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Software update: Manufacturing and retail - Views on News from Equitymaster
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Software update: Manufacturing and retail
Aug 17, 2007

In a previous article, we had discussed about the BFSI and telecom sectors worth respect to their technology requirements and growth prospects therein. In this article, we put forward our views on developments in the manufacturing and retail verticals. Manufacturing
In the past few years, the manufacturing sector has evolved very fast as far as IT spending is concerned. Although the IT spending in manufacturing sector across the globe is relatively lower when compared with financial services and telecom, but it still offers huge offshoring opportunities to Indian IT service provider. Companies are facing intense competitive pressures and being challenged to innovate, introduce new products, and expand into new markets. Due to this, offshore outsourcing is increasingly becoming the strategic business solution of choice to position manufacturing firms for ‘profitable’ growth.

The top three growth areas for technology companies in the manufacturing space are engineering (product design and development functions), logistics, and finance and accounting (F&A). The goal of decreasing time to market is driving manufacturers to outsource engineering processes. An increasing reliance on a global supplier base, a shift toward offshore manufacturing, and the development of multiple channels to market impacts the logistics and supply chain functions. Finally, F&A outsourcing is increasing in the manufacturing sector because many discrete manufacturing firms have grown through acquisitions; many also have production or operational units located in various regions around the world. Outsourcing is an effective solution for consolidating their disparate accounting systems and gaining transparency in business units' financial operations. Outsourcing in the manufacturing sector achieves increased productivity, new revenue generation, cost reduction, and business transformation - all adding up to increased shareholder value.

Retail
The retail industry in India is estimated to spend anywhere in the range of US$ 1.5 bn to US$ 2.5 bn over the next five years on outsourcing their IT operations. The global outsourcing market in retail segment stands at US$ 400 bn. Out of this, 85% of the work is done onshore and the remaining in offshore. India has about 30% share in the US$ 60 bn offshore market. IT outsourcing alone can improve operating margins by 0.3% to 0.5% for retailers, which will enable them to improve their profitability. It also creates growth opportunities by reducing capital investment required per unit of growth and helps in reducing operating costs through more efficient and competitive service delivery.

With the increase in globalisation of retailers, both in terms of their points-of-sale as well as their points-of-supply, the IT spend in the retail sector has increased considerably and plays an increasingly important role in managing the complexity of retail operations.

The growth in retail IT spending has been about 12% CAGR during the period 2000 through 2006. However, the corresponding growth in revenues for the retail sector has been at only about 2%, translating IT costs to be a larger fraction of the overall cost base of the retail sector. This has resulted in considerable pressure on IT to deliver value in the retail sector as well as closer scrutiny of the IT spends. In retail, the IT operations are relatively complex mainly due to product, scale and process complexity along with supply chain challenges. But going forward, we believe that retailers who do not manage their IT landscape effectively will find that with time the IT systems become part of the problem rather than components of the solution.

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