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Supply Chain Management Practices and Scope for Bullwhip Effect in Indian Dry Grocery Business Tapan K Panda* and Prashant K Mohanty**

Supply Chain Management (SCM) has come to stay as a key driver of business success and source of competitive advantage. Aligning business process through corporate restructuring is an age-old phenomenon. But more significantly, streamlining flow of goods and services along with that of suppliers, i.e., beyond the organizational context and integrating business processes of a firm with its suppliers is a bigger managerial challenge. The issue becomes more complex when the demand frequency increases due to the nature of the products; it becomes more complex due to the number of stock keeping units required for satisfying the endcustomers, and overall, there are issues of market fluctuations both in terms of demand and prices. The customers also negotiate and use their order size as the source of bargaining power to enhance their profitability, thus reducing the gross margins of the suppliers. A distortion in the buyer-seller relationship cycle and erosion of trust makes the flow of goods and services more transactional. In order to protect the market and control of supply cycle not to lose the end-customers, suppliers tend to supply more, leading to higher inventory costs. These kinds of structural issues and market fallacies lead to the ‘Bullwhip effect’. Bullwhip effect (Lee et al., 1997a and 1997b), which was first published by Forrester (1961), a pioneer of modern SCM, remains a critical issue in the supply chain of products in the global market. A small variance in the demands of the downstream end-customers may cause dramatic variance in the procurement volumes of upstream suppliers via the bullwhip effect under the condition that the distortions of demand-related information exist among the members of a supply chain (Lee et al., 1997a and 1997b; and Metters, 1997). This research paper focuses on understanding the impact of various factors like demand forecast updating order, order batching, price fluctuations and rationing and storage gaming in creating the bullwhip effect among suppliers of grocery items to large retailers. This paper also examines the influences of various external variables like business practices in the industry, nature of product supplied, small customer management issues, frequency of product supply and negotiation on SCM of grocery to large retailers.

Introduction The Indian retail industry has undergone a series of changes over the last decade. It has drawn attention from policy makers, researchers, strategists, investors and even politicians. Each of these players looked into the emerging scenario of organized retailing in India through their own lenses. While there was a big controversy about foreign direct capital flow to organized retailing in India, many policy makers are of the opinion that *

Professor, Marketing; and Director, Kotler-Srinivasan Center for Research in Marketing, Great Lakes Institute of Management, Chennai, Tamil Nadu, India. E-mail: [email protected]

* * Professor, Department of Management Studies, Centurion University of Technology and Management Bhubaneswar, Odisha, India. E-mail: [email protected] Supply Practices and Scope for Bullwhip Effect © 2012 Chain IUP. AllManagement Rights Reserved. in Indian Dry Grocery Business

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the same, if allowed, is going to significantly alter the composition of the Indian retail market. Whereas 96% of Indian retailing is unorganized, generating mass employment in the country through a network of kirana stores and wholesale shops, there are issues related to efficiency and fair value delivery to customers. The current business practices in the retail industry are not based on efficiency and win-win for all the players in business. While farmers do not get a fair price for their output, the consumers are also not able to get the products and services at fair prices. Some may lament this phenomenon as a problem of inherent structure of the market, but a majority of these markets in the developed world have emerged out of strategic interventions by lead players to bring transparency in business practices, to improve supply chain efficiency and to alter the current power balance that is heavily tilted towards the trading class. Supply Chain Management (SCM) is a key driver for growth and profitability of the retail industry. Though the end-customers are never able to visualize the effect of good SCM practices, the smooth flow of products, lower inventory turnover, increase in average shelf life of the products and enhanced profitability for the members of the value chain are some of the measurable gains from good SCM practice. The idea of an efficient SCM practice emerges from the fact that the distance between the producer and the end customer is increasing over the years. A part of this phenomenon can be attributed to the overall business model of mass production, mass distribution and mass consumption through mass promotion. As companies try to cover up multiple segments, multiple geographic locations inside and outside the country, and sell through multiple channels, managing supply chains for uninterrupted flow of goods and services is a big challenge. Despite all precautions, many products and brands suffer due to supply chain inefficiency. One of the problems in SCM is the bullwhip effect which not only restricts the equal distribution of products and services, but also creates bottlenecks in the flow of goods and services, leading to loss of sale opportunity and increase in average inventory level.

Literature Review The concept of supply chain, proposed by Houlihan (1985), suggests a “process for building improved and stronger upstream and downstream business linkages”(Cooper and Ellram, 1993). McAfee et al. (2002) focused on improving value for the ultimate customer (Lummus et al., 1998). Related definitions of the supply chain include: “how to integrate and perform logistics and manufacturing activities” (Pagh and Cooper, 1998), or more generally, collaboration among supply chain partners. A more elaborate and applied definition is: “the connected series of activities concerned with the planning and controlling of raw materials, components, and finished products from suppliers to the final customer” (Vickery et al., 1999). The purpose of SCM is described by Kaufman (1997) as to “... remove communication barriers and eliminate redundancies” through coordinating, monitoring and controlling processes. As pointed out by Akkermans et al. (1999), the characteristics of a supply chain must include: (1) multiple echelons; (2) focus on integration; and (3) goals of service and profitability, and may also involve (a) collaborative processes; and (b) value adding considerations. 64

The IUP Journal of Supply Chain Management, Vol. IX, No. 3, 2012

The traditional view on a supply chain is the cycle view. The scope of SCM as a process covers from the point of origin to the point of consumption. It requires coordinated efforts and cooperation between the company’s business operations in supply chains. The stocking level variability in supplying chains tends to be distorted as it is moves upstream in the supply chain. It may so happen that there is a variance of orders which can be larger than the sales and distribution cycle as one moves upstream in the SCM process. This means each cycle is decoupled from the next cycle via an inventory level so that the preceding cycle can function independent of the next cycle, optimizes its own processes and is not affected by supply chain problems of another cycle. For example, if a cycle has replenished the retailer inventories by delivering from the producer/manufacturer’s end product inventory, and another cycle that takes care of replenishing the manufacturer or producer’s inventory by manufacturing or producing new end products, then an inventorysales mismatch is likely in the supply chain pipeline. This is known as the Bullwhip effect. We can observe such phenomenon in frequently purchased product categories and also in products with large variation in their demand and supply due to seasonality of demand and supply. SCM has been of interest for many years in literature (Oliver and Webber, 1982; Jones and Riley, 1985 and 1987). Houlihan (1985 and 1987) states that SCM is an influential ingredient in today’s literature and thinking in the field of logistics. The synchronization of business operations between multiple relationships in marketing channels is often referred to as SCM (Lambert et al., 1998). Alderson (1957 and 1965) recognizes the interdependence between companies’ business operations in marketing channels. Forrester (1958) also acknowledges the linkages between business operations in marketing channels, e.g., in terms of the interactions between the flow of information, materials, money and manpower, and capital equipment. Forrester (1961) discusses dynamics in the business environment and writes that industrial dynamics views business as an integrated system. Furthermore, Weld (1916) stresses the importance of addressing the distribution channel as a whole. SCM addresses the supply chain from the point-oforigin to the point-of-consumption. Mentzer et al. (2001) argue that there is a necessity to extend SCM to other supply chains. Furthermore, SCM requires cooperation and co-ordination between companies’ business operations in the supply chains (Xu et al., 2001). Otherwise, the stocking level variability in the supply chains tends to be distorted as it is moves upstream in the supply chain (Towill, 1996). Lee et al. (1997a and 1997b) write that the variance of orders may be larger than that of sales and the distortion tends to increase as one moves upstream in the supply chain. This phenomenon is referred to as the ‘Bullwhip effect’ (Chen et al., 2000). In fact, practitioners and consultants have striven to deal with the bullwhip effect, e.g., in the automotive, textile, and retail industries. In the automotive industry, the term just-in-time is used, while in the textile and retail industries, the terms quick response and efficient consumer response are applied. Supply Chain Management Practices and Scope for Bullwhip Effect in Indian Dry Grocery Business

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The whole idea of referring to these terms is with an aim to reduce stocking level variability in the supply chains and improve profitability by substantial reduction in costs, leading to an overall improvement in the performance of supply chain. The bullwhip effect, was first found at Proctor & Gamble (P&G), where logistics executives were examining the order patterns of one of their best-selling products, pampers disposable diapers. It was found from the study that the sales at the retail level were fluctuating due to changes in the demand patterns. When the same was checked by analyzing the orders placed by the retailer to the distributors, they could find a variation in the actual products sold and the order placed in a specific period of time. An inspection of the orders placed by the distributors to the manufacturer was made, it was found that the orders varied more and the variance between the orders placed by the manufacturer to their supplier had the highest variance. So they observed that while going up the supply chain, the demand variability swings were on a rise and increasing at each of these levels in the supply chain. This effect was named as the bullwhip effect by the P&G executives as it resembled a bull-whip. The bullwhip effect is also known as ‘whiplash’ or the ‘whipsaw’ effect. Let us discuss the implications of a bullwhip effect. Such an effect indicates that the stock level variations in a supply chain tend to be higher upstream than downstream. It is caused by factors such as limited/no information sharing across the supply chain, unavailability or insufficient market data, improper method of forecasting and any other emerging uncertainties. Fransoo and Wouters (2000) write that the bullwhip effect refers to an increasing variability of demand further upstream in the supply chain, and conclude that the theory of measurement of the bullwhip effect in a practical setting has received limited attention. The research of the bullwhip effect considered interorganizational echelons, such as two echelons between companies (e.g., Chen et al., 2000; Fransoo and Wouters, 2000; and Yu et al., 2001) or three/multiechelons between a sequence of companies (Metters, 1997; and Lee et al., 1997a and 1997b), or intraorganizational echelons, such as company’s inbound and outbound logistics flows (Svensson, 2003), in supply chains. In addition, Svensson (2003) introduces the term ‘reversed bullwhip effect’ (i.e., increased downstream variability) as opposed to the traditional term ‘bullwhip effect’ (i.e., increased upstream variability). The first research to extensively study the amplification of demand information in a supply chain was reported by Forrester in his seminal book Industrial Dynamics (Forrester, 1961), where he reduces the root cause of demand amplification by a double whammy approach, namely, delay in transfer of demand information, and then delay in transferring physical product through the supply chain by managing the lead time. The term ‘bullwhip effect’ was first used by Procter & Gamble, when they experienced extensive demand amplifications for their diaper product ‘pampers’. Lee et al. (1997a and 1997b) describe the bullwhip effect as the result of information distortion in a supply chain where companies upstream do not have information on the actual consumer demand. So they put their order on the basis of the incoming order from the next downstream company. 66


This behavior or practice may lead to amplified order variability, i.e., demand coming from a downstream company has a lower variability than an upstream company in the supply chain. There are four major causes of the bullwhip effect (Lee et al., 1997a and 1997b): demand forecast updating, order batching, price fluctuations and rationing. We have reproduced the major causes in Table 1. Table 1: Framework of Supply Chain Coordination Initiatives Causes

Initiatives Information Sharing

Channel Alignment

Operational Efficiency

Demand Forecast Update

Understanding system dynamics: Use Point of Sale (POS) data, Electronic Data Interchange (EDI) Internet

Vendor Managed Inventory (VMI) discount for information sharing consumer direct

Lead time reduction Echelon-based inventory control

Order Batching

EDI Internet ordering

Discount for truckload assortment. Delivery appointments consolidation logistics Outsourcing

Reduction in fixed cost of ordering by EDI or electronic commerce (CAO)

Price Fluctuation

Shortage Gaming

Continuous Everyday Low Price Replenishment Program (EDLP) Actively Based (CRP) Everyday Low Costing (ABC) Cost (EDLC) Sharing sales, capacity and inventory data

Allocation based on past sales

Source: Adopted from Lee et al. (1997a and 1997b)

It is interesting to observe how links in a supply chain base their expectations about future demand on orders they receive from their succeeding or preceding link. If there is an increase in the order, it leads to a greater demand forecast which automatically gets transferred to the next link by increased order quantities. That link also observes an increase in the demand and updates its forecasts and distorts information for the subsequent link. The same cycle operates in a reverse way when there is a decrease in the demand at end customer level. A possible solution for this is to make consumer demand data directly available to all the companies in the supply chain and mostly to upstream companies in the supply chain. One can use a single source of forecasting for the entire supply chain. Though there can be a demand fluctuation either by increase in demand or depletion of inventory, companies cannot place immediate orders with its suppliers. There will be an accumulation of demand before an order is issued due to fixed order costs or distribution efficiency. Let us say a company receives its orders daily but accumulates them Supply Chain Management Practices and Scope for Bullwhip Effect in Indian Dry Grocery Business

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to place an order with the supplier on a weekly basis. So there will be a higher variability of orders placed with the supplier than the demands the company itself faces. One can make the consumer’s data available across the supply chain, and to add to that, one can reduce batch size of the order and increase order frequency which will help in reducing this effect. One can reduce batch size by using EDI so that the administrative cost of ordering can be reduced and use of third party logistics service provider can make smaller loads more economical and reduce the supply chain cost substantially. Many channel members wish to take the benefit of price fluctuations. Companies undertake consumer and trade promotions to push sales and offload inventory. So prices fluctuate due to promotion programs which create a situation of variability in demand over a period of time. When the price of the product is low, a customer purchases bigger quantities than what he actually requires. So when prices return to normal, the customer purcases less than normal to deplete his inventory. One should take steps to stabilize prices and reduce incidents of consumer and trade promotions so that the bullwhip effect can be reduced. It is observed that when the product demand exceeds the supply, a supplier should ration its products to the customers. If the customer knows this or has a previous purchase experience, then he will order more than what he actually requires. In a situation where there is no shortage, orders disappear. One should introduce rationing methods based on the past sales, rather than on orders placed. This will take away the incentives to customers to inflate order sizes.

Significance of the Study This research is an attempt to find out the overall supply chain practices from the supplier’s point of view. By supplier we mean the organizations, individuals, trade associations and cooperatives who supply products and services to retail majors. We have limited the scope of our research to suppliers of retail majors in organized retailing industry. This is because of the nature of the retailing industry in India. It is difficult to find a set of suppliers who hold significant share of market in an unorganized sector, as the sector itself is highly fragmented. The key issue to be addressed is to find out whether any features in the supply of groceries distort competition in the Indian market and to determine whether there is any bullwhip effect in the supply of grocery items in the Indian market. This research also attempts to find out whether differences in effects in the three independent variables of a supply process like information sharing, channel alignment and operational efficiency influence the intensity and scope of the bullwhip effect in the Indian market. The findings will help the companies to effectively counteract the effect by thoroughly understanding its underlying causes. Research will pave way for the companies to implement innovative strategies that pose new challenges. It may be useful to implement new information systems, defining new organizational relationships, and implementing new incentive and measurement systems. Choice for the company is provided to overcome the bullwhip effect and find a way to conquer it. 68


Poor supply and demand management is usually one of the biggest reasons for retail business inefficiency mainly in India. Poor demand visibility and agility lead to demand distortion. Second guessing in Decentralized Inventory Control Model (DICM), which is most prominently used in retail business in India, leads to bullwhip effect. This leads to stock-outs/backorders. To compensate this, the price of merchandise is hiked up and the end customer happens to be at a loss. As a result of this, the overall retail efficiency becomes poor. Information sharing in the supply chain may effectively reduce the bullwhip effect in the supply chain (Fiala, 2005), an activity that is enabled by information technology (Boubekri, 2001). Also lead-time reduction (Helo, 2004) and the reduction of the length of the chain (Ackere et al., 1993) may improve demand distortion problem considerably. Similarly, McCullen and Towill (2002) have pointed out that the remedies for bullwhip effect reduction require material flow considerations, such as the implementation of control systems, time compression, information transparency and echelon elimination principles.

Objectives The key objectives of this study include:

• To analyze the retail business practices of the selected firms and suppliers in India; to assess the supplier’s competitive pressures including buying power of customers;

• To evaluate the method and strategy used by customers to express/exert their negotiation strength; and

• To measure the impact of variables like information sharing, channel alignment and operational efficiency which influence the intensity and scope of bullwhip effect in Indian market. The researchers have developed key hypotheses for testing (refer to discussion section of the research paper) based on the literature survey and research gaps existing in the current body of knowledge. The hypotheses are discussed and interpreted in the subsequent sections of the study. The list of variables and set of key measures used in this study are explained in Table 2.

Scope of the Study Any plausible research explaining the SCM practices and bullwhip effect with significant empirical evidence was not found to exist in India. However, to improve the accuracy of the current work, research is limited to study the selected grocery products, as mentioned in Table 3. The study is based on the primary data collected from the suppliers through a structured questionnaire and is confined to understanding the set of objectives as mentioned earlier. It is limited to study the bullwhip effect in the supply of identified products in the Indian organized retailing world. Supply Chain Management Practices and Scope for Bullwhip Effect in Indian Dry Grocery Business

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Table 2: Variables Measured in the Study Variables

Key Measures

Business Practices in the Industry

Types of business by product category, by customers supplied Category of product supplied Proportion of revenue contribution from categories

Nature of Product Supplied

Branded versus non-branded Standard versus premium

Small Customer Management

Advantages of small customer management Disadvantages of small customer management

Product Supply and Negotiation

Frequency of product supply Frequency of price negotiation Frequency of volume negotiation Satisfaction with price and volume negotiation Perceived negotiation power with customers Additional services to customers

Competitive Environment Mapping Increase in levels of gross margins Behavioral changes in the last five years Relative Importance of Causes of Bullwhip Effect

Demand forecast updating order Order batching Price fluctuation Rationing and shortage gaming

Table 3: Category of Grocery Products Selected for Study Main Category Unpreserved Foods

Individual Categories Dairy Non-dairy chilled foods Fresh produce such as fruits and vegetables Other fresh foods (meat, fish, poultry) Bakery/bread/cakes

Other Food

Packet dried foods Canned/bottled foods Confectionery Other foods

Non-Food Goods

70

Toiletries and healthcare products Household and fabric cleaning goods Small household goods (pots, pans, cutlery) Pet food and pet accessories The IUP Journal of Supply Chain Management, Vol. IX, No. 3, 2012

Research Methodology As there is no significant study conducted before highlighting the mentioned research objectives, it is important on the part of the researchers to take utmost care in research design, validation of the instrument and application of statistical measures in analyzing the collected data. This research is conducted at two levels, i.e., exploratory and descriptive levels. The brief literature survey helped in finding out the research gaps and variables to measure supply chain efficiency and influence of information sharing, channel alignment and operational efficiency on the intensity and scope of the bullwhip effect. The first level of in-depth interviews were conducted through telephone and online questionnaire among suppliers of grocery to major retailers in India. This helped in refining the instrument further and adding/deleting certain variables before undertaking the second round of in-depth interviews. An initial introductory letter from the researcher was sent to all potential respondents prior to the fieldwork to assure the respondents that the research was genuine and that their responses would be treated in the strictest confidence. A structured questionnaire was developed for the second part of the research. Within the questionnaire, respondents were asked for their opinions on their customers. Statistical validation test was done for the drafted questionnaire (with a 0.731 Cronbach’s alpha).

Sampling Framework The supermarkets were initially asked to provide the contact details of suppliers they had used in the last financial year (2010). The retailers who provided details of suppliers included in this study, including Big Bazaar (Future Group), Spencer’s, Star India Bazaar (Tata Group), Landmark (in association with South African Retail Giant Shoprite), Reliance Industries, Rainbow Retail (Raheja Group), Trinethra (AV Birla Group) and Nilgiris, among others. The sample was then collated to form one list of suppliers, which was the main sampling frame for the survey. The sample was de-duplicated to ensure that suppliers only appeared once in the list. In addition, suppliers of non-grocery products and non-India-based suppliers were removed from the sample. Some of the largest suppliers were selected for the in-depth interviews and the remaining sample was used for the main structured interviews. In total, 456 interviews were conducted, from which 268 interviews were conducted over phone and 137 via telephone initially, and then online. Table 4 shows the breakdown of the sample, in terms of the main product categories, as identified in the initial sample. The achieved sample was representative of the original sampling frame.

Results and Discussions There are four significant factors that contribute to the bullwhip effect in a supply chain— demand forecast updating order, order batching, price fluctuations and finally rationing and shortage gaming. But before we discuss the relative importance of these four factors, Supply Chain Management Practices and Scope for Bullwhip Effect in Indian Dry Grocery Business

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Table 4: Sample Distribution Sampling Frame

Product Category

Number

Achieved Sample

%

Number

%

Supplier Population Number

%

Frozen Foods

185

7

21

5

270

7

Unpreserved Food

905

32

153

34

1,170

31

Other Food

584

21

105

23

820

22

Drinks

459

16

74

16

660

17

Non-Food Goods

657

24

103

23

880

23

2,790

100

456

100

3,800

100

Total

we need to understand other factors like business practices in retail industry, nature of the product supplied to customers, role of small customers in SCM, product supply flows and negotiation, and nature of competition existing in the industry. Understanding these variables will help us in developing a perspective for strategic intervention in reducing the bullwhip effect.

Business Practices in the Industry Suppliers were asked to describe their company in terms of type of business from a predefined list. Respondents were asked to only identify their main business activities. The responses to this question are shown in Figure 1 as a total of the whole sample, and then as main product categories. In total, approximately half of the suppliers defined their companies as manufacturers (51%) and just over a third claimed to be primary producers (35%), importers (33%) or processors/packers (31%). When comparing types of business by product category, those supplying unpreserved foods were significantly more likely to be processors or packers than any other type of supplier. In addition, companies supplying Figure 1: Suppliers by Type of Business Types of Business 60

51%

Percentage

50 40

35%

30

33%

31%

20

15%

10 0

72

Primary Producer (170)

Processor or Packer (158)

Manufacturer (288)

Importer (167)

Wholesaler (81)

12%

Other (51)


drinks were significantly more likely to be importers compared to suppliers of food products (Figure 2). All suppliers were asked which Indian customers they supplied grocery products to directly, and the responses to this question are shown in Figure 3. Around three-fifths of these suppliers supply to Big Bazaar, Spencer’s, Star India Bazaar, Landmark or Reliance and 90% of suppliers provided grocery products to one of the other multiple retailers. Amongst the remaining multiple retailers, these suppliers were most likely to be providing goods to Jubilant, mentioned by a similar proportion as those supplying the four largest supermarkets (60%). Suppliers were asked which products they supplied to the grocery trade. This was asked spontaneously and the actual product was coded into the predefined list of products (Figure 4). In general, most suppliers were only providing products within one main Figure 2: Nature of the Company 70

Percentage

55 38 40

35

30

Primary Producer (170) Frozen Foods

52

49 35

34 24

67

60

27

33 36

41

26 18

Processor or Packer (158)

Manufacturer (228)

Unpreserved Foods

Importer (167) Other Foods

29

25

28 20

15

20 10

Wholesaler (81) Drinks

19

21

12 5 Other (51)

Non-Food Goods

Figure 3: Customer Types for Suppliers

Percentage

Customers Types 100 90 80 70 60 50 40 30 20 10 0

90% 81% 65%

62%

60%

57%

55% 45%

Big Spencer’s StarIndia Landmark Reliance Other Wholesaler Independent (400) (540) (525) Chain (654) Bazaar Bazaar (542) (750) (535) (500)

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category. The exception is suppliers of frozen food, of whom 56% claimed to be supplying in another category, most likely to be unpreserved food mentioned by 36% of frozen food suppliers. Around a fifth of the suppliers of unpreserved food (19%), other food (21%) and drinks (17%) claimed to supply goods from more than one of the main product categories and 12% of suppliers of non-food products. Figure 4: Category of Product Supplied 30 24%

Percentage

25 19%

20

15%

15 10

8%

5 5%

7% 7%

7%

9% 6%

10%

8% 9%

7% 4%

2% Toiletries and Healthcare

Household

Pet Food and Accessories

Small Household Goods

Alcoholic Drinks

Non-Alcoholic Drinks

Packed Dried Foods

Canned/Bottled Foods

Other Foods

Confectionery

Dairy

Non-Dairy

Fresh Product

Other Fresh

Bakery

Frozen

0

The next important task was to find out the major proportion of revenue contribution by different categories to the suppliers top line. Nearly half of the suppliers (45%) claimed that the four largest supermarkets accounted for at least 50% of their grocery revenue, 23% claimed they provided 75% or more of their revenue, and 5% claimed that they contributed all of their revenue from the selected customers. It is clearly evident that these customers have the ability to negotiate and give a price for the suppliers to agree to. They also have the power for rationing and shortening due to their size of order and ability to control the supply chain of the selected suppliers.

Nature of the Product Supplied Nature of the product supplied by the suppliers to customers has a role to play in creating the bullwhip effect. In this case, two measures were used, viz., branded versus unbranded, and premium versus standard products. Companies supplying frozen foods, drinks and non-food goods were the most likely to be selling in the branded category. Those selling frozen and unpreserved food had the highest incidence of own label products. A fifth of 74


suppliers claimed to be only selling branded goods (20%), 10% were only selling own label products and just 4% were only selling non-branded goods. On an average, suppliers claimed that about half their products were sold as branded goods, 10% as non-branded and about a third as own-label. There were some differences between the types of grocery products being sold. Suppliers selling drinks and non-food items claimed to be selling a significantly higher proportion of their products as branded goods compared to all other suppliers. Figure 5 shows the average percentage sold as branded/non-branded and ownlabel goods by product category. Figure 5: Branded versus Unbranded Goods Supply Branded, Unbranded and Private Label Supply 95%

100 90% 90 75%

80

82%

78%

93%

70%

70 Percentage

90%

84%

57%

60 50 40 30

27%

30%

Frozen Foods

Unpreserved Food

37% 27%

20%

20 10 0

Branded

Other Food Non-Branded

Drinks

Non-Food Goods

Own Label

The level of premium involved in the product decides the bargaining power between the supplier and the buyer. Premium products were defined, for example as being niche or organic. Overall, four-fifths of the suppliers claimed to sell premium products, three-fifths standard products and third value products. There were few variations across sellers of different food categories, although those selling in the non-food category were less likely to claim to be selling products in the premium category. A higher proportion of suppliers selling non-branded goods were selling value products compared with those selling branded goods. Just 1% of suppliers claimed to be selling only value products and 9% were selling only standard products. However, a higher proportion (28%) claimed to be sole suppliers of premium goods. On an average, suppliers claimed to be selling about half of their products as premium goods, two-fifths as standard products and just 8% as value goods. There were relatively few among the suppliers in terms of the type of grocery product being sold. Supply Chain Management Practices and Scope for Bullwhip Effect in Indian Dry Grocery Business

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Small Customer Management Small customer management is a tricky issue in supply chain. These customers will have smaller demand size but higher frequency of demand. They often do not forecast their demand and are subject to fluctuations for any smaller changes in the demand supply management. Two key questions were asked, related to advantages and/or disadvantages for their smaller customers as a result of their relationship with larger customers. The questions were asked specifically in relation to one of their largest customers, which were selected at random from the customers they dealt with. Suppliers were read out a list of rotated statements describing possible benefits for smaller customers which could have resulted from their relationship with a specified larger customer. The following statements were rated higher by the respondents in order of their mean values. • We become more efficient suppliers; • We invest in process innovation; • Our products are improved; • We gain insights into consumers and the market; and • We are given technical support which improves our overall offering. Suppliers were most likely to agree that process innovation’ as a consequence of approximately half of the suppliers agreeing divided in their opinions as to whether their into consumers and the market.

they become ‘more efficient’ and ‘invest in their dealing with large customers, with with these statements. Suppliers were more ‘products are improved’ and ‘gaining insights

Suppliers were also asked about potential/existing disadvantages of small customers in relation to large customers. Suppliers were then read out a list of rotated statements describing possible disadvantages for smaller customers, which could have resulted from their relationship with a specified larger customer. The relative importance of the statements (mean value measure) are as per the following orders. • If there is a supply shortage, we supply a larger customer but cannot supply smaller customers; • If a larger customer increases demand at short notice, we cannot supply smaller customers; • If a larger customer demands better/additional services, services to smaller customers becomes worse; • If a larger customer negotiates a lower price, we increase prices to smaller customers. 76


The only statement which suppliers were more likely to agree with, as opposed to disagree with, was ‘if there is a supply shortage, we supply a larger customer, but cannot supply smaller customers’. Nearly half of the suppliers agreed with this statement, compared to 38% who disagreed. The next highest level of agreement for any of these statements was also related to the supply of product, namely ‘if a larger customer increases demand we cannot supply smaller customers’, with two-fifths of suppliers in agreement.

Product Supply and Negotiation In this part the researchers have identified six variables to measure the product supply cycle and types of negotiations involved in the business. These variables are (1) frequency of product supply; (2) frequency of price negotiation; (3) frequency of volume negotiation; (4) satisfaction with price and volume negotiation; (5) perceived negotiation power with customers; and (6) additional services provided by suppliers to customers. The researchers focussed on understanding the supplier’s dealings with specific customers in terms of supplying product and level of negotiation involved in the process. Questions were also specifically asked about suppliers’ top products in terms of revenue. Suppliers were initially asked how often they supply a particular customer with their top product. Figure 6 shows the responses received by each type of customer. Suppliers supply their top products more frequently to the four largest supermarkets than to other customers. This was not explained by differences in the products supplied. However, the frequency of delivery does depend upon the type of product: those supplying unpreserved food are more likely to deliver daily (mentioned by 69% of suppliers) compared with suppliers of other products. Figure 6: Frequency of Product Supply by Customer Type

60 50

48%

45% 39%

40 30

28%

28%

20

16%

13%

10

32%

28% 17% 8%

14%

0 Daily

Weekly Five Largest Markets

Monthly

Other Chain


Less Often

Wholesaler

77

Frequency of price negotiation with a specific customer for their top grocery product is the next key measure. Quarterly price negotiations tended to be more common with customers that were chain stores other than the four largest supermarkets. Over two-fifths of suppliers answering about an ‘other chain’ store claimed to have quarterly or more frequent price negotiations. The equivalent percentage for the five largest supermarkets was about a fifth. As for the supply of product, those supplying unpreserved food had more frequent price negotiations than those supplying other types of product. A fifth of the suppliers of unpreserved food had weekly negotiations, compared to only 2-3% of suppliers of other products. Respondents could answer about more than one customer. The end result of negotiation and use of buying power leads to the phenomenon of supplier satisfaction. The suppliers were asked to report their satisfaction levels with customer’s frequency and volume of negotiation. Overall, a majority of the suppliers claimed to be satisfied, with over three-fifths giving a positive response. Only 14% claimed to be dissatisfied. It is also important to decipher about volume negotiation that large customers undertake with these suppliers. Suppliers were then asked to say how frequent their volume negotiations with a specific customer were for their top grocery product. Figure 7 shows that the responses were similar to those for price negotiations. Suppliers who were answering about one of the chain supermarkets other than the four largest said that they had at least quarterly volume negotiations (46% compared with about a quarter for other customers). There were some differences amongst suppliers in terms of product category. Amongst suppliers providing unpreserved food, a fifth had volume negotiations at least weekly. Interestingly, those suppliers selling drinks claimed to have weekly negotiations to a greater extent than other suppliers, with the exception of suppliers providing unpreserved food. Figure 7: Frequency of Volume Negotiation

Don’t Know

9% 9%

Less Frequently

14% 23% 23%

14%

Annually Six Monthly

26% 10% 14%

Daily-Weekly

78

18% 17%

Monthly-Quarterly

20% 9% 10%

14%

42% 36%

34% Wholesaler Other Chain Five Largest Markets


In addition to this, the smallest suppliers felt they had less power than the largest suppliers. A quarter of those with a grocery turnover of less than 36.5 cr gave a rating of 1 or 2 (no control) compared with 13% of companies with a grocery turnover of 100 cr or more. Those selling at least 90% of their products as own-label were less likely to consider their bargaining power to be as high with their supermarket customers as those selling virtually all branded goods. Suppliers also provide additional services to customers. All suppliers were asked whether they provided any additional services to customers from a specified list. The types of additional services read out to suppliers were: (1) help with marketing; (2) provision of staff in busy periods; (3) adapting packaging systems to conform with customer’s standard; (4) delivering on pallets which conform to customer’s standards; and (5) category management—managing shelf space for products. Figure 8 presents the summary result of supplier’s opinion. The additional service most likely to be provided to the customers was delivering on pallets, which conform to the customer’s standard. It is observed that 85% of responses from suppliers were of the opinion that this type of additional service was provided to customers. Approximately, three-fifths of all responses from suppliers were that of adapting packaging systems was a service provided to customers, about half provided help with marketing and a third claimed about category management related services. The service which had the lowest proportion of mentions, was that the supplier provided staff in busy periods (17%). Figure 8: Summary of Additional Services Provided to Customers

Provision of Staff in Busy Periods

17

Category Management Managing Shelf Space for Products

40

Help with Marketing

57

Adapting Packaging Systems to Conform with Customer’s Standards

65

Delivering on Pallets which Conform to Customer’s Standards

85 0

20

20

20

20

100

Percentage (%)


79

Competitive Environment Mapping The next important factor influencing bullwhip effect is the competitive environment mapping. If there is a high level of competition in the industry, there is a likelihood of the bullwhip effect as suppliers would like to keep the inventory at different levels of supply chain to avoid any kind of stock out situations. Any fluctuations in competitive environment may lead to either stock out or excess inventory situation leading to a probable bullwhip effect. The researchers asked a set of questions about gross margins of their products. These questions include increase/decrease in gross margins over the last five years; differences in gross margins of different types of products; segment of customers with lower gross margins and reasons thereof for low level of gross margins. 69% of them are of the opinion that gross margins have reduced over the last five years. Decrease in gross margins is a phenomenon across all grocery product categories. The summary of responses is presented in Figure 9 which shows that a majority of the suppliers have opined about a decrease in the gross margins over the last five years across the board. Overall, half of those supplying one of the five largest supermarkets mentioned one of these supermarkets. Just under a fifth mentioned another chain supermarket and less than 10% mentioned either a wholesaler store or an independent retailer. Table 5 represents the detailed distribution of customers with lower gross margins. Figure 9: Decrease in Gross Margins Over 5 Years Decrease in Gross Margins Across Product Category 10% Non-food Goods 13%

65

19%

6% Drinks

70

21%

11% 8% Other Food

66

19% 16% 5%

Unpreserved Food

68

16% 19% 5%

Frozen Foods

69

19% 16% 0

10

20

30

40

50

60

70

80

Percentage (%) Don’t Know

80

Decreased

Stayed the Same

Increased


Table 5: Customers with Lower Gross Margin Customers with Lower Gross Margins

%

Any of the five largest supermarkets

53

Any other chain supermarket

17

Wholesaler

8

Independent retailer

6

All suppliers were asked spontaneously why lower gross margins were received from some customers. Verbatim responses were then grouped into similar categories for the analysis. Figure 10 shows the grouped responses to this question for all responses of 7% or more, and the reasons for sources of lower gross margin. The researchers also studied the behavioral changes that have emerged in the last five years between customers and suppliers. Trust, commitment and reliance are the important factors to build better relationships and hence, reduce apprehensions in SCM flows, and thus reducing the scope for bullwhip effect. If trust and relationship is not good, then the suppliers will try to build excess inventory as they cannot rely on the customers and their order size with an apprehension that they may lose business due to uncertainty involved in the business. Figure 10: Reasons of Lower Gross Margin Sources of Lower Gross Margins We have to pay a fee to get on the list

7

They want to be competitive

7

Because of their market position

7

They insist on a discount

8

They have higher costs/Packaging/ Distribution/Marketing Costs

11

They buy in bulk/High Volume/Large Quantities

13

They won’t pay more/they tell us the price/we can’t get any more

15

They are tough aggressive negotiators

17

Percentage (%)


81

The behavior which suppliers claimed to have happened the most in the last five years was ‘a customer requesting obligatory contributions to marketing costs’. Almost 50% of suppliers claimed that ‘delays in receiving payments from a customer substantially beyond the agreed time’ and ‘a customer requesting excessive payments for consumer complaints’ had increased in the last five years. Suppliers providing drinks were significantly more likely to claim delays in payments compared to the sample as a whole. Over a third of the suppliers claimed that changes in the behavior like customers requesting obligatory additional services, such as packaging and distribution; customer requesting price reductions for products soon before or after delivery and customer requesting obligatory payments in return for stocking or listing products have happened over the last five years. These behavioral changes have strained relationships between customers and suppliers.

Relative Weights of Causes of Bullwhip Effect A brief literature review conducted during the study helped in identifying four important factors having a significant bearing on the cause of bullwhip effect. The suppliers were explained the concept of bullwhip effect through a ‘concept card’ exercise and then asked questions about the relative importance of these identified variables causing the bullwhip effect. While the bullwhip effect phenomenon was taken as a dependent variable, other four variables were assumed to be independent variables. Decision of choosing them as independent variables is based on the confirmatory factor analysis conducted at the pilot stage of the study. The p-value was observed to be 0.0001, indicating that the model was statistically significant at a confidence level of 99.99%. The R2 value was 0.09462. The researchers also noted that t-test for significance of individual independent variables indicated that at the significance level of 0.10 (confidence level of 90%), demand forecasting updating order and rationing and shortage gaming were statistically significant. The other two variables were statistically insignificant at 90% confidence level. This means the bullwhip effect will increase when there is an increase in the inaccurate demand forecasting and rationing and shortage game used by the customers. The relative weights of various variables are: Demand forecasting order updating (–1.04689); order batching (+1.389); price fluctuations (–0.453) and rationing and shortage gaming (+0.081). This along with the t-values for independent variables support the claim that customers are responsible for causing bullwhip effect for supplier due to their improper demand planning and rationing gaming.

Conclusions and Future Direction of Research This research is helpful in throwing certain significant insights into the causes of bullwhip effect in the Indian grocery retail industry. As a primer, this guides the researchers to further explore the impact of variables in causing the bullwhip effect and also helps in developing strategic alternatives for countering bullwhip effect among the suppliers of grocery to formal retail outlets in India. 82


The hierarchical framework of this study has three levels, which can be used to analyze the relative importance of the causes of the bullwhip effect and its countering strategies. This study got empirical data through questionnaire to analyze the relative importance for solving the bullwhip effect. From personal interview the researchers could know the reasons and different methods to solve the bullwhip effect in supply chain of grocery products in India. The causes of bullwhip effect in whole sample are demand forecast updating (–1.04689); order batching (+1. 389); price fluctuations (–0.453) and rationing and shortage gaming (+0.081). There is a common perception that sharing sales information is an efficient method to solve the problem of demand forecast and can benefit from every member of the supply chain. In the order batching, small and medium manufacturers benefit from communicable information by setting up information systems. In the price fluctuation, large manufacturers hope to find major sources of costs, because large manufacturers could reduce the effect of price fluctuation by understanding the major sources of costs. In rationing and shortage gaming, large manufacturers request that downstream members of a supply chain place orders well in advance of the sales plans. However, small and medium manufacturers tend to share the capacity and inventory information on manufacturers during peak shortage. The factors contributing to the bullwhip effect were also analyzed. The relative importance of various factors like business practices in the retail industry, nature of the product supplied, small customer management process followed by suppliers, level of product supply and negotiating power of buyers and the overall competitive environment were analyzed to draw inferences about the status of grocery retailing in the organized sector in India and how SCM practices are affected by these factors. It will be interesting to further study the different SCM practices among large and small customers. The researchers will also able to find out and compare the relative importance of identified four factors like demand forecasting, order updating, order batching and price fluctuations. Rationing and shortage gaming vary depending on the size of the customer. 

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