures from BCG show that Mexican exports of electronics have more than tripled to US$78 billion from 2006 to 2013. This has also attracted the eyes of Asian electronic giants such as Sharp, Sony, Samsung, and Foxconn who invested heavily in Mexico as a part of their outsourcing strategy to effectively serve their North American markets. In 2013, they account for nearly one-third of investment in Mexican electronics manufacturing.

In the automobile sector, Mexico today is the world’s fourth largest exporter of light vehicles. On top of Ford, General Motors, and Chrysler’s significant investments towards manufacturing facilities in Mexico, the country is now gaining traction from the likes of global players such as Nissan, Honda, Toyota, Mazda, BMW, and Volkswagen. By investing in Mexico, all companies have committed to establish or strengthen their manufacturing capabilities there. According to IHS’s 2012 estimates, by 2020, Mexico will have the capacity to build 25% of the vehicles remaining on roads in North America.

Why manufacturing companies are running to Mexico with their manufacturing needs makes perfect sense due to its cheap and well-educated labor force and the proximity that can provide companies a strong supply base to cater the North American markets. Combining these factors with the rising middle-class population and increasing consumer spending across several South American nations, offers manufacturers a strong value proposition not only to use Mexico-based manufacturing to support their established North American markets, but also to penetrate and grow its customer base in emerging South American markets.

Challenging Times Ahead

Despite Mexico’s emergence as a leading destination for manufacturing nearshoring, there are certain pain-points that need to be addressed. Mexican government lowered its growth projections for 2014 after a disappointing economic performance during the first quarter of the current year. As reported by Bloomberg in May 2014, the economy is struggling to re-bound from 1.1% growth last year and many analysts predict the growth to be extremely modest in the short term.

Security concerns top the list of worries due to the nation’s history of drug-related crime and attempts to slip contraband into trucks moving north across the Mexico border. It will be interesting to see how the government plans to keep this under control, and whether these attempts will result in investors’ increased confidence in this market.

Further, despite recent reforms and investments made in infrastructure, there are large gaps that need to be filled. The country has areas with unstable supplies of water, electricity, and gas. In order to compete with the likes of China, and to further encourage the influx of foreign investments, Mexico’s government will have to make continued investments in infrastructure in the foreseeable future.

Additionally, over longer term, as Mexico continues to attract manufacturers from across the globe, leading to growth in manufacturing employment and increase of wages, the country might face a similar challenge to that of China, where labor rates continuously increase over years and cease to be as attractive as they used to be. This can hamper the nation’s competitiveness as a lucrative outsourcing destination. It is now the task for policy makers to develop policies that can enable Mexico to be more than just a source of cheap labor. To maintain good availability of skilled labor both in terms of quality and quantity that can meet the global manufacturing demands is a rather complex challenge.

 

For manufacturers operating in today’s cost-conscious environment, Mexico is becoming their top manufacturing go-to destination to shorten supply chains, cut inventory and logistics costs, and reduce delivery lead times. Although Mexico seems to be on the right path towards establishing itself as the manufacturing hub for the North American markets, it still has a long way to go in order to become the global manufacturing hub. Together with ongoing economic, social, and political reforms, as well as a progressive work environment, Mexico definitely can hope for a bright future as the hotspot for global manufacturing.

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Evolving Business Needs to Pave Way for Retail Distribution Centers in South Africa

Traditionally, retail distribution in South Africa was largely in the hands of the manufacturers, who solely owned and operated the warehouses and fleet of vehicles that were used to distribute products to retail stores. Today, this system is seen as inefficient and is increasingly losing in popularity. Leading retail chains, such as Shoprite, SPAR, Pick n Pay, and Woolworths, established centralized distribution centers and implemented warehouse management technologies to cut costs and ensure that there are no disruptions in demand and supply. While online retailers have also established central warehouses, it is still to be seen if they can implement the model with equal success as online retailing supply chain is more complex.

Back in the day, it was a well stated fact in the country and also across the world that manufacturers were responsible for moving goods from their manufacturing hubs to the retailer’s back door. These manufacturers would own and operate large warehouses and vehicles for distribution, and would supply to several retailers in its coverage area. As retailers were largely at the mercy of the manufacturer’s delivery schedule, this system put significant control of the supply chain in the hands of the manufacturer. Moreover, retailers could not cater to unexpected demand spurs, which in turn hampered their business.

Over the years, several leading retail chains in South Africa have abandoned this system and worked towards gaining complete control of their supply chains. This has resulted in them establishing their own centralized distribution centers (DCs). Under this system, retailers buy in bulk and then distribute from their DCs to various outlets on a need-be basis. This has not only helped them gain autonomy over their inventory levels, but has also reduced their distribution costs as well the lead time between order and delivery time to stores. Moreover, with self-owned distribution centers, retailers have been able to re-engineer their retail stores and improve its space utilization by dedicating a minimum required area to storage and all the remaining space to sales.

Benefits of centralized retail distribution centers are not only limited to retailers, but extend both ways in the supply chain to manufacturers and end consumers as well. This model enables the manufacturers to keep inventory levels as low as they can and eliminate the risk of obsolete or over stock positions. In addition, this model empowers smaller manufacturers, who do not have the financial strength to maintain their own warehouses or large distribution fleet. Under this model, they can compete with larger manufacturers as they only have to deliver their products to the retailers’ centralized distribution centers instead of investing heavily in their own distribution network and infrastructure. At the consumer end, retailers pass on a part of the benefit accrued (in terms of savings and discounts, respectively) from the elimination of a middle man and buying in large quantities from manufacturers.

Shoprite, a leading retail chain in South Africa was one of the first to adopt the centralized distribution strategy, giving it a strong competitive advantage. The group has distribution centers in Centurion (145,000 m2), Cape Town (45,000 m2), and Durban (11,500 m2). SPAR, another major retail group operates six technologically advanced DCs across South Africa. Two other retail chains, Woolworths and Pick n Pay, also receive their stocks from self-owned DCs. Experts estimate that retailers, which follow the centralized distribution system, manage savings of about 5-7% of supply chain costs.

In addition to working wonderfully for retail stores, centralized warehouses have lent immense support to the online retail model. While e-commerce in South Africa is still in its nascent stage (with Internet penetration at around 34%), online retailing has been growing rapidly (33% year-on-year in 2013) owing to attractive pricing, as well as improved technology and online payment security. Usually, online retailers store their goods in a central warehouse. However, the delivery of large volumes of value goods within short periods gives rise to the need for more distribution points that are located close to stores. E-commerce companies undertake direct-to-customer deliveries through their own internal facilities or through outsourced partnerships. They extensively use the services of courier and express parcel (CEP) industry to distribute their goods.

Another important aspect for efficient distribution is supply chain information technology and sharing. South African retailers have invested heavily in advanced distribution and supply chain technologies, such as RFID, electronic point of sales (EPOS), and electronic data interchange (EDI) that link the physical inventory levels with the information flows to adapt quickly to changes in demand.

The introduction of RFID into the distribution system helps in attaining real-time access and updation of current store inventory levels, along with increased inventory visibility, availability of accurate sales data, and better control of the entire supply chain.

EPOS facilitates the consolidation and transmission of aggregated sales data and other information from individual retail stores to the centralized DC. Alternatively, the centralized warehouse uses EDI to share information among all its supply chain trading partners. Over and above the inventory and warehouse management solutions, retailers also use transport route planning and scheduling system that optimizes store deliveries and integrates the operations of the distribution center and the transport division.

Although it is safe to say that the evolution of centralized warehouses have benefited retailers, manufacturers, and customers alike, the ever-evolving and digitally empowered consumer is driving the need for further innovation in the way companies, especially online retailers, are managing their distribution and supply chain operations. The rise in e-commerce and its inherent challenges and opportunities is spurring the need for greater visibility across the entire supply chain. While South African retail chains are on the right track with centralized distribution centers and warehouse management technologies, only time will tell if they manage to optimize their retail industry to the levels of the developed nations.

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