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Kolkata: ITC Ltd is working on the “leanest possible" distribution model to supply products directly from its manufacturing units to retail outlets across the country, aiming to ultimately reduce lead time to just one day, a senior executive said.

That compares with a week to three weeks now.

The company, with interests in cigarettes, packaged food, personal care, apparel, hotels and information technology, is changing its distribution supply chain model for cigarettes and packaged goods such as shampoo and soap to sharpen its competitive edge and reduce costs.

“Our long-term goal is to reach the retail points directly from the manufacturing facility, so that we are able to improve our competitiveness in the market. However, this will take time, given the existing complexities and challenges that are inherent in the transportation norms and regulations today. In some cities, we are already serving retailers every day," said B. Sumant, divisional chief executive in charge of FMCG (fast-moving consumer goods) trade marketing and distribution, ITC.

ITC has one of the most extensive distribution networks in India. Its products are available at 4.3 million of the estimated eight million retail stores in India. Of this, about 2 million are under ITC’s direct distribution network. ITC will replicate the new factory-to-retail point distribution in phases, and eventually bring all the 2 million retail points under the new structure.

Traditionally, ITC, like all packaged goods companies in India, stocks products at its distribution centres. Products first go to its exclusive wholesale dealers, then distributors and direct retailers. In some areas, mostly in rural India, the big retailers supply products to smaller retail outlets. The entire process takes anything from one week to three weeks, depending on the distance between the retail outlet and the factory.

ITC wants to reduce that to a day.

The new model will be implemented across the 2 million retail stores that are touched by ITC’s direct distribution network.

It is possible that the disintermediation the new model involves will affect some of ITC’s 1,550 exclusive wholesale dealers. The company declined comment on this facet.

ITC’s rival and India’s largest packaged goods company Hindustan Unilever Ltd reaches about 6.3 million outlets, of which it touches 3 million through its direct distribution network. Swiss food maker Nestle India Ltd’s total reach is 4.5 million stores of which it reaches only 1 million outlets directly.

HUL declined comment.

ITC plans to remove as many stocking points as possible as part of its new model. At each stocking point, products get degraded due to handling. The company will require less working capital if it eliminates some stocking points. “This will ensure better profitability and we’ll get closer to the consumers," Sumant said.

ITC has lined up significant investments for the implementation of the new model, according to Sumant, who did not put a number to this.

“Our ultimate goal is to ensure a supply chain that is as close to the market as possible with minimum stocking points. This will ensure greater freshness of products, greater responsiveness and lower costs."

According to a McKinsey and Co. report on the future of retail supply chains, companies can reduce costs by about 20% at the distribution centre level, while optimal deployment of inventory can reduce working capital by about 10%.

An analyst described ITC’s approach as “unique in India".

“This is the right move, but it may not be easy for any FMCG company to replicate the factory-to-retail points direct supply given the scale and nature of Indian retailing. Every FMCG company is trying to come as close as possible to its consumers," said Abneesh Roy, associate director (institutional equities research), Edelweiss Securities Ltd.

The new model will help the company get more data about consumers and, in the long run, that and not cost could be the biggest benefit for ITC, Roy explained.

Indeed, the new model will help the company respond better to market demand, Sumant admitted.

The new distribution model is part of ITC’s plan to reach 1 trillion in revenue from its cigarettes and packaged goods business by 2030. The company has also lined up investment of 25,000 crore in 65 projects, including 25 factories for packaged goods, covering an area of 28 million square feet, according to its annual report.

In the year ended 31 March 2015, ITC reported gross revenue of 49,964.82 crore. Of this, cigarettes accounted for 30,452.38 crore, while revenue from packaged consumer goods stood at 9,038 crore. ITC’s revenue from branded packaged food products crossed the $1 billion mark to 6,411.27 crore during the year, overtaking HUL’s revenue from the foods business ( 5,522 crore).

“ITC’s investments in manufacturing infrastructure across India provide its businesses and brands competitive edge in terms of scale, quality and time-to-market whilst ensuring rigorous standards of safety and hygiene," the company said in its latest annual report.

The company said it would continue to make investments towards establishing a distributed manufacturing footprint, structural interventions with a view to reducing operating costs and focus on supply chain optimization and improve supply chain responsiveness to support the rapid and profitable growth of the branded packaged foods businesses.

It added that the focus is on building flexibility and agility across the supply chain to ensure delivery of volume and variety in a timely and cost-effective manner.

Referring to ITC’s factory-to-retail distribution strategy, Rajat Wahi, partner and head of consumer markets at consulting firm KPMG in India, said that although the concept is definitely worth experimenting with, it might not work across product categories. “To come closer to the consumers, or retail points, a company needs more stocking points through its distributors or on its own. But a factory-to-retail point model is yet to be proven successful anywhere," he said.

According to him, a company that is successful in replicating the factory-to-retail point direct supply, may typically save about 10% on costs. “But it already has an established network of dealers, distributors and sub-distributors. What happens to them?," he asked.

ITC is also in the process of automating all its 62 warehouses and its 1,550 wholesale dealers. “The distribution network includes over 1,550 wholesale dealers and a force of 25,000-plus sales people who are IT-enabled and empowered with hand-held devices, which ensure that every member of the sales team has access to real-time actionable information on business imperatives and performance. The supply chain mechanism is determined by analytics based on real-time feeds and insights for over 1,000 stock keeping units (SKUs). This enables informed decision-making and helps determine inputs, while ensuring an efficient distribution based on store-level demand," said Sumant.

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