CFO Leaders: How HUL Is Going The Last Mile – Srinivas Phatak
CFO Srinivas Phatak talks about HUL’s newest mission - 24 hour delivery to stores.
Before he returned to India, Srinivas Phatak, now chief financial officer of Hindustan Unilever Ltd., spent two years in Switzerland managing American supply chains for parent company Unilever Plc. That likely prepared him for the newest phase of disruption at the India business. And, it immunised him to all kinds of country crazy.
“Someone decided to take an Indian, base that person in Switzerland and get him to handle North America and Latin America supply-chain finance; it doesn’t get crazier than that,” Phatak says describing the project that saw a billion dollars invested to rework the supply chain.
It was an amazing opportunity to work at the same time between a developed market —North America, which was about omni-channel—and its crazy (emerging market) counterpart Latin America, he says.
That experience is now coming handy for the 20-year Unilever veteran. Phatak was appointed CFO of India’s largest consumer goods company just months after the government implemented a nationwide Good and Services Tax in 2017.
Though riddled with technology issues, implementation glitches and constantly changing rules, the consumption tax did transform India into a borderless business zone, prompting companies like HUL to rethink the entire supply chain so as to locate factories, warehouses and distribution nodes based on commercial logic and not tax boundaries.
What’s The Rush?
Consumers are not just shopping more frequently nowadays, there is an urgency to their consumption desires that didn’t exist say a decade ago. Marry that to an explosion in brand choices.
That makes availability more critical now than ever before – whether at a neighbourhood store or at the consumer’s doorstep.
But stores suffer two main constraints: shelf space and money locked in inventory.
To be relevant to the customer, HUL, and every other consumer company, needs to ensure its products are available when she needs them. Or in Phatak’s words: “the right assortment and the right frequency of services.”
- That involves knowing what she may need and when – (data).
- Ensuring a wide assortment is available readily – (distribution).
- And that store has the capability to partner you in this exercise – (display).
HUL’s current average, in terms time-to-store, is 48 hours. It says the industry average is 72 hours.
So far, HUL is close to achieving its 24-hour target in six-eight top cities.
To understand the scale of the ambition—HUL services close to 90 lakh outlets via 3,500 distributors.
A lot of work that we have done says that, if you are able to service the customer within 24 hours, your ability to get that disproportionate increase to sales...you are really well positioned [for that].Srinivas Phatak, Executive Director and CFO, HUL
Phatak wouldn’t reveal how much HUL is investing in this exercise. Nor did he detail the financial gains, except to say that in the stores they have achieved 24-hour delivery “growth can be at least a couple of percentage points higher”.
In the last decade HUL has reworked its distribution network and processes significantly to ensure goods move from the company stock depot to the distributor and then to the retailer within 48 hours.
- The reduction in timelines was achieved using daily digital data collection via field sales staff that help augment store replenishment orders placed with distributors weekly. Timely data allowed for faster fulfillment.
- The next day, the C&F agent sends the required goods to distributors who in turn deliver it to retailers.
It has ensured virtually zero inventory and holding costs at the distributor level.
Phase One Of Distribution Changes
HUL now wants to halve the time taken to reach stores. Phatak said with 95 percent of the stores are GPS-tagged, and technology is helping crunch the time taken.
“Look at your typical, traditional supply chain. You will take it from a manufacturing site, you will put it into a big distribution centre, from there you will take it to a distributor and the distributor then will start to break bulk and then they will try and deliver—and imagine what happens in the cities, even in the moment you start to break bulk and try and unpack it, you have lost about 8-12 hours. So, therefore how do you do it?
What we are saying is that, can we now, based on the orders, break bulk at our main distribution centre? And therefore get the goods right through. All that you have to do at a distributor point is perhaps change the truck because a large truck can’t enter the city. Take it into a smaller truck and you are still able to go to the retailer.
And the interesting aspect is this is talked about in general trade, now the question is again how do you do it for e-commerce? What is it really for modern trade? Similarly, that then starts becoming a very interesting challenge and the beauty is with every challenge, you got a big value unlocked, if you can get this right you will get a disproportionate value creation opportunity.”
Experiments such as four-year-old HumaraShop.com achieve the final few feet of this logistical last-mile effort, by providing consumers a platform for online purchases home-delivered by the nearest kirana store.
“That is the answer to the question on can I beat Amazon’s two-hour delivery (only in the U.S. currently). In which case you have to partner with some of these guys who manage the delivery ecosystem.”
In rural areas, the company’s Shakti network of 1.2 lakh women is helping achieve the same direct distribution goal. Today HUL is digitising that as well, Phatak said.
That again is a very big source of competitive advantage. Cities everybody will target. The game really happens in the many Indias and the mini Indias.Srinivas Phatak, Executive Director and CFO, HUL
Phase Two Of Distribution Changes
Eventually HUL hopes to reach stores directly, thereby disintermediating the distribution structure as well as further reducing time-to-market.
“Into the future, the whole role of the distributor will change. Today, they break bulk, they basically go and distribute. They offer credit so obviously there is one important chain, that is distributors offer credit to the stores. We don’t, but the distributor does. The rate at which all of this is changing, into the future, you could have a very different looking distributor. We don’t know if it is a two-year phenomenon or a five-year phenomenon. You take the app, you will get the orders, and the full algos that you conduct at the back end. You can almost decide not to go to a distributor point to do this changing of trucks. It could be anywhere else and you make sure you reach the stock directly into the stores.
Second question is, with the explosion that is happening to the digitisation of the economy—in the foreseeable future you can can also start to see how you can get credit (to the store) out of the equation. There are multiple solutions coming through.
Then it comes down to the interesting question of how do you look at the distributor? The distributor then starts to become someone who is really reading for you—market development. You still have to educate the stores in terms of market products. You can have a very interesting job to say, how do you want the products to be visible in a store? How do you want to make it really more consumer facing?
That’s how I think it will go. Do I know whether it will go there in 12 months? Definitely not. If it will go in 36 months, probably yes. But we will have to learn it a few times and do and undo models before we get there.”
Data And Digital
This distribution transformation depends on data. If at one time consumer goods companies relied on distributors and wholesalers to build geographical reach, connect with small stores flung across the country, take their orders and communicate them back to the company depots...now some of that can be done via an app. Say HUL’s Shikhar for instance, which connects the retailer, distributor and the company...real time.
“It is an app which is available to the retail store. They can simply place an order (with the distributor and HUL), in case they don’t have a salesperson calling them, and you’ll be able to service them. We’ve taken it up to about 13 cities.
Again, some key metrics. How many orders received? Are they repeat orders? Or is it that people have used the app and not come through; more importantly if they have placed an order, how have we serviced, what kind of time frames have we serviced, have orders dropped? I think all of these become critical metrics and key performance indicators which we need to monitor to make sure that it is a sustainable solution. We are in 13 cities and we will expand.”
There’s the Samadhan app currently being deployed only in Chennai where the company is building a huge distribution centre that could help eliminate having to break bulk at the distributor level.
And HumaraShop connects HUL directly to the consumer.
For most FMCG companies there’s little direct access to consumer data. In general trade it’s the retailer and in e-commerce the platform that know what the consumer wants, when and in what colour.
But the bit-by-bit disintermediation and digitisation of its distribution chain is giving HUL more insight into that other critical last mile - the consumer’s mind.
So, the more sophisticated you get in terms of what should be in the store, then you figure out right in the back end how quickly can you make that and how can you actually get the technology to map the whole thing. That’s when you really start to make a big difference to the whole value equation.Srinivas Phatak, Executive Director and CFO, HUL
The Final Frontier – The Store
But de-layering the distribution network could have collateral impact. For instance, distributors give stores credit to stock goods till they are purchased by consumers. HUL itself extends no credit, to distributors or stores. That’s how it’s able to achieve a negative working capital cycle.
If the final leg of this transformation is direct-to-store delivery, then who will fund stores? Phatak said the company is already working with banking and fintech partners as well as point of sale solutions companies to find answers to such questions.
“Modern trade we give a little bit of credit, general trade we don’t give any credit. To a large extent, we don’t want a lot of our distributors to hold inventory. Even with the distributor, there are constraints of space and there is the constraint of capital. One element is how do you continue to become efficient in your end-to-end operations in which case the whole cycle then starts to make sense. I don’t need to push credit since I don’t need to hold inventory. I don’t need to hold inventory because I am more agile and responsive. And therefore, the total equation is an end-to-end one. So, that’s one way of looking at it.
Having said that, the interesting piece is really the retailer today. It’s less about the distributor. If one of the constraints is the retailer, in terms of space and funding, I think that’s where interesting opportunities are coming up. As you look at a lot fintech solution providers who are coming through and as you partner with some of the banks, you don’t have to necessarily bet your money into it. You have an experience of working with some of them, you have the data to say how consistently and well something works for you, you have an understanding of the size of the business. If you are then able to to bring in extended partners, you can actually create a win-win situation.”
Finance Into The Future
This last-mile journey that HUL has set off on is an organisation-wide mission. What role does the CFO play in plotting the journey and marking the milestones? Phatak said the biggest responsibility is risk management. In other words - the cost of not doing something.
He calls it “finance into the future”.
“It is very simple. First, there is a cost and an investment. Second is, if you want to bring in a lot of data and technology, you work with the external ecosystem to bring that in. Third is that, if you are doing anything about the partnerships - how do you get that to work? If you want to think about funding and financing in a different way, how do you get that to work?
The point in all of this is, if you step back, you need to have the courage of conviction to start saying that we will continue to invest in this. You’re not going to see money in the first six months, twelve months, maybe eighteen months. Or for example, in some cases, even three years. How comfortable are you with that? You need to get extremely comfortable to saying that what is this consumer lifecycle value, what is the cost of not doing this versus cost of doing it.
We are used to saying that if I invest in a fixed asset, what’s the return on investment? What’s the financial key performance indicator? That’s very easy. The moment you start to get into many of these (new) things, the question is, can you hard code some of the financial metrics?”
That is why I’ll link it back to why I said it’s ‘finance into the future’. How comfortable can you be with some of this ambiguity? How well can you think about risk and risk management? That’s not how traditionally finance has been tuned - you look at a lot more certainty, Welcome to the new world, it is all about dealing with ambiguity.Srinivas Phatak, Executive Director and CFO, HUL
Watch HUL CFO Srinivas Phatak talk about transforming distribution with big data.