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Supply Chain Management For Retailing
 0070145040, 9780070145047

Table of contents :
Cover
Half Title
About the Author
Title Page
Copy Right
Preface
Contents
Introduction
Chapter 1: Introducing Retail Supply Chain
Introducing Retail Supply Chain
How Retail Supply Chain is Different from Manufacturing Supply Chain
Supply Chain and Logistics
Retail Supply Chain Management is a Subset of Retail Management
Retail Supply Chain Elements
Retail is Not One Supply Chain—Category and Format Specific Chain
Strategic, Tactical, Operational and Execution View of Retail Supply Chain
Retail Supply Chain Maturity
Conclusion
Review Questions
Assignments
PART 1: Merchandise Planning
Chapter 2: Category Management and Merchandise Budgeting
Category Management Defined
Category Management Process
Enabling Components of Category Management
Category Captain
Challenges in Category Management
What is Merchandising and What are its Benefits
Merchandise Types
Merchandise Hierarchy
Merchandise Forecasting
Forecasting Methods
Merchandise Budgeting
Six Months Merchandise Budgeting
Open to Buy Control
Conclusion
Review Questions
Assignments
Chapter 3: Assortment and Space Management
The Concept of Assortment Management
Assortment Management Framework
Assortment Objectives
Assortment Selection
Assortment Plan
Role of Data and Information Technology in Assortment
Store Clustering
The Concept of Space Management and its Benefits
Different Stages of Space Planning
The Concept of Planograms
Issues in Space Management
Role of Information Technology in Space Management
Conclusion
Review Questions
Assignment
Chapter 4: Retail Pricing
Retail Pricing Challenges
Managing the Retail Pricing Life Cycle
Managing Retail Promotions
Managing Retail Markdowns
Promotion Management Maturity Model
Personalised Pricing/One to One Pricing
IT for Managing Price, Promotion and Markdown
Conclusion
Review Questions
Assignments
PART 2: Retail Product
Chapter 5: Retail Product Lifecycle Management
Product Design
Private Labels
Retail Packaging
Shelf Ready Packaging
Green Design and Packaging
IT for Retail Product Life Cycle Management
Conclusion
Review Questions
Objective Type Questions
Assignments
PART 3: Managing Retail Logistics
Chapter 6: Retail Distribution and Replenishment
Retail Distribution
Retail Replenishment
Direct Store Delivery (DSD)
Managing Retail Home Delivery
IT for Retail Distribution and Replenishment
Measures for Retail Distribution and Replenishment
Conclusion
Review Questions
Objective Type Questions
Assignments
7. Retail Logistics
Retail Transport
Retail Warehousing
Conclusion
Review Questions
Objective Type Questions
Assignments
8. Retail Logistics—Contemporary Issues
Managing Retail Shrinkage
Managing Logistics Service Provider
Managing Logistics Visibility and Exceptions
Green Retailing
Green Information Technology
Conclusion
Review Questions
Objective Type Questions
Assignments
PART 4: Managing Retail Stakeholder Relationships
Chapter 9: Retail Supplier Relationship Management
Retail Sourcing
Merchandise procurement
Global Sourcing
Green Sourcing
Sourcing Measures
Information Technology for Sourcing
Retail Sourcing Trends
Conclusion
Review Questions
Objective Type Questions
Assignments
10. Retail Customer Relationship Management
Introducing Retail Customer Relationship Management
Customer Service
Order Management
Multi Channel Retailing
Retail Return and Reverse Logistics
Retail Loyalty Programmes
Retail Kiosk
Green Retailing—What it Means for CRM
Measures of Retail CRM
Conclusion
Review Questions
Objective Type Questions
Assignments
PART 5: Category and Format Specific Supply Chain Issues
Chapter 11: Food and Grocery Retailing Supply Chain
Food and Grocery Retailing
Food and Grocery Supply Chain Characteristics
Fresh Fruit and Vegetable Supply Chain
Contract and Corporate Farming
Managing the Cold Chain
Food Safety
Food Processing
Fresh Food Retailing—An Indian perspective
Retail DELI Section
Dairy Retailing
Live Stock and Poultry Retailing
Food Services
Technology Requirements for Food and Grocery Retailing
Conclusion
Review Questions
Objective Type Questions
Assignments
12. Apparel and Footwear Retailing Supply Chain
Apparel and Footwear Retailing—Understanding the Segment
Apparel Retailing Supply Chain
Supply Chain Characteristics
Pre Pack planning
Apparel Retailing in India
Apparel Retail Supply Chain Innovations
Footwear Retailing
Managing Footwear Retailing Supply Chain Efficiently: Case Study: Khadim
Conclusion
Review Questions
Assignments
13. Other Category Retailing Supply Chain
Consumer Electronics Retailing—Understanding the Segment
Consumer Electronics Retailing Supply Chain Characteristics
Jewellery Retailing
Home Furnishing Retailing
Health and Beauty Retailing
Pharma Retailing
Books and Music
Other Category Retailing
Conclusion
Review Questions
Assignments
14. Managing Supply Chains of Different Retail Formats
Classification of Retailers
Organised B2C Retail Chain Formats
Organised B2B Cash and Carry Formats
Rural Retail Formats
Airport Retailing
Cooperative Stores
Non Store based Retail Formats
Online Shopping/E Tailing
Service Retailing
Retailing of Financial Products and Retail Banking
Courier Service Retailing
Conclusion
Review Questions
Assignments
PART 6: Information Technology for Retail
Chapter 15: Retail Technology
Retail Technology Maturity Model
Bar Coding
RFID
Retail ERP
Retail Analytics
Point of Sales Solutions
Mobile Applications
Other Emerging Retail Technologies
Conclusion
Review Questions
Objective Type Questions
Assignments
Index

Citation preview

Supply Chain Management for Retailing

About the Author Rajesh Ray is an Engineer and an M.B.A., and currently leads the supply chain management product area in IBM India. Prior to joining IBM, Rajesh had spent six years with SAP Consulting and a year with HP Consulting. During the twelve years of his consulting career he has worked with several leading retail clients like Tesco, Best Buy, Staples etc. in the capacity of Business Consultant, Business Analyst, Implementation Consultant and Solution architect. His core areas of expertise are supply chain management, process design, ERP implantation and deployment of supply chain best practices. He has contributed many articles in leading international journals of supply chain management and has been a regular speaker in different supply chain forums. He has been given honorary membership in CII (Confederation of Indian Industry) Logistics Council. His recent areas of interest are: Industry supply chain and Supply chain optimisation. He can be reached at [email protected]

Supply Chain Management for Retailing

Rajesh Ray Managing Consultant & Product Lead (Supply Chain Management) IBM India, Kolkata

Tata McGraw Hill Education Private Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto

Tata McGraw Hill Published by the Tata McGraw Hill Education Private Limited, 7 West Patel Nagar, New Delhi 110 008. Supply Chain Management for Retailing Copyright © 2010, by Tata McGraw Hill Education Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw Hill Education Private Limited ISBN-13: 978-0-07-014504-7 ISBN-10: 0-07-014504-0 Managing Director: Ajay Shukla Head—Higher Education Publishing: Vibha Mahajan Publishing Manager—B&E/HSSL: Tapas K Maji Assistant Sponsoring Editor: Piyali Ganguly Editorial Executive: Hemant K Jha Development Editor: Shalini Negi Assistant Manager (Editorial Services): Anubha Srivastava Senior Production Manager: Manohar Lal Production Executive: Atul Gupta General Manager—Marketing (Higher Ed & School): Michael J Cruz Product Manager: Vijay S Jagannathan General Manager—Production: Rajender P Ghansela Assistant General Manager—Production: B L Dogra Information contained in this work has been obtained by Tata McGraw Hill, from sources believed to be reliable. However, neither Tata McGraw Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at The Composers, 260, C.A. Apt., Paschim Vihar, New Delhi 110 063 and printed at Anand Book Binding House, 1036, Reghubarpura No. 1, Gandhi Nagar, Delhi 110 031 Cover Design: K Anoop Cover Printer: Rashtriya Printers RALCRRBFRBDYX

Preface Retail is one of the largest industries in the world in terms of both size and the number of people employed globally. It is also one of the classic industries from the supply chain management perspective and for every facet of supply chain—be it sourcing, contract manufacturing, product development, inventory management, logistics or using technology—it is a trend setter in many cases. The retail industry has pioneered many breakthrough supply chain concepts like cross docking or vendor managed inventory and has been using these practices much before they became fashionable in the supply chain world. Leading retailers like Walmart, Zara and Amazon bring in supply chain innovations regularly to challenge those age old supply chain beliefs that you need a distributor to distribute the goods or you need to receive materials in warehouse days ahead before issuing from there. However modern retail is a recent phenomenon in India. The first phase of retail revolution in the country had seen a mad rush for occupying premium space in cities, efforts to experiment with different store formats and big investment plans from everyone. Very few really talked about quick ROI. As things are settling down in the country, few retailers have already experienced what works and what does not and, much like B2C revolution, most of them discovered that success in this business is largely driven by how effective you are in putting together a strong supply chain at the back end to deliver goods of right quality and at right price on time—every time. That is easier said then done—as there are things beyond a particular retailer’s efficiency—since the country has acute shortage of infrastructure, cold chain and a host of other things. In this book we will discuss different aspects of retail supply chain along with a special focus on different retail categories and retail formats. I wrote this book as there is no similar text on retail supply chain, especially from Indian perspective. However, there is growing interest in this subject, both in the world of academics and among professionals. The book is written to serve as: l A text book for certificate, diploma, and post graduate diploma courses in retail management l A reference book for logistics and supply chain management courses, specifically covering retail supply chain l A reference book for teachers, consultants and practitioners involved in any one of the processes that make up the retail supply chain. The book has been written in simple manner and each chapter uses examples for easy explanation of the theories and concepts introduced in the chapter. I have attempted to cover every aspect of retail supply chain with reasonable depth in this book. I would like to thank Ms Mamta Mohan, Program Director (MBA Retail), Amity Business School, Noida, Ms Surbhi Jain, Program Leader (DRM), Indian Retail School, New Delhi, and Mr S L Gupta, Professor (Retail Management), Birla Institute of Technology, Noida for their valuable feedback on the contents of the book. I sincerely request comments and inputs from readers to improve the content of this book further in its future editions. RAJESH RAY

Contents Preface

v

Introduction 1.

Introducing Retail Supply Chain Introducing Retail Supply Chain 4 How Retail Supply Chain is Different from Manufacturing Supply Chain 5 Supply Chain and Logistics 9 Retail Supply Chain Management is a Subset of Retail Management 13 Retail Supply Chain Elements 14 Retail is Not One Supply Chain—Category and Format Specific Chain 17 Strategic, Tactical, Operational and Execution View of Retail Supply Chain 18 Retail Supply Chain Maturity 20 Conclusion 21 Review Questions 22 Assignments 22

3

PART 1: Merchandise Planning 2.

Category Management and Merchandise Budgeting Category Management Defined 26 Category Management Process 26 Enabling Components of Category Management 36 Category Captain 38 Challenges in Category Management 38 What is Merchandising and What are its Benefits 42 Merchandise Types 42 Merchandise Hierarchy 43 Merchandise Forecasting 44 Forecasting Methods 44 Merchandise Budgeting 49 Six Months Merchandise Budgeting 51 Open to Buy Control 53 Conclusion 55 Review Questions 56 Assignments 56

25

viii Contents 3.

Assortment and Space Management The Concept of Assortment Management 58 Assortment Management Framework 59 Assortment Objectives 60 Assortment Selection 61 Assortment Plan 64 Role of Data and Information Technology in Assortment 66 Store Clustering 67 The Concept of Space Management and its Benefits 69 Different Stages of Space Planning 69 The Concept of Planograms 70 Issues in Space Management 72 Role of Information Technology in Space Management 74 Conclusion 74 Review Questions 75 Assignment 75

57

4.

Retail Pricing Retail Pricing Challenges 77 Managing the Retail Pricing Life Cycle 81 Managing Retail Promotions 81 Managing Retail Markdowns 90 Promotion Management Maturity Model 91 Personalised Pricing/One to One Pricing 91 IT for Managing Price, Promotion and Markdown Conclusion 96 Review Questions 96 Assignments 96

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PART 2: Retail Product 5.

Retail Product Lifecycle Management Product Design 99 Private Labels 101 Retail Packaging 105 Shelf Ready Packaging 107 Green Design and Packaging 111 IT for Retail Product Life Cycle Management Conclusion 116 Review Questions 117 Objective Type Questions 117 Assignments 117

99

112

PART 3: Managing Retail Logistics 6.

Retail Distribution and Replenishment Retail Distribution 121 Retail Replenishment 123

121

Contents ix Direct Store Delivery (DSD) 134 Managing Retail Home Delivery 135 IT for Retail Distribution and Replenishment 137 Measures for Retail Distribution and Replenishment 137 Conclusion 138 Review Questions 139 Objective Type Questions 139 Assignments 139 7.

Retail Logistics Retail Transport 141 Retail Warehousing 157 Conclusion 190 Review Questions 191 Objective Type Questions 192 Assignments 192

140

8.

Retail Logistics—Contemporary Issues Managing Retail Shrinkage 194 Managing Logistics Service Provider 198 Managing Logistics Visibility and Exceptions Green Retailing 212 Green Information Technology 214 Conclusion 214 Review Questions 215 Objective Type Questions 215 Assignments 215

193

208

PART 4: Managing Retail Stakeholder Relationships 9.

Retail Supplier Relationship Management Retail Sourcing 219 Merchandise procurement 222 Global Sourcing 227 Green Sourcing 234 Sourcing Measures 235 Information Technology for Sourcing 236 Retail Sourcing Trends 237 Conclusion 238 Review Questions 239 Objective Type Questions 239 Assignments 240

10. Retail Customer Relationship Management Introducing Retail Customer Relationship Management Customer Service 244 Order Management 251 Multi Channel Retailing 255

219

241 243

x Contents Retail Return and Reverse Logistics 260 Retail Loyalty Programmes 270 Retail Kiosk 275 Green Retailing—What it Means for CRM Measures of Retail CRM 278 Conclusion 279 Review Questions 280 Objective Type Questions 280 Assignments 281

278

PART 5: Category and Format Specific Supply Chain Issues 11. Food and Grocery Retailing Supply Chain Food and Grocery Retailing 286 Food and Grocery Supply Chain Characteristics 289 Fresh Fruit and Vegetable Supply Chain 290 Contract and Corporate Farming 291 Managing the Cold Chain 294 Food Safety 295 Food Processing 298 Fresh Food Retailing—An Indian perspective 299 Retail DELI Section 300 Dairy Retailing 300 Live Stock and Poultry Retailing 305 Food Services 309 Technology Requirements for Food and Grocery Retailing 316 Conclusion 318 Review Questions 318 Objective Type Questions 319 Assignments 319

285

12. Apparel and Footwear Retailing Supply Chain Apparel and Footwear Retailing—Understanding the Segment 321 Apparel Retailing Supply Chain 322 Supply Chain Characteristics 322 Pre Pack planning 326 Apparel Retailing in India 328 Apparel Retail Supply Chain Innovations 332 Footwear Retailing 337 Managing Footwear Retailing Supply Chain Efficiently: Case Study: Khadim Conclusion 344 Review Questions 344 Assignments 345

320

13. Other Category Retailing Supply Chain Consumer Electronics Retailing—Understanding the Segment

340

346 346

Contents xi Consumer Electronics Retailing Supply Chain Characteristics Jewellery Retailing 350 Home Furnishing Retailing 352 Health and Beauty Retailing 354 Pharma Retailing 355 Books and Music 357 Other Category Retailing 359 Conclusion 360 Review Questions 360 Assignments 360

347

14. Managing Supply Chains of Different Retail Formats Classification of Retailers 362 Organised B2C Retail Chain Formats 363 Organised B2B Cash and Carry Formats 366 Rural Retail Formats 368 Airport Retailing 372 Cooperative Stores 373 Non Store based Retail Formats 374 Online Shopping/E Tailing 377 Service Retailing 382 Retailing of Financial Products and Retail Banking 382 Courier Service Retailing 384 Conclusion 385 Review Questions 386 Assignments 386

361

PART 6: Information Technology for Retail 15. Retail Technology Retail Technology Maturity Model 390 Bar Coding 393 RFID 394 Retail ERP 398 Retail Analytics 408 Point of Sales Solutions 412 Mobile Applications 417 Other Emerging Retail Technologies 422 Conclusion 424 Review Questions 425 Objective Type Questions 426 Assignments 426

389

Index

427

[CHAPTER]

LEARNING OBJECTIVES

Introducing Retail Supply Chain

1 In this chapter we will explain following concepts: 1. Introducing retail supply chain—why supply chain is important in Retailing 2. How retail supply chain is different from manufacturing supply chain 3. Supply chain and Logistics 4. Retail supply chain management—A subset of Retail management 5. Retail Supply Chain Elements 6. Retail is not one supply chain—Category and format specific chain 7. Strategic, Tactical, Operational and Execution view of retail supply chain 8. Retail supply chain maturity

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Supply Chain Management for Retailing

INTRODUCING RETAIL SUPPLY CHAIN Supply chain management involves all processes of designing a product, sourcing components for making it, manufacturing the finished product and distributing the finished product from its origin to the final customer. Thus, supply chain involves a variety of processes like product development, sourcing, manufacturing, distribution, transportation, warehousing etc. What is the boundary of a supply chain? Again, it depends on how a particular company defines it, on the basis of the scope of its influence. A company’s supply chain boundary can be upto its direct supplier and customer or upto its supplier’s supplier and customer’s customer. Several consumer goods companies sell products to their wholesalers, i.e., their direct customers are their wholesalers. However, they also monitor how their wholesalers sell to their distributors (This is called secondary sales as they are monitoring their customer’s customer) and how distributors sell to their retailers (This is called tertiary sales and they are monitoring their customer’s customer’s customer). Similarly, in the auto industry, auto manufacturers not only monitor their direct suppliers (Tier 1) but also their supplier’s supplier (Tier 2) and in some cases, even their supplier’s supplier’s supplier (Tier 3). Managing supply chain is core to a retailer’s business since one of the important value additions a retailer does is moving the product from the point of origin (Manufacturer) or other source (Supplier) to the point of consumption (Customer). There are several supply chain processes involved in this like sourcing, transportation, warehousing, inventory management, replenishment, cold chain management etc. Increasingly, retailers are taking control of design and manufacturing of private labels, though in most cases they outsource manufacturing. Retailers also need to take care of several other supply chain issues like which products to stock (Assortment management), how to price their products and how to handle the reverse logistics when the products are returned. The efficiency and effectiveness of managing these processes decide what kind of product choices the retailer offers in its store, at what price he can offer them and how he can provide better customer service. Leading retailers of the world like Wal-Mart had brought continuous innovations in the supply chain processes and pioneered several supply best practices in the world of supply chain like Continuous replenishment programs (CRP), Collaborative planning forecasting and replenishment (CPFR), Cross docking, Floor ready merchandise (FRM) etc. These innovations had not only helped Walmart to remain at leading slot in the Fortune 500 list, but also helped its numerous customers to get products at everyday low price (EDLP) and enough choices at all of its stores. Another important thing to remember is that unlike manufacturing, retail is not one supply chain. An automotive manufacturer will typically deal with only auto components, but a retailer like Big Bazaar needs to manage supply chains for different types of products, i.e., they would have different supply chains for consumer durables, food and grocery, dairy products, furniture and even jewellery—each of these supply chains would have separate supply chain characteristics, a different set of suppliers, separate forecast and replenishment patterns etc. Retail is a recent phenomenon in India and in the first generation of retailing in this country, retailers had invested on the front end of retailing, i.e., grabbing the prominent locations for putting up their store, initiatives to create awareness and mindshare, investing in loyalty schemes etc. Increasingly, now the battle is shifting towards investing in the backend, i.e., putting an efficient and responsive supply chain in place which can deliver products to the store quickly and at a reasonable cost. According to a KSA report, supply chain and logistics costs for organised retail chains in India comprise up to 10% of retail sales price, much behind US and Europe where it is less than 5%. In India, lack of infrastructure and inefficient supply chains causes a wastage of around 40% of the country’s total fresh fruit and vegetables production and the difference between firm price

Introducing Retail Supply Chain

5

(Price at origin) and the price consumers pay at retail stores can be inflated by more than 300% due to numerous intermediaries which add their cost in the process of distribution without much value addition. At the end of the day, both end consumers and original producers, i.e., manufacturers and farmers suffers at one end due to the very high price that the final consumers pay and the original producers at the other end due to the very low prices they get. Organised retailing can change this, benefiting both these stakeholders and removing this inefficiency from the supply chain. Efficiency in the supply chain can be a major point of differentiation for retailers of tomorrow and the best will only survive. This happened in B2C retailing a few years back—you can hardly remember a few names like Amazon and EBay today who survived the race because of their supply chain innovations.

HOW RETAIL SUPPLY CHAIN IS DIFFERENT FROM MANUFACTURING SUPPLY CHAIN The supply chain in a retail company is different from a traditional manufacturing supply chain. Figure 1.1 and Figure 1.2 explain a manufacturing and retail supply chain. A manufacturer gets raw materials and components from its suppliers to make the finished goods. Materials can come directly to the manufacturer’s factory or these can be given to an external godown where they get consolidated and finally, they come to the factory. These materials are processed in the plant, converted to finished goods, packed and finally delivered to the manufacturer’s customers. These customers are generally warehouses or distribution centers, from where the goods reach retailers and then to final consumers. This supply chain network is shown in

Fig. 1.1

A Simple Manufacturing Supply Chain—An example

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Supply Chain Management for Retailing

Fig. 1.2

A Simple Retailer’s Supply Chain—An example

Figure 1.1. However, in some cases, there could be multiple tiers in the distribution network, like manufacturers, wholesalers, distributors, small distributors and retailers. While the materials flow in the forward direction, the information of actual sales flows back from the retailers to the manufacturer and then to the supplier, helping everyone in the chain to plan better for tomorrow. In case of a retail supply chain as shown in Figure 1.2, items are sourced from a supplier or directly from the manufacturer. These items can be delivered directly to the store, or at the retailer’s central warehouse from where it is given to the store; or the items can be first given to an external godown of the retailer, from where they come to the retailer’s central distribution centre and from there to the store. There can be different models of this distribution network as shown in the figure, depending on the type of item, for example, fresh fruits and vegetables can be directly distributed to the store for their short self life, small volume items can be delivered in a consolidation point like a godown, where it is consolidated and then sent to retailer’s distribution centre in full truck load and from there, finally to the store. Figure 1.3 explains the different functions of a manufacturing supply chain. A typical manufacturing supply chain comprises following processes: A. Inbound supply chain: l Sourcing l Incoming quality control

Introducing Retail Supply Chain

Fig. 1.3

7

Manufacturing Supply Chain

Inbound transportation from supplier to the manufacturing unit Import documentation/clearance processes if materials are imported l Goods receiving and warehousing l Inventory management of production raw materials B. Manufacturing and in-house value addition processes: l Production planning, scheduling and production l In process quality control l Work in progress inventory management l Plant maintenance C. Outbound supply chain/Distribution: l Outbound transport l Finished good quality control l Warehousing of finished goods at company’s factory, external warehouses and distribution centers l Packaging l Goods issue l Finished goods inventory management D. Customer Service l Defining customer service levels l Order management l l

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Supply Chain Management for Retailing

Managing returns Packaging l Fixing channels of distribution l Product development E. Other supply chain management functions: l Reverse logistics l Managing supply chain exceptions l Logistics outsourcing (Typically done at corporate head office) l Product development and R&D Figure 1.4 explains the different functions of a retail supply chain. As in this case, there is no manufacturing, manufacturing related supply chain elements are not part of this supply chain. Retail has some additional supply chain functions like Private label development, Multi channel retailing, Managing Loyalty programs, Category planning, Assortment management, Store clustering etc. l l

Fig. 1.4

Retail Supply Chain

Figure 1.5 explains the common elements of a manufacturer’s and retailer’s supply chain and the areas they differ in. Warehousing, Transportation, Sourcing and Incoming quality control are common elements for both these supply chains. Processes like Category management or Assortment planning are retail exclusive, whereas plant maintenance or in-process quality control can be exclusive to the manufacturing supply chain.

Introducing Retail Supply Chain

Fig. 1.5

9

Supply Chain for Manufacturer and Retailer have things in Common and Difference

SUPPLY CHAIN AND LOGISTICS The term logistics had its origin in army, in connection with supplying and quartering of troops. Today, the word logistics is applied to all businesses, wherever there is physical distribution, i.e., where moving and storing of goods are involved. As the scope and processes of a retail supply chain is a little different from that of a typical manufacturing organisation—the scope of logistics also differs here.

Scope of Logistics Among the elements mentioned in Figure 1.3, which ones should be included in logistics is always a point of debate and also varies with different organisations. In a lot of companies, logistics is considered to be the same as managing the outbound supply chain/distribution. However in the last two decades, as the concept of supply chain became popular, the definition of logistics started to change. Figure 1.6 shows the elements that are part of logistics and those that are not. Elements that are part of supply chain but not part of logistics: l Product development is the core for most business as that is what a company brings to market for the ultimate consumer’s consumption. This is something that requires separate focus and coordination among a lot of divisions within (like: Marketing, Engineering, R&D, Manufacturing, Procurement etc.) and outside the company (like: Suppliers, Inputs from customer etc.). This is something that is never a part of logistics. In some companies, it is a part of the supply chain process while other companies prefer to keep it outside the supply chain, as a R&D function. l Packaging Packaging serves different needs of the manufacturer, like: attracting customers, sales promotion, protection of the items inside, carrying the item through the distribution channel etc. There are several entities in the organisation involved in designing the packaging the end product, like Marketing, who give inputs on layout, Distribution team, who give inputs on transport and warehouse worthiness, Engineering and R&D team, who design the packaging, etc. Till now, we discussed the packaging of finished products. The procurement department plays a role in defining how raw materials/components etc. should be packed by suppliers

10

Supply Chain Management for Retailing

Fig. 1.6

l

l

l

Logistics is a Subset of Supply Chain Management

while sending to the factory and negotiating with packaging material suppliers. As several departments are involved in this—in some companies it is considered to be a logistics function, in some, it is a marketing function while in some others still, it is a function of the design team. Manufacturing (i.e., Production planning, scheduling and shop floor management) and processes like Maintenance are always out of logistics. Quality processes (i.e., Incoming, Work in progress and Outbound) are also considered out of logistics. Most of the companies these days look at quality more as an organisational philosophy and not merely a process of ensuring the quality of incoming and outgoing products. Modern tools of quality, like six sigma, spans over all organisation processes and does not cover product quality alone. Sourcing constitutes 30–50% of the total product cost in most of the companies, so they prefer to keep it outside logistics as it needs separate focus.

Elements that are Commonly Considered as Part of Logistics l

Warehousing Traditionally, in manufacturing companies, warehouses for production raw materials/components used to be under the control of the procurement department while finished goods warehouses at factory and distribution centers used to be controlled by the marketing department. These outbound warehouses used to be considered to be part of logistics. However, increasingly, companies started to see warehousing as one operation which could control all warehousing needs of the company like: raw material warehouses, finished goods warehouses, external warehouses, bonded warehouses for import/export etc. Managing goods receipts, issue, material handling equipments etc., everything comes under their purview.

Introducing Retail Supply Chain l

l

l

l

l

l

l

11

Transportation Again here, in the past, the procurement department used to negotiate with suppliers and transporters as they carried the responsibility of bringing materials required for production from suppliers to the factory. The Marketing/Distribution/Logistics department used to control outbound transports as they carried the responsibility of taking materials to customers. Increasingly, companies started consolidating all their transport needs like: Inbound, Outbound, Inter factory, etc. and this now comes under the control of the logistics department. Inventory management Whose baby is inventory? That’s the common question in most of the companies. There are several owners depending on the type of inventory. In case of production raw materials and components—typically, the ownership lies with the procurement department, for wok in progress (WIP) items, it is production, for finished goods it is marketing/ distribution, for engineering items/spares it is maintenance department and for transit it is either procurement (for incoming) or marketing (for outgoing). Increasingly, companies are realising that one of the reasons for their poor performance in inventory management is ‘no single ownership’. The challenge is to identify the single owner. As logistics department is responsible for managing all warehouses (which constitute most of the inventory in the form of raw materials, components, finished goods etc.) and transportation (i.e., transit inventories)— in most cases, the logistics department is the common choice. Import/Export documentation and clearance In several companies, there is a separate department which handles all import/export documentation, clearance from port, liasioning with several government bodies like customs, port authority etc. However, as this is something which is close to the core definition of logistics (i.e. activities facilitating moving and storing of goods), it should be a part of logistics. Reverse Logistics Processes related to returning of materials from the consumer to the point of manufacturing is always a part of logistics in almost every company. Logistics outsourcing By virtue of basic definition, this is a logistics process. The logistics department of a company takes the responsibility of deciding what to outsource, selecting the right vendor, negotiating with them and monitoring them on a regular basis. Order management Here, the responsibility is generally divided. Historically, the first part of the process like taking the enquiry from the customer, checking availability of material, promising a delivery date and price in case the material is available, entering the order in the system, sending order acknowledgement to customer and communicating this to production/ logistics was mostly the responsibility of the marketing team. However, the fulfillment of the order in terms of manufacturing falls under the production department while storing, packing, picking and transporting this to the end customer was a logistics responsibility. As managing orders efficiently is increasingly becoming top priority for most of the companies, this is one area where companies want to consolidate the activities under one department and this is possible by keeping it under a single owner. In most cases, the logistics department is the most preferred choice. Designing customer service levels Customer service is a subject in itself having several elements encompassing marketing, product design, customer relationship management and supply chain. From the supply chain and logistics perspective, what is most important is to know the service levels required by different customer groups as this influences inventory decision (higher inventory for high service level requirement), the warehousing decision (for important customers requiring high service level, one may decide to store materials in a warehouse near to the customer) and transport decisions (customers asking for next day delivery, one may choose to send material by air). This is an important element of logistics, having a bearing on other activities of logistics.

12

Supply Chain Management for Retailing l

Managing different channels of distribution Increasingly, companies are selling through different channels like through the conventional channel of distributor–wholesaler–retailer, direct to wholesales–retailer, direct to retailer, company owned retail shops, through internet etc. Selling through these different channels adds complexity in terms of transportation by various modes and combination of trucks, in terms of order management, warehousing and managing inventories. Order fulfillment through several channels is a logistics responsibility.

Scope of Retail Logistics Once the scope of general logistics elements is identified—we need to define the scope of retail logistics. A good part of the elements identified earlier is applicable here as well; however, there are a few significant differences: l Most of the retailers do very little manufacturing of their own, so processes like production planning, scheduling, plant maintenance etc. do not make sense for them. Some retailers do light manufacturing operations in retail warehouse in terms of packaging, leveling, kitting etc. —however, this is considered as warehouse value added services and not manufacturing. Some retailers do contract manufacturing of products under their private labels, but in these cases, manufacturing is totally outsourced and is a part of the logistics outsourcing operation. l Unlike the supply chain of manufacturing companies where quality is a three stage process (incoming, in process and finished goods inspection), in retail, generally, there is only inspection of incoming goods and it is a part of strategic sourcing process. l There are additional processes in retail logistics, like home delivery of merchandise, which is not a part of a manufacturing supply chain. l Product design is relevant for a retailer for its private labels. The elements of retail logistics can be defined as follows: l Transportation (from supplier to store directly, from supplier to RDC, from RDC to store, from Store to individual consumer’s home in case of home delivery) l Warehousing (At retail store, at retail RDC) l Import documentation/clearance (export is not much applicable for a retailer and generally, is a part of a manufacturer’s processes) l Return and Reverse logistics l Order management—In a physical retail store, there is no customer order as the customer picks up whatever he wants and pays while going out. However, in internet retailing/e-tailing the order management cycle is applicable—where the customer selects the item, the system provides its availability information, retailer acknowledges the order and plans for order fulfillment post transaction. Order management cycle is also prevalent between store and RDC and between RDC and supplier. l Customer service—Customer service in all forms of retailing, i.e., in physical store or in etailing, is an important part of retail logistics l Inventory management—Inventory at store and at RDC l Logistics outsourcing l Managing different channels—Retailers need to manage multiple channels of retailing like: Physical store, web, catalog store etc. l Packaging—Retailers need to manage the packaging of private labels, i.e., they need to ensure that suppliers are packaging their supplies in a way which is floor ready and can be put in shelf quickly.

Introducing Retail Supply Chain l l

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Managing logistics exceptions Managing home delivery logistics

RETAIL SUPPLY CHAIN MANAGEMENT IS A SUBSET OF RETAIL MANAGEMENT This book is on retail supply chain management, which is a subset of retail management. There are other elements of retail management that are not covered in this book, as shown in Figure 1.7. For example: l Store planning, Design and layout: Types of Store layout and layout management, Store Exterior and interior design and Planning customer circulation l Store positioning l Visual Merchandising and creative communications like Color psychology, Graphics, Signage, Lighting and Design l Displays and POPs, Collaterals, POP materials and activities l Planogram design l Retail Branding and Brand Communications Strategy l Understanding consumer behavior l Retail Marketing—Retail marketing strategies, Retail marketing mix, Retail market segmentation and Retail sales techniques l Retail Finance, Economics and Legal—Financial and Legal Aspects of Retail Management, Accounting and Finance in Retail Business, Retail Economics, etc. l Mall and Shopping Centre Management—Various types of retail formats and concepts in mall design

Fig. 1.7

Retail Supply Chain Management is a Subset of Retail Management

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Supply Chain Management for Retailing

RETAIL SUPPLY CHAIN ELEMENTS Retail supply chain processes are shown in Figure 1.8. These processes are broken down into four major categories: l Merchandise management processes l Buying or Sourcing processes l Move or Logistics processes l Sell or Customer service processes Each of these can be broken down into a set of planning and execution processes.

Fig. 1.8

Retail Supply Chain—Planning and Execution Elements

Merchandise Management Processes Category Management Processes This includes processes for defining merchandise categories and developing strategies for each category. The related processes are category planning, category role definition, developing category strategies and tactics. These are discussed in detail in Chapter 2.

Merchandise Forecasting and Budgeting Processes These processes help in long term forecasting of merchandise requirements, financial budgeting process and the process of budget control, i.e., Open To Buy. Processes are as follows:

Introducing Retail Supply Chain l

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Forecasting This estimates the merchandise requirement for the future and is discussed in Chapter 2. Merchandise budget This is a financial estimate regarding how much money the retailer can invest in procurement of merchandise to achieve his business targets and is discussed in Chapter 2. Open to buy (OTB) control This is a merchandise control system that controls merchandise procurement in a way that stock availability at retail store at any point matches planned sales as closely as possible. This is discussed in Chapter 2.

Assortment Management Processes These include planning processes like line and range planning, store clustering, size and pack planning, space planning, planogram design etc. and execution processes like Merchandise allocation and Planogram execution. The processes are as follows: l Planning assortment This includes planning of range, depth and model stock plan. For an apparel retailer, it may be the particular size and color. This process helps to identify which particular SKU needs to be stored and in how much quantity so as to meet the target sales and profit objective. This is discussed in Chapter 3. l Store clustering Typically, large retailers group stores on the basis of similarity of demographics, assortment or economy in logistics, i.e., stores in the same cluster would have a similar assortment or will be supplied from same RDC and by the same transport service provider. This is discussed in Chapter 3. l Size and pack planning These days, most of the retail merchandises are available in prepacks, i.e., as an example, an apparel manufacturers ships men’s polo T-Shirts in-pre packs of 20 XXL, 20 XL and 10L. This reduces material handing in the supply chain, but it also poses a challenge to the retailers as now they need to order the right number and combination of prepacks, otherwise these pre-packs need to be opened at the RDC and would involve extra material handling before they reach the stores. These pre-packs need to be allocated to the right store and in the right quantity. This is discussed in detail in Chapter 12. l Space planning, i.e., how much space is required for displaying the assortment. As space is generally fixed for a particular retailer, this process is generally carried out with assortment planning, i.e., within a fixed space, what best assortment can be planned. The challenge is to give the right display and right facings to the SKUs you want to focus for profitability and turnover goals. This is discussed in Chapter 3. l Planogram design and execution The placement of merchandise that is arriving at the store can be planned out on paper by using a Planogram, before the products actually arrive at the store. A planogram is a diagram that shows how and where specific retail SKUs should be placed on retail shelves, racks, fixtures or displays in order to increase visibility and customer purchases. One part of the process is designing the planograms but the greater challenge is following this planogram plan in the store as in most cases, planograms are planned in the head office and are then sent to the store, but the stores rarely follow these instructions. This is discussed in Chapter 3. l Merchandise allocation Stocks ordered by the retailer reaches the retailer’s distribution centre and this then, needs to be allocated to the various stores based on the most recent demand patterns. This is always a challenge as typically, there is a time lag between the point when merchandise is ordered and when it is delivered to the central warehouse. In case of some merchandise items, like garments ordered from overseas manufacturers, this lead time

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Supply Chain Management for Retailing can be as high as 6–9 months, by this time, the demand pattern might have changed since the time it was ordered. Now, this stock needs to be allocated on the basis of the most recent demand pattern. This allocation problem is discussed in Chapter 3.

Price Management Processes Setting the right price is a challenge throughout the life cycle of the merchandise. It starts with the initial price set up, which is then adjusted constantly during the life cycle of the merchandise through different promotion schemes, and finally, it has to be marked down at the end to get quick clearance from the store. So, price management includes planning processes like Promotion planning, Planning markdowns, Trade funds planning, Promotion optimisation, Promotion collaboration etc., and execution processes like Price and Promotion execution. l Promotion planning This includes planning which categories to promote, when to promote, how often to promote, the duration of the promotion and how to communicate the promotion. These processes are discussed in Chapter 4. l Planning markdowns Taking a markdown decision is an optimisation decision between carrying the stock for some more time and incurring inventory carrying costs versus giving a discount. A retailer needs to decide at what point to offer the markdown, how much percentage discount to be offered and for how long. These processes are discussed in Chapter 4. l Trade funds planning Consumer goods manufacturers sometimes, provide retailers with various kinds of incentives for merchandising support. Sometimes, a part of this is passed on directly to the consumer and in some cases, the retailer jointly works with his supplier on this budget and work out plans about how this amount can be effectively used to boost the sales of the item. This is discussed in Chapter 4. l Promotion collaboration These are processes where retailers and consumer goods companies jointly plan for promotion. This is discussed in Chapter 4.

Private Label Design and Sourcing Processes Retailers have several options for sourcing today—buying in directly from the manufacturer or the wholesalers or distributors. Increasingly, private labels or the retailers’ own brands are getting popular, where retailers are controlling the design, production, branding and distribution of the products all by themselves. So, private label design and sourcing include several processes like Designing private labels, Packaging design, Outsourcing manufacturing, Selecting vendors, Releasing purchase orders and finally, vendor selection. l Product design and Private labels Issues related to designing product and private labels is covered in Chapter 5. l Packaging design Increasingly, retailers are working with manufacturers for shelf ready packaging, i.e., products will be delivered by consumer goods companies to retail stores in a form in which it can be put immediately on the shelves. Also, green packaging is becoming the order of the day. These topics are covered in Chapter 5. l Vendor selection/Manufacturing outsourcing Selection of vendors is a critical process for a retailer having several sub processes like source identification, evaluation, commercial negotiation etc. In case of private labels, this process can be longer, as this may involve first giving a sample order, sample approval and then finally, giving permission for mass production. In cases of private labels, as manufacturing is outsourced typically to third world countries—this also brings complexities related to global sourcing. These topics are discussed in Chapter 9.

Introducing Retail Supply Chain l

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Global sourcing Increasingly, low cost countries like China, India and Bangladesh are becoming sourcing hubs for global retailers. Global sourcing has a lot of issues related to customs, excise, tariff etc., which are also discussed in Chapter 9. Merchandise procurement and managing supplier performance Processes of releasing purchase orders, delivery schedules and monitoring supplier performances are discussed in Chapter 9. Replenishment Replenishing the stock from supplier to store, from supplier to central warehouse or from central warehouse to store is a process where the retail industry has brought in a lot of innovative and collaborative approaches, like vendor managed inventory (VMI), Continuous replenishment program (CRP), Collaborative planning forecasting and replenishment approach (CPFR), Direct Store deliveries (DSD) etc. These are discussed in Chapter 6.

Logistics Management Processes These are processes associated with moving the goods, like transportation, warehouse management, inventory management etc. These have been discussed earlier in this chapter under “Scope of Logistics” and are discussed in detail in Chapter 7. Modern day retailing also involves advanced logistics issues like Logistics outsourcing, Green logistics, Managing logistics exceptions and a focused approach for managing loss of items/shrinkage across supply chain (and not only in the store). These topics were not areas of concern for retailers a few decades ago. These are covered under “Retail Logistics—Contemporary issues” in Chapter 8.

Customer Service Customer service processes in retail cover processes like Return management, managing reverse logistics of return products, managing customer orders, Loyalty program management and managing multi-channel logistics. l Return management and Managing reverse logistics Managing returns effectively, calls for having a defined policy for returns, having a reverse supply chain network that can handle these return items and return them to the manufacturer or recycle them. The emergence of green retailing has made return and recycling important considerations for retailers around the world, especially for certain category of items, like Electronics. These are covered under Chapter 10. l Order management Managing customer orders is important for a certain category of retailers like online retailers, catalogue retailers (for jewellery and furniture retailers, where you choose an item from a catalogue) and durable retailers. For suppliers to the retail industry, order management means managing orders from retail companies. Order management is discussed in Chapter 10. l Loyalty programme management Managing loyalty programmes and analysing the loyalty card data for improving supply chain performance is discussed in Chapter 10. l Planning multi-channel logistics Increasingly, buying online and taking delivery in stores or buying online and exchanging at the store is becoming a reality. This calls for multi-channel logistics capabilities for retailers and it is discussed in detail in Chapter 10.

RETAIL IS NOT ONE SUPPLY CHAIN—CATEGORY AND FORMAT SPECIFIC CHAIN Retail is not one supply chain. Different retail product categories have different supply chain

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Supply Chain Management for Retailing

characteristic, as shown in Figure 1.9. For example, style and design matters most for apparel retailers though they are not so important for grocery retailers and not at all applicable for Petrol retailers. In the same way, a cold chain is most important for food and pharma retailers—to prevent wastage and to keep the product in right condition—but, this is not applicable at all for apparel retailers. There are very few supply chain characteristics, like Replenishment, which are important for all retail categories as no retailer likes a stockout. This Figure also makes it clear that retailers who deal in lot of categories, like big hypermarkets (For example Big Bazaar), need to understand this difference and actually need to manage lot of supply chains together, i.e., one for perishable products, one for nonperishable and several others. Supply chain characteristics for different retail categories are discussed in detail in Chapter 11, Chapter 12 and Chapter 13. Chapter 11 deals with the food and grocery supply chain, which is the largest retail supply chain category globally. Chapter 12 deals with the Apparel and Footwear category, which is the second largest retail category. Chapter 13 deals with other retail categories like Consumer electronics, Jewellery, Home furnishing, Health and Beauty, Pharma, Book and Music, Petrol and Mobile retailing.

Fig. 1.9

Different Retail Product Category have different Supply Chain Characteristics

Just as retail supply chain characteristics differ with product categories, it also differs with different retail formats. Figure 1.10 explains this. Product category strategy, Assortment strategy, Service level and Price can differ in a Hypermart, Supernmarket, Specialty retailer, Departmental store, Discount store and Factory outlets. Chapter 14 discusses in detail, the supply chain issues with these different retail formats.

STRATEGIC, TACTICAL, OPERATIONAL AND EXECUTION VIEW OF RETAIL SUPPLY CHAIN Retail supply chain decisions can be strategic, tactical, operational or execution level decisions, based on time frame and criticality. Figure 1.11 explains this.

Introducing Retail Supply Chain

Fig. 1.10

Different Retail Format have different Supply Chain Characteristics

Fig. 1.11

Different Supply Chain Decisions need Different Horizons for Planning

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Supply Chain Management for Retailing

Strategic decisions These are the most critical decisions for a retailer, having a very long term implication for several decisions. Decisions like, where to locate the store, where to locate the warehouse, whether the retailer should look for global sources for procurement of merchandise or not and in which countries, Private label strategy etc., fall in this category. Once these decisions have been taken, it is difficult to reverse them and even if the retailer changes his mind, there is a substantial cost involved in this change. These decisions also influence the retailer’s long term profit and sales goals. Tactical decisions These are medium term decisions generally reviewed every month. Forecast, Budget, Pricing plan etc., fall into this category. Operational decisions These are short term decisions, generally reviewed every week. Vendor schedules, Distribution plans, Transportation and route plans etc., fall in this category. Execution decisions A retailer needs to take numerous decisions on a regular basis, such as, where to unload the stock, how to manage a stockout, Inventory decisions, where to display the promotional products in the store, which materials to move first from the warehouse etc. Figure 1.12 explains that Strategic decisions have the maximum ROI impact, followed by Tactical, Operational and finally, execution level decisions.

Fig. 1.12

Strategic Supply Chain Decisions have Maximum Impact on ROI

RETAIL SUPPLY CHAIN MATURITY Earlier in this chapter, we discussed the different retail supply chain elements. It is not necessary that all retailers’ supply chains should have all those elements as different retailers are at different stages of maturity. For example, for most of the kirana stores in our country, what matters most is sourcing the product from the right source at cheap price and of right quality, stocking it and selling it and if possible provide some services in terms of giving credit and home delivery. Figure 1.13 explains this concept of a retail supply chain’s process maturity. Most of the organised retailers need to have the basic processes like transportation, warehousing, inventory control, sourcing, promotion management etc., in place to be in business. Some of them have adopted mature

Introducing Retail Supply Chain

Fig. 1.13

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Retail Supply Chain Process Maturity

supply chain practices like scientific forecasting and budgeting, Merchandise management, Space planning, Category planning, Planning for reverse logistics etc. Very few retailers have adopted the innovative retail supply chain practices like cross docking, Promotion optimisation, Route and Load optimisation etc.

Conclusion In this chapter, the concept of retail supply chain has been introduced. l The differences between a retail supply chain and that of a manufacturing company has been discussed. While these two supply chains have a lot of similarity in terms of warehouse management, transportation, inventory management etc., there are differences in terms of manufacturing elements like production, in-process quality management etc., which are a part of a manufacturing supply chain and not a part of a retail supply chain. On the other hand, things like category management, assortment, space planning etc., are part of retail supply chain but not of a manufacturing supply chain. l The difference between supply chain and logistics is always confusing. This chapter has explained this difference and the elements of retail logistics have been discussed. l The different elements of a retail supply chain are discussed in this chapter and corresponding chapter references are provided.

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Supply Chain Management for Retailing l

l

l

Retail is not one supply chain and as per the category and format, the importance of the various retail supply chain elements differ and in some cases, some elements may not be applicable at all for certain categories and formats. Retail decisions can be divided into four categories, i.e., strategic, tactical, operational and execution level decisions. Each type of decision has a different criticality, time frame and review frequency. The concept of retail supply chain maturity model is introduced in this chapter. Retail supply chain processes can be divided into Basic processes, Matured processes and Innovative processes. Different retailers are at different stages of maturity on this scale.

Review Questions 1. Why is supply chain management important in retailing? 2. What are the common elements between manufacturing and retail supply chains? What are the differences? 3. What are the differences between the concept of a supply chain and Logistics? 4. Explain the different retail supply chain elements. 5. How does the importance of the various retail supply chain elements vary between the different categories? 6. How do retail supply chain elements vary between different retail formats? 7. Give some examples of strategic, tactical and operational decisions of a retail supply chain. 8. Explain the concept of retail supply chain maturity.

Assignments 1. Visit an organised retail chain in your locality. Study what supply chain functions they perform and how. 2. Study two retailers selling two different product categories. Do a comparative study of what supply chain elements are important for them in order of priority. 3. Study two different retail formats of the same organised retail chain. Do a comparative study of what supply chain elements are important for them in order of priority. 4. Take three leading retailers from India and the top three global retail chains. Compare them on different supply chain elements shown in the retail supply chain maturity model, on the basis of data gathered from secondary research. How do they compare?

[CHAPTER]

LEARNING OBJECTIVES

Category Management and Merchandise Budgeting

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In this chapter we will explain following concepts: Category Management 1. Category management defined 2. Category management process 3. Enabling components of category management 4. Category captain 5. Challenges in category management 6. Information technology in category management Merchandise Management, Forecasting and Budgeting 7. What is Merchandising and what are its benefits 8. Merchandise types 9. Merchandise hierarchy 10. Merchandise forecasting 11. Merchandise budgeting 12. Six months merchandise budgeting 13. Open to buy control

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In this chapter, we introduce the concept of category management and Merchandise Budgeting. Category management is widely popular among the leading retailers and suppliers in the US and Europe and this new way of doing business is slowly catching up in India. Industry preached for a long time the age-old slogan that “customer is the king” and category management practices that from the very beginning, i.e., redefining your product offerings from the customer’s perspective. Merchandise forecasting, budgeting and control—the topics next discussed in this chapter—are medium to long term planning tools in the hands of a retailer. While merchandise forecasting indicates the likely sales in quantity in future periods, merchandise budgeting indicates to the retailer how much actual money he can spend in the future periods. Merchandise control processes, like open-to-buy, helps in putting the right checks and balances in the budget cycle so that whatever is procured is in line with what is selling and the retailer is not very far from reality.

CATEGORY MANAGEMENT DEFINED Category management is defined as “a retailer supplier process of managing categories as strategic business units, producing enhanced results by focusing on delivering customer value”. Let’s understand the definition a bit further. There are three parts to this definition and they are as follows: “This is a retailer supplier process”, i.e., category management is a collaborative process between a retailer and a supplier where they together develop a category business plan, jointly develop tactics in pricing, assortment or promotion to achieve this business plan and on a continuous basis, jointly review the performance of the category. “Managing category as strategic business units producing enhanced result”, i.e., each category needs to be managed as a separate business having turnover, growth and profitability targets and this ensures that both the supplier and the retailer achieve enhanced business performances. “Focusing on customer value”, i.e., the core objective of category management is to deliver higher customer value in terms of defining a category based on customer’s buying behavior and providing wide choices of selection in his desired price range. This concept of category management was first introduced in the grocery industry in Europe and U.S. Gradually, this became an industry-wide phenomenon and the concept was extended to pharma, apparel, footwear, books, music and several other industries. Now, we will start with understanding the eight basic processes of category management as per category management best practices followed by understanding the enabling components of category management. The concept of category captain, Issues in category management implementation and understanding the role of information technology in category management will follow later.

CATEGORY MANAGEMENT PROCESS According to retail best practices, Category management has eight critical business processes as defined in the table below and shown in Figure 2.1.

Category Definition The best practice definition of a category is: A distinct, manageable group of products/services that the consumer perceives to be interrelated and/or substitutable in meeting customer need.

Category Management and Merchandise Budgeting 27

Fig. 2.1

Category Management Process

Some of the guidelines for defining a category are: 1. A category is something the definition of which is commonly understood by the supplier and the retailer. 2. A category definition is based on how the customer buys and not on how the retailer thinks. Many retailers display products by supplier to facilitate stock management and restocking. In the dairy cabinet, yoghurts are usually displayed by brand name. Customers on the other hand, shop by type: diet, low fat, full fat, thick and creamy. Within this, the next option can be individual flavours. Ready-prepared meals, in the same way, are first selected by type: veg, non veg, south Indian, north Indian etc., then by cooking method (microwave, cook in the bag etc), portion size, and finally, by cost—rarely is it selected by brand, i.e., MTR, Kitchens of India etc. However that’s the way traditionally, retailers liked to store. 3. Supplier’s expertise and consumer knowledge generally play a key role in developing the definition and structure of a category. Typically, suppliers invest a lot in understanding their customers—their needs, buying habits etc. Think about India—most of the retail chains came in existence during the last 10 years—however, some of their suppliers have been in the business (like Hindusthan Unilever, Nestle etc) for more than 50 years and their understanding of consumer behavior is much deeper for specified categories. Ideally, there should be a collaborative effort from both the retailer and supplier as both parties can bring unique insights to the table. Retailers have access to shoppers’ data – loyalty etc., which suppliers do not have. On the other hand, suppliers have access to shopper insights across channels, regions and stores, which can be valuable to retailers.

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4. There is no one definition of category—it may be defined narrowly or very broadly. A large hypermarket may define Books and Music as one category. A specialised book retailer may have several categories within books itself: Management books, Medical books, Story books, Books for kids etc. The consumer’s perspective is most important here, i.e., when making a decision to fulfill his need—what options does he evaluate and how he filters all the information. 5. Each product should appear in only one category. Retailers should realise that products within the same category will behave differently. For example, within paper products—table napkins, toilet tissues and kitchen towels will behave differently.

Defining a Category—A Five Step Process Figure 2.2 explains the five step process of category definition.

Fig. 2.2

Step 1

Defining a Category

Define the Consumer Need (Assume the customer need is to have morning breakfast)

Step 2 What all options provide similar solutions to meet the need: In the Indian context, there are a number of items which can fulfill this need, like: Cereals, Bread, Breakfast rolls, Butter, Jelly, Egg, Fruits, Beverages (like: Tea, Coffee, Milk, Juice etc.), South Indian items (like idly, vada, dosa) etc. Step 3 What does the consumer see as substitutable and interrelated? Some examples of substitutes can be: l Tea or Coffee or Juice. l Butter or Jelly l Banana or Apple Interrelated products are those whose purchase decisions are made together, like—pasta and sauce. In this example, it can be tea and milk powder or coffee and milk powder. In the same way, all baby products (baby food, wipes, diapers, lotions, creams) should be located in the ‘baby care’ category, as opposed to being scattered around the store as they are assumed to be interrelated by the customer. Step 4

What does the retailer see as interrelated and manageable by him?

Category Management and Merchandise Budgeting 29 Typically, the retailer now decides what SKUs he can manage together on the basis of his logistical constraints. Assume that the consumer prefers tea, coffee, juice and milk to be available side by side as these are closely related or are close substitutes for his breakfast drink. However, the retailer perhaps needs to store juice and milk in a different place due to their cold storage requirements. The same holds true for Butter and Jelly. In this example, the retailer may consider those SKUs to be interrelated that have similar storage requirements, replenishment requirements and similarity of supplier, i.e., they are manageable together from the logistics point of view. Perishables that require daily replenishment l Bakery (Bread and Breakfast roll) Perishables that require cold storage and daily replenishment l Fresh fruits and vegetables (Banana, Apple, Cucumber, Tomato) l Dairy—Meat and Egg (Milk, Curd, Butter, Meat, Egg) Self stable items (High volume) that does not require much promotion l Beverages (Tea, Coffee, Milk powder etc.) l Staples (Sugar, Atta) Self stable items (Low volume) that require frequent promotion l Ready to eat mixes (Sambar mix, Vada mix, Rasam mix, Dhosa mix) Another example of this can be that a customer may want to have a choice between a manual razor and an electronic razor. Ideally, these two should be parts of the same category as they are meant for the same purpose. However, typically, an electronic razor may be a part of an electronic grooming category in the shop, which could also include other non substitutable products like hair dryers. Therefore, for a retailer category should be manageable from the logistics point of view. Step 5 What are the groups of products that comprise the category? Here, the idea is to come out with a category name, the category structure, i.e., sub categories— segments etc., and aligning the SKUs to the lowest structure within the category. Definitions of the sub categories, segments and sub segments are typically based on how consumers make a choice within a category. This process is called category decision hierarchy or consumer decision tree. For example: The Dairy—Meat and Egg category has three clear sub categories. The Dairy sub category can be further divided into Milk, Curd and Butter segments. The Milk segment can be further divided into sub-segments like: Toned Milk, Double toned milk, Milk with cream, Cow milk etc. At the end, each sub-segment can have several SKUs. For instance: Cow milk will have SKUs of different sizes: 1 ltr, 500 ml, 250 ml etc. Here, the consumer will first decide what to buy (Dairy, Meat or Egg), what product to buy (Milk, Curd or Butter), and what type of milk to buy (Toned, Milk with cream or cow milk) and in the end, which size to buy (1 ltr, 500 ml or 250 ml). The consumer typically follows this decision tree in this sequence. This is an example of a situation where only the first row is broken up into individual SKUs.

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Table 2.1 Category Decision Hierarchy Category

Sub Category

Segment

Sub Segment

SKU

Dairy – Meat - Egg

Dairy

Milk

Cow Milk

1 ltr 0.5 ltr 0.25 ltr

Toned Milk Milk with cream Curd Butter Meat Egg

In the same way, for deciding on a particular bottle of wine, the consumer may first select the grape type (Red or white or champagne). Subsequently, he may decide on the country of origin (French/Russian/German etc), then the brand, and then finally, the year and size of the bottle. This is another example of a consumer decision tree.

Problems of Defining a Category Too Narrowly or Too Broadly If you define a category too narrowly, sometimes the retailer may loose cross merchandising opportunity. For example, the retailer may want to cross merchandise sugar with Tea, i.e., he may wish to offer to give 1 kg sugar free with 1 kg of Tea. In this case, if these two products are considered to be parts of the same category, say the ‘Morning Beverage Pack’ category—it may give the retailer a consolidated view so as to be able to look at the overall profit of the category. Whereas, if these two belong to two different categories—the performance of one category may suffer at the cost of a slightly better performance of the other. This needs to be kept in mind while defining categories, since if there are too many categories, managing them is a challenge and the retailer may also loose out on bundling or cross merchandising opportunities. On the other hand, if a category is defined too broadly, category specific planning may become an issue. Ready to eat and staples can be bought under the same category from the logistics point of view as both of them do not need cold storage; however, these two have very different promotional needs, i.e., ready to eat may need frequent promotions wheras staples like rice or pulses are basic items and may not need heavy promotion. Therefore, while defining categories, care should be taken so that the category is not defined too narrowly or too broadly.

Category Role Definition This step assigns the role of each category in the retailer’s overall category portfolio. This is done mainly for building focus in terms of resource allocation for both the retailer as well as the supplier, for a particular category. This process decides the most important categories for the retailer so that he can allocate his maximum resources (in terms of shelf space, promotion, inventory investment and management time) to them. This process is important for suppliers also as through this, they can allocate their promotion budgets and other resources more effectively among different retailers in different locations. A supplier will invest more in a retailer who considers his products as the most

Category Management and Merchandise Budgeting 31 important category, as compared to another retailer who does not consider goods supplied by him as so important. According to Category management best practices there are four category roles: 1. Destination category Here, the retailer is the customer’s most preferred choice. The retailer offers consistently superior value in these categories to the target customer. These categories lead in areas of turnover and market share. To put it simply, these are the categories for which consumers will like to come to a particular store and do not mind travelling or spending more time in the overall purchase process. Typically, 5–7% of a retailer’s categories can be like this. 2. Preferred category The retailer wants to be the preferred provider of these products to the target customer and delivers consistent competitive value, thereby ensuring profit—both, as cash flow and as return on investment. These are typically routine categories. These are given a fair share of the retailer’s resources and typically make up about half (50–55%) of the retailer’s portfolio. 3. Occasional category Procurement of these categories are seasonal/cyclical. Examples of these can be: Christmas cake, Diwali crackers, New Year cards, Seasonal fruits, Winter clothing, Clothing for rainy season etc. These categories provide competitive value to the target customer and play a secondary role in delivering profit, i.e., cash flow and ROI for the retailer. Typically, 15–20% of the categories are managed with this role. 4. Convenience category These categories typically enhance the target customer’s image of the retailer as the place for one stop shopping and the consumer does not feel the need to travel to another place for buying products from this category. These play an important role for margin generation as in most cases, these are comparatively lower value products and the retailer can charge a slightly higher price than a retailer specialising in this. An example of this will be socks and laces for a shoe retailer or lingerie and undergarments for an apparel retailer. Stationery products also can be a good example. These typically constitute 15–20% of the categories. Category Role

% of retailer’s category

Destination Category

5–7%

Preferred Category

50–55%

Occasional Category Convenience Category

15–20% 15–20%

Retailer’s positioning Retailer of choice, provide superior value, help retailer to gain market share and turnover Preferred source, provide retailer reasonable profit and sales Provide competitive value, provide retailer good profit Place for one stop shopping, give retailer good margin

It is important to have a balanced set of roles across categories as each category plays a critical part in achieving the retailer’s corporate objective. Assignment of a particular category to a role is done by cross category quantitative and qualitative data analysis and this data comes from the consumer, retailer and market. It is based on these four inputs: l How important is the category to the retailer’s target customer? l How important is the category to the retailer in terms of profit? l How important is the category to the retailer’s competitors? l How is the category’s outlook and future prospects within the retailer’s market?

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Supply Chain Management for Retailing

Categories which rank high in sales among its target customers, offer high gross margins for the retailer, have a higher market share than the competitors and have a strong future outlook in terms of growth obviously fall in the destination category. One point to remember during this assignment of categories is that it is based on dynamic data. Therefore, the position may change over time as the cost of procurement, activity of competitors and market shares change on a regular basis. So, as per the strategy, if a retailer had decided on a few categories as destination categories—the retailer needs to continuously bring operational efficiency (to increase margin), promotional initiatives (for market share) and other resources together to remain the preferred destination of the customers for these categories. Thus, category role definition ensures correct focus and return on investment for both the retailer and the supplier.

Category Assessment The objective of this step is to understand the current performance of the category, the gap between the current and desired state for the category and areas of opportunity for improved turnover, profit and ROI. This analysis is jointly done by the retailer and the suppliers. A supplier should provide data on category share and consumer data like buyer profile, purchase behavior etc. A retailer should provide information on the category’s contribution, profit etc. Based on this, an assessment is done of the customer, market, retailer, supplier etc., and these assessments show areas of opportunities. The retailer also needs to do an assessment of assortment, pricing, promotion, space and product supply. This analysis helps to understand the customer’s buying behavior and his reasons for buying; the retailer’s market share, pricing, promotion and assortment compared to the competitors; the retailer’s sales, profit, inventory turnover, service etc.; and the supplier’s reliability, brand profitability, effectiveness of replenishment etc. This analysis generates a lot of data on customer demographics, key competitors for the category, a segment’s performance, which products in the category help in building traffic and profit, the key drivers impacting category performance like range coverage, merchandising, pricing differential, promotions etc. This kind of analysis helps a retailer understand which categories are profitable and growth oriented, which categories provide opportunities and hence, need to be focused upon and which categories to prune. This also shows the possible weak areas which need attention, whether it is price, promotion or merchandise range coverage. Depending on the category role, the intensity of analysis will change. Perhaps not much analysis is needed for seasonal categories and the level of analysis required will be far higher in the case of a destination category than for a convenience category.

Category Performance Measure Whatever gets measured gets done—so to achieve the target for each category, it is important that we define those targets and set the target values in quantitative term. This process is similar to designing any performance measurement system. The target objectives should be consistent with the category’s role, like a destination category may have turnover and market share as targets while a convenience category’s main focus should be profit. For measures to be effective, there should be the right balance between external (customer facing like, customer service) and internal (operational, like inventory turnover) measures and most importantly, there should not be too many measures for a particular category. Measures should be jointly agreed by the retailer and the supplier. There are different approaches for developing performance measures. The Balance scorecard and SCOR are two such popular approaches.

Category Management and Merchandise Budgeting 33 Some of the common measures are: l Financial measures: Turnover growth, Gross profit, Net profit etc. l Operational or supply chain measures: Inventory turnover, Customer service, Cash to cash cycle time etc. l Marketing measures : Market share, Penetration etc. These measures need to be reviewed on a regular basis and the target vs. actual performance need to be analysed and corrective action needs to be taken in case there is a negative variance.

Category Strategies Once the category targets have been established, the next important thing is to deliver strategies to achieve these performance targets. Strategies can be marketing or operational strategies. Figure 2.3 explains these different category strategies. As per the category management best practices, there are seven category marketing strategies:

Fig. 2.3 l

l

l

l

Category Strategies

Traffic building The focus here is to draw consumer traffic to the store/category. This is generally applicable for products with high penetration, price awareness and requiring frequent purchase. Big Bazaar selling potatoes at half the market price can be an example of this strategy (on Big Bazaar buying old newspapers at Rs 25/kg). Transaction building The focus here is to increase the size of the average transaction or total store transaction (market basket). Products attractive to large families and subject to impulse purchases fall in this category. A special price for Maggi extra large family pack (increasing transaction size) or a ketchup at discounted price with a Maggi extra pack (increasing market basket) can be examples of this strategy. Turf defending This strategy aggressively positions certain parts of a category so as to protect the retailer’s business in the category from targeted competitors. Products frequently purchased by target customers, or those that are highly price sensitive and frequently promoted by the competition will require this kind of strategy. Profit generating This strategy focuses on using parts of a category to generate profits. Products with higher margins, loyalty and lack of price sensitivity may fall in this category.

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Supply Chain Management for Retailing

Cash generating This strategy focuses on using parts of a category to generate cash flow for the retailer. Fast turning products with efficient supplies and low inventory can fall into this category. l Excitement creating This strategy is used to communicate a sense of urgency or opportunity to the consumer. New products, seasonal items or rapidly growing segments can fall into this. A promotion proclaiming ‘Last 10% of the stock left for this latest design Nokia mobile, can be an example of this strategy. l Image creating This strategy is used in a category to help the retailer communicate his desired image to the consumer in the following image areas: Price, Services, Quality and Variety. A balanced mix of categories is needed to achieve a retailer’s business goals. Some categories offer a high risk alongwith a high reward, while others are growth oriented. The store cannot rely simply on traffic builders as they are likely to yield low margins. Conversely, the store cannot just carry cash generators as they are unlikely to attract sufficient customers to the store and add sales. An effective balance of roles is needed to optimise sales and profitability. This mix needs to be continuously reassessed to match changes in customer preferences and demographics. l

Category Strategy—Points to Remember 1. Strategies must be linked to category roles Category Role Category marketing strategy Destination Traffic Building Transaction building Excitement creation Preferred Transaction building Profit generation 2. Strategies are implied from category performance measures and targets Performance Measure Marketing strategy Market share and Turnover growth Traffic building Turf defending Gross profit improvement Transaction Building Profit generating 3. Pricing, Promotion, New product introduction and Merchandising strategies need to work together with category marketing strategy to make it successful. In one case, the retailer reduced the range of toothpaste category, limiting the choice of the slower selling SKUs and promoted the popular SKUs by aggressive pricing. Although the sales went up, the margin percent and gross profit went down. However, the investment in stock was reduced by proportionally more, resulting in an increase in the Gross margin return on investment (GMROI). The category manager thus, optimised the use of stock and space and the resulting savings were used to invest in other profitable products in the same category. For most of the buyers also, it meant value delivered as the unit prices came down. 4. Role of a supplier may change depending on the retail format A supplier should prepare category strategy recommendations for all appropriate category roles and retailer formats. For example, a supplier of a health and beauty care category may develop strategy options for (1) a supermarket choosing a convenience role, (2) a hyper market choosing a preferred role and (3) a drug store choosing a destination role. These three options will require different marketing and product supply strategies and thus, the supplier can help the retailer develop an appropriate corporate strategy.

Category Management and Merchandise Budgeting 35

Category Tactics Once the category strategy has been developed, in this step, the retailer and the supplier identify the specific actions that need to be taken to implement these category strategies and such tactics are developed in four areas: l Assortment/Ranging l Pricing l Promotion l Shelf presentation The different tactical choices available are as follows.

Assortment A retailer needs to provide an assortment that offers enough variety without duplication. He can have several choices here, like l Decrease (Reduce number of SKUs in category) l Increase (Increase number of SKUs in category) l Swap (Alter existing SKUs with new ones) l Uniform vs. Tailored (Same assortment in all stores or tailor assortment by store format) l Private label (Develop or expand a private label within the category)

Pricing Decrease (Reduction in price of one item or average price of a group of items within a category) Increase (Increase in price of one item or average price of a group of items within a category) l Uniform vs. Tailored (Same pricing in all stores or tailor pricing store by store) l Private label (retailer needs to have a pricing strategy for his private labels in place. The private labels can be used as low cost entry points to the category by a grocery retailer or as high priced exclusive fashion products for an apparel retailer) Consumers relate to price in three ways: awareness, comparison to a reference and response to a price increase or decrease. Often, consumers cannot recall the absolute price paid for specific items purchased. Consumers judge whether or not the price is reasonable by comparing the price to a reference. The reference could be information at the point of sale, such as price in a competitive store, or price in a consumer’s memory. If the purchase price is at or below the reference, it will appear to be reasonable. l l

Promotion A retailer can have several decision points here like: l Tools for promotion (Price reduction, Coupons, Advertising, Display, Special packs etc.) l Products (which items to be promoted) l Frequency—Duration and Timing of promotion l Location of promotion—which stores etc.

Shelf Presentation A retailer’s decision options here can be things like: l Location within the store—where within the store, the category will be displayed l Planogram layout l Space allocation—How much space will be allocated for the category

36

Supply Chain Management for Retailing Uniform vs. Tailored—Whether the category will be presented in the same way at every store or there will be store specific presentation strategies. The Table 2.2 shows how category tactics can vary as per different category types. l

Table 2.2 Category tactics based on category type Category Type

Assortment

Pricing

Shelf presentation

Promotion

Destination

Full variety

Leadership

Prime store location

Preferred Seasonality/ Occasional Convenience

Broad variety Competitive Timely variety Competitive

Average store location Good store location

High level of activity, High frequency, Multiple tools Average level of activity Seasonality/Timely activity

Select variety

Available store location Low level of activity

Acceptable

Category Plan Implementation This is the most critical step in the category management process where the implementation plan/ schedule is finalised and responsibilities are assigned for different actions as planned. Responsibilities can be assigned to different teams of the retailer (Merchandising team, Sales team, Logistics team, IT team etc.) and the supplier (like the marketing team, the product development team etc.). The implementation calendar needs to be reviewed on a regular basis by both the retailer and the supplier.

Category Review This is the final step in the category management process. Category plans need to be reviewed on a regular basis to see how is the different categories are performing against their targets. If there is a large variation, the plan needs to be modified accordingly. At least a quarterly joint review by the retailer and the supplier, in a commonly acceptable format, is a must. It needs to be remembered that any business plan is developed on the basis of some assumptions and a particular operating environment—if there is a change in these assumptions or in the operating environment, then the business plan will need to be modified as per the changed circumstances. Successful implementation of category management depends on an effective category review process. Once the steps of the category management process are understood, the next step is to understand the other enabling components that need to be in place for category management to succeed.

ENABLING COMPONENTS OF CATEGORY MANAGEMENT Figure 2.4 explains the enabling components of category management and these are detailed below.

Performance Measurements Category performance needs to be monitored on a regular basis to improve category planning and decision making and this can be used as the basis for reward and recognition. The idea is to have a balanced set of internal measures (like financial measures) and external measures (like customer satisfaction rating) and not to have too many measures. The scorecard objectives are jointly developed by the retailer and the supplier. For some large retailers, the score card can be represented in

Category Management and Merchandise Budgeting 37

Fig. 2.4

Category Management Components

a three dimensional model that reviews the supplier in one axis, the retailer on another and the measures on the third. In this way, a retailer can look at the performance of all its suppliers, a supplier can look at all its retailers across all measures, and finally, we can get an industry-wide view of one measure, say customer satisfaction, involving all the suppliers and retailers.

Organisation Capability An organisation’s category management competence can be developed through the following components: l Organisational structure l Job roles and responsibilities l Skill requirements l Job performance measures l Rewards and recognition Leading retailers and suppliers have redesigned their organisation structures to support category management and have brought about changes, like integrating buying and merchandising under the same team so that buyers buy only what retailers can sell so as to maximise the return on assets. This requires that all functions involved in procurement, logistics and merchandising operate seamlessly. A few retailers are developing the key responsibilities of the category manager in their organisation and aligning them across following key result areas like: l Developing, communicating, implementing and monitoring strategic business plans for the assigned categories. l Developing and maintaining supplier relationships in support of category plans and strategies l Managing product assortment, variety, quality and new product introductions l Managing pricing strategies and margin objectives l Developing and implementing promotion plans l Developing the category shelf presentation and space assignment plans

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Supply Chain Management for Retailing l

Identifing opportunities to enhance category sales and profit and reduce risks from a total value chain perspective.

Information Technology This refers to the data and systems that support the fact based decisions of category management. This is detailed in the next subsection ‘Retail category management application’.

Cooperative Trading Partner Relationships Trading partners cooperate for a common objective, like, profitability for both and delivering better customer value.

CATEGORY CAPTAIN Often, a retailer will invite one of his suppliers with abilities in category management to be category captain. He would be the first point of contact for advice and information and would typically be designated to lead the strategic direction of the category with other suppliers. The captain may receive additional data from the retailer, not generally given to suppliers, about the performance of the category and he also benefits from having a more influential voice with the retailer in deciding the range, promotions or assortment. It is quiet common to have the largest supplier as category captain; however, this is not a must. Depending on his presence in the category, sometimes, a private label supplier can also become the category captain. A category captain needs to have an unbiased view of all other brands in the category and should work with the retailer to achieve the category objectives. This is often a difficult job as most of the other brands may be from close competitors. For instance, the Food World chain of food and grocery stores is working on a joint category management programme with some manufacturers. The bottom-line in such an arrangement is that the category captain must have an understanding of the core consumers for the category, as well as an understanding of the core consumers for the retailer.

CHALLENGES IN CATEGORY MANAGEMENT Though the idea of category management seems quiet promising, there are several issues that need to be taken care of for an effective implementation of this practice in reality. Figure 2.5 explains some of these challenges and these have been explained below.

Fig. 2.5

Category Management Challenges

Category Management and Merchandise Budgeting 39 l

l

l

l

l

l

Data explosion The amount of data points that a retailer and supplier can get for a category has exploded in the last few years with the invent of point of sale solutions, third party vendors who can provide syndicated data, and numerous data from the retailer’s supply chain systems on inventory, stock-out etc. This makes category management highly information technology and mathematics driven. Though there is a large social science element involved in category management (like: understanding shopper behaviour)—its success depends a lot on how these huge volumes of data can be analysed and meaningful decisions made. Data ownership and sharing Many retailers are not comfortable sharing loyalty card data with suppliers because it shows the consumer shopping patterns at the market basket level. This always leads to the old question about the ownership of the data and whether it is ethical from the retailer’s perspective to share individual data with its suppliers. Proliferation of new products Sometimes, some new products confuse category managers. For instance, recently, Pepsi has introduced a product that can be defined as both a soft drink and as an energy drink. In such cases, retailers require help from manufacturers to place them in the right category. More and more of such products are resulting in blurring of categories. It’s not one range fits all approach For a large retailer, one definition of a category and one set of category tactics may not suit all stores. Walmart in USA has the concept of ‘Store of the community’, where individual store ranges are tailored according to the demographics of the local population—either for a specific store or for a cluster of stores. Communication and connectivity Sometimes, communication between partners, degree of connectivity, and availability of information are major bottlenecks for category management. This is truer in developing countries like India. Brand is more important to suppliers Suppliers considering category management need to align their thinking, their organisation and business processes around categories. Historically, suppliers have been focused on ‘brands’. Their organisations are structured to sell ‘brands’ and all business processes and policies are brand-oriented and not category-oriented.

Information Technology in Category Management As we were discussing in the enabling components, without the help of information technology, it is difficult to implement category management as category management is a data driven process which involves analysing category performance based on a variety of data like sales, out of stock, inventory holding, growth (from the retailer) and market share of SKUs within a category, penetration, consumer profile etc. (from the supplier). This data need to be collected, analysed and based on this, a category strategy needs to be developed and the performance needs to be monitored. There are two kinds of applications that help in the process of category management. These are: 1. Category strategy planning applications The retailer will use these modules to conduct a formal category assessment and strategy planning, resulting in designation of housing of category roles, plans and targets. Software vendors offer solutions to manage this strategy development process. In addition to facilitating the category strategy development process, this module serves as a system of record for category roles and plans, which guides tactical decision making, such as the determination of price, promotion, assortment and space plans. Vendors such as JDA software, Soft solutions and IRI offer systems of record and capabilities that facilitate category planning.

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Supply Chain Management for Retailing

2. Category performance monitoring applications This consists of category performance monitoring against the established targets. Software vendors often provide reports and dashboards to help monitor category progress against objectives. Most major business intelligence vendors offer some kind of category performance monitoring solutions. SAP, Business intelligence and Cognos from IBM are some of the leading vendors in this space.

Case Study Retail link—Walmart’s Category Management Solution This is the proprietary information sharing database of Walmart, accessible via internet and key for any supplier for doing business with Walmart. This is the main vehicle for category monitoring and discussion for all its suppliers, with the company. Suppliers can run a variety of reports to see their category performance. Nielsen Co., New York, which provides consumer panel services to Wal-Mart, has introduced this category management solution for Wal-Mart suppliers to help suppliers plan, execute and measure innovative sales, optimising strategies at the store, category and SKU level. Retail link provides a variety of reports to the supplier on his category, like: 1. How long does it take for consumers to come back to the stores to purchase the supplier’s product again? This fact is important and can provide insights into how much on-hand inventory is required. Purchase frequency of the product supplied by a particular supplier

2. How many items do consumers purchase in one trip? This information gives insights into consumer shopping habits.

Category Management and Merchandise Budgeting 41

3. How long does it take for a new item to reach 100% distribution? Retail Link® can also show you which stores are not carrying the supplier’s product. New Item Distribution Tracking

4. At what time of the day are consumers buying the supplier’s product? This Retail Link® chart also shows the penetration of the item. Out of all the consumers that are shopping at WalMart, it provides you with the number of consumers that purchased the supplier’s product. Product sales by hour-weekdays

Source: www.retailright.ca (accessed on 2nd May, 2009)

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Supply Chain Management for Retailing

WHAT IS MERCHANDISING AND WHAT ARE ITS BENEFITS Merchandising is the process of acquiring goods and/or services and making them available at the right place, at the right time, at the right price and in the right quantity, to the target customer. Therefore, retail merchandising involves processes like sourcing, assortment, pricing and communicating the retailer’s merchandise offerings to the target customer. The typical aim of a good merchandising process is to maximise ROI and profitability through a better planning of sales and inventory. It achieves this by maximising the sales potential and minimising losses from mark downs and stockouts, planning and controlling merchandise inventory in a manner that balances the expectation of the target customer with the strategy of the firm.

Benefits of Merchandising Merchandise planning benefits the customer as well as the retailer. It benefits the retailer as it enhances the possibility of the right assortment of goods, with an adequate depth to be available at stores and this increases the possibility of better inventory turnover and an increased chance of sales. For the customer, it increases the choice available and reduces the possibility of a stock-out. Merchandise planning reduces the chances of a stock-out or a mark down. A typical retail clothing business will loose about 5% of its turnover in a mark down and 10% due to loss of sales. If we assume a turnover of Rs. 1 crore, then we are looking at a loss of Rs. 15 lacs. Reducing each of these figures by 1%, adds 2 lacs to the bottom line and more importantly, this profit increase can be delivered in a sustained way. This is the benefit of better merchandise planning.

MERCHANDISE TYPES A retailer needs to keep different types of merchandise in his store. Depending on the type of retailer, the quantity under each type may vary, i.e., a value retailer may keep more of staple, and very few fashion merchandise, whereas a fashion retailer may store the opposite. Before discussing this further, let us first understand the different types of merchandise. l Staple merchandise l Seasonal merchandise l Fashion merchandise l Fad merchandise l Staple Merchandise These are regular products carried by a retailer, that always have a steady demand. For a grocery store, these can be things like: rice, wheat, pulses, bread, egg, cooking oil, washing powder etc. For an apparel retailer, these can be socks, handkerchiefs, men’s white shirts, black trousers etc. From a consumer’s perspective, the major drivers for these kind of merchandise is fair price and availability. These merchandises are characterised by predictable demand, relatively accurate forecast etc. l Seasonal Merchandise These are the types of merchandise that sell well during particular seasons. Example of this can be air conditioners during summer, raincoats during rainy season and woolen jackets during winter. Seasons can also refer to situations such as: Consumer electronics products selling more during diwali, Christmas trees in December, etc. Availability, end of season mark downs and promotion drives these categories of merchandise. l Fashion Merchandise These types of merchandise have a demand for relatively short periods, i.e., may be for a season. This is applicable mainly for categories like appreal, footwear,

Category Management and Merchandise Budgeting 43

l

watches etc., where design and style matters a lot. A wide assortment, style, designs, colours and price points that offer customer a wide selection are most important here. Such merchandise is characterised by unpredictable demand, limited sales history and difficult to forecast sales. Fad Merchandise Products that sell for a very small period but generate huge sales volume within a short period are called fads, i.e., for a short period of time, these sell like hot cake. For example, these days, there is a new children’s game almost everyday, like, X Boxes, PS1, PS2 etc. As soon as there is a new Hollywood or Bollywood blockbuster, the markets are flooded with T shirts, caps and other related merchandise. It is widely known that 60% to 70% of the lifetime sales of a new DVD can be seen in the first week of its release. Investing in systems that ensure that stock is always available during these high-traffic times is mission critical.

MERCHANDISE HIERARCHY Merchandising hierarchy is a logical way of classifying or grouping merchandise. Typically, its logic depends on the way a customer is most likely to buy the product. Let us try to understand this concept with an example. A particular customer wants to buy a shirt. To take the final decision on which shirt to buy, he will go through a series of steps, as follows: l The first step would be to decide the type of store to visit. He can go to a mall, a supermarket, a fashion retail store, a value retail store or a hypermarket. The decision here is generally based on the price point the consumer has in mind, the type of merchandise he wants to buy and his fashion/style consciousness. Assume that he enters a hypermarket. l The consumer now needs to go to the right department. There can be several sections in a hypermarket, like grocery, consumer durables, apparels etc. Once he has selected the right section (say: Apparel in this case), there would be several departments within that section (say: Men’s wear, Women’s wear, Children’s wear etc). To fulfill his need, he needs to travel to the Men’s wear section. l Once the particular section is selected, there are further classifications within the section. In Men’s wear there can be classifications like: formal (office shirts, trousers etc), informal (T shirt, Polo shirt etc), ethnic (Kurta etc.) and accessories (Belt, Tie, Handkerchief etc). Let us assume that this particular customer is interested in the formal category. l Within the formal category, now, there would again be several options i.e. sub categories, like checkered shirts, single colour variety etc. Say this customer settles for the single color option. l Now there are different options in terms of colour (dark, light etc.), size (L, XL, XXL etc.), styles and price points. From these, the consumer finally selects the particular SKU. Typically, merchandise in a store will be grouped/classified according to the decision sequence of the consumer, i.e., store format, section, department, category, sub-category, colour, size, style and finally, the SKU. This is the concept of merchandise hierarchy. This sort of classification is common in all types of retailing like grocery, consumer durables etc. Merchandise hierarchy should not be confused with organisational hierarchy, which represents the reporting structure of a retail organisation—typically starting from a store employee going upto the corporate management level.

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Supply Chain Management for Retailing

MERCHANDISE FORECASTING Retailers need to forecast future demand of its products so as to be able to place orders with its suppliers accordingly, for doing its capacity infrastructure planning and for future budgeting. Depending on the type of a particular item, the forecast periods may vary. For a global apparel retailer, it is not uncommon to forecast for the next 12 months, as based on that forecast, new designs will be created, samples will be prepared by the vendor (probably in another low cost country), those samples would be approved, the item would be produced in bulk and then sent to the retailer after completing the necessary quality inspection. The entire process can take between 10–12 months and therefore, the retailer always needs to forecast 12 months ahead. For items that can be procured locally, the retailer may forecast only for the next month. Forecasting is also important for logistics planning as it helps the retailer plan the capacity he will require at his warehouses, the kind of transport capacity he will require in the future, etc. Some retailers take a simple approach for forecasting—they take the last year’s data as the base and multiply it by a growth percentage (which is generally an intelligent guess) to arrive at the next year’s forecast. However, these days, most of the large retailers prefer to follow a scientific approach in forecasting.

FORECASTING METHODS There are two methods of sales forecasting: l Qualitative methods l Quantitative methods.

Qualitative Methods These are also known as ‘Judgmental’ or Subjective methods. These rely on subjective assessments of a person or group of people who understand the current marketplace and have a fair idea about what is likely to occur in the coming days. Estimation is based on gut feeling and intuition. Examples of this can be: l Independent Judgement l Committees l Sales Force Estimates l Juries of Executive Opinion Advantages l Low cost of development l Can provide sales forecasts fairly quickly Disadvantages l They are always ‘biased’ toward the user group l They are not consistently accurate over time l Not well suited for firms with a large number of products

Quantitative Methods These are known as ‘Mathematical’ or Objective methods. These methods can be grouped under two main categories: l Univariate models or Time series models l Causal models

Category Management and Merchandise Budgeting 45

Univariate Models These methods use variability of one past data, like sale or shipments, to estimate future sales/ shipments. Figure 2.6 shows some of these models. Some common models are: l Moving average (MA): Each forecast is an average of some number of previous demand points, like 3 months MA, 6 months MA etc. l Exponential smoothing: Each forecast is a weighted average of the previous forecast and the last demand point. This method is similar to moving average, except that it is a weighted average of all past data points, with more recent points receiving more weight. l Methods for data with trend: If there is a trend in the data, methods such as linear regression analysis and Holt’s method are useful. Linear regression fits a straight line to data points and Holt’s method combines exponential smoothing with linear trend. l Methods for seasonal data: If there is seasonality in data, seasonal decomposition or winter’s method can be used. Seasonal decomposition helps in removing the seasonal pattern from the data while winter’s method accounts for both trend and seasonality.

Fig. 2.6

Different Univariate Models

Advantages of univariate models l They are well suited to situations where sales forecasts are needed for a large number of products l They work very well for products with fairly stable sales l They can smooth out small random fluctuations l They are simple to understand and use l They are generally good at short-term forecasting l Most cost effective and easily systematised Disadvantages of univariate models l They require a large amount of historical data l They adjust slowly to changes in sales

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Supply Chain Management for Retailing l l

They usually fall apart when the forecast horizon is long Forecasts can be thrown into great error if there are large fluctuations in the current data

Causal Techniques These tools make projections of the future by modeling the relationship between demand and other external variables, i.e., they are built on a relationship(s) between past sales and some other variable(s). For example, causal sales forecast for the next quarter may not based on the sales for the last few quarters but on some other variable like GDP growth, inflation, weather etc. Figure 2.7 explains a causal model. Examples of causal models are: l Simple Regression l Multiple Regression l Econometric Modeling l Robust Regression

Fig. 2.7

Causal Models

Advantages of Causal Methods l They provide accurate short, medium, and long-term forecasts, and l They are capable of supporting a ‘What-if’ analysis Disadvantages of Causal Methods l Their forecasting accuracy depends on a consistent relationship between independent and dependent variables l An accurate estimate of the independent variable is crucial l A lack of understanding by many managers who view it as a ‘black box’ technique l They are more time-intensive to develop and require a strong understanding of statistics; they also tend to be more expensive to build and maintain

Attribute based Forecasting/Characteristic based Forecasting Attributes are structured descriptors of a product’s composition and selling characteristics like style, colour, size, geography, customer, selling price, promotional activity or age. Sometimes, attribute based forecasting becomes important for retailers as they are forecasting much ahead of the real requirement and at that point, many details are not available and it is OK to forecast based on a particular attribute for particular purpose. An example can be a situation where a retailer needs to forecast women apparel requirement for the next year for the purpose of buying raw uncoloured fabric – for this purpose, he needs to know only the size and style of different womenswear he would sell next year and not the particular colour variant, which would be required much later, before the actual dying of the fabric starts.

Category Management and Merchandise Budgeting 47

Composite Forecasting This method combines the effects of the forecasts made by different forecasting models, i.e., it is a weighted average of multiple forecast methods. These can be different forecasts made by different univariate models or a combination of the results of univariate and causal models etc.

Consensus Based Forecasting This is a forecasting process in which a team within and across the supply chain interacts in predefined ways to build a consensus forecast over a time horizon. This integrates and combines multiple plans (Product level plan for Marketing, Sales plan, Operations plan, Business units finance plan, Purchase plan etc.) into one consensus plan that drives business. This process requires the opinions and insights of all the participants, with shared accountability for the forecasting process. Generally, there is one monthly consensus/review meeting in which the rolling plan for the next three months/six months is agreed upon. A typical consensus plan can look like this Different Forecast Elements

Jan

Feb

Mar

Apr

May

June

Retail Store Sales forecast Retail Head office forecast Retail Marketing Manager forecast Supplier’s forecast Financial Target Consensus Forecast (20% wt on each)

15K 18K 20K 18K 20K 18.2K

20K 22K 19K 21K 20K 20.4K

16K 18K 17K 19K 20K 18K

15K 18K 20k 18k 20K 18.2K

20K 22K 19K 21K 20K 20.4K

16K 18K 17K 19K 20K 18K

Collaborative Forecasting In this process, a retailer may collaborate with companies outside its own legal entity, i.e. its suppliers and key customers, to decide the forecast numbers.

New Product Forecasting Forecasting for new products is always a challenge for retailers as past demand data is not available. The approach taken by some retailers here is to make the initial forecast of these products on the basis of the sales figures of similar products in the recent past. Forecast numbers are modified as and when the sales data for this product is obtained. This approach is known as like modeling.

Forecasting Approach A recommended approach for forecasting is as follows: l First decide the level of forecasting. A retailer will have thousands of articles and it is impossible to forecast for all of them, individually. Generally, forecasting is done at group level and then, the results are later disaggregated for individual articles. This group can be a product group, a line or a category. The retailer needs to make a trade off here – the forecasting can be done at a very high level and then the results can be disaggregated several times to get a number for the individual articles, in which case, the chances are that the number arrived at will be very far from reality. On the other hand, if the forecasting is done at too low a level, then the number of forecasts increases and it becomes difficult to administer, besides being costly and time consuming.

48

Supply Chain Management for Retailing l

Next, historical sales data need to be cleaned. To get a good forecast, it is important to have a good history. The history may not show the actual trends for a variety of reasons, like sales promotions, supply interruptions etc. Sudden picks and valleys in sales history are called outliers. The history needs to be cleaned from all these promotions and outliers. Figure 2.8 shows one such outlier when shipment demand from one of the retailer’s distribution centre had suddenly increased as the competitor’s store in the region had closed. This is not a normal situation and needs to be treated as an outlier.

Fig. 2.8

Example of an Outlier on DC Demand

The next step is to select the right forecasting tool. This is a lengthy process where after looking at the data patterns in the history, first, a few tools are short-listed (i.e. if data has a trend, then trend models are selected, if data has both trend and seasonality, a relevant model can be chosen). The forecasting is then done for a known period with different selected models and results are compared with actual sales. For example, to forecast the demand for dairy items, history is taken for year 2004 – year 2007, and based on this, forecasting is done for year 2008 by different forecasting models (Say: Moving average, Exponential, Trend model and Trend with seasonality models) and these four forecasts are compared with the actual sales of 2008, which is already available. The methods giving the lowest forecast error are short listed. This approach is called the Best fit model. A baseline forecast for the future can be created using this baseline model. l It is important to forecast promotions separately based on the yearly promotion calendar. This promotion effect can be added to the baseline forecast numbers. A promotion will affect the demand before, during and after the promotional time period. A promotion can also have a cannibalisation effect, i.e., promotion of one product may eat into the sales of another product. There are a variety of forecasting softwares from leading vendors like SAP (SAP APO Demand Planning), i2 Technology (i2 Demand planner), Oracle (Oracle Advanced planning and scheduling solutions—Demand planning module) and JDA, which help in scientific forecasting. l

Category Management and Merchandise Budgeting 49

MERCHANDISE BUDGETING Merchandise budgeting is an exercise where the retailer plans in financial terms, i.e., in dollars or Rupees, the amount of sales he is going to make, the amount of stock he needs to hold for making the intended sale and the amount of merchandise he needs to procure additionally for the same. The planning for markup, retail reductions etc. are also part of this process. Though merchandise budgeting specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives, it is not a complete buying plan and does not indicate what specific SKUs to buy or in what quantities. Typically, the budgeting exercise is done for next six months. Typical decisions for a merchandising budgeting exercise are shown in Figure 2.9 and can include things like: l What will be the anticipated sales for the department, division or store? l How much stock on hand will be needed to achieve the sales plan, given the level of inventory turnover expected? l What reductions, if any, from the original retail price must be made in order to dispose of all the merchandise brought into the store? l What additional purchases must be made during the season? l What gross margin (the difference between sales and cost of goods sold) should the department, division or store contribute to the overall profitability of the company?

Fig. 2.9

Merchandise Budgeting Decisions

A merchandise budget comprises five parts and Figure 2.10 shows these parts. The components have also been explained below. l Planned Sales This tell us how much of each product needs to be sold. This is estimated on the basis of past sales and expected increase or decrease in sales for the budget period. Sometimes, advanced statistical forecasting tools are used for this.

50

Supply Chain Management for Retailing

Fig. 2.10 l

l

l

l

Merchandise Budget

Stock support plan, i.e., planned beginning of month (BOM) and end of month (EOM) inventories This tells us how much inventory or stock is needed for achieving the planned sales. There are different methods of estimating these inventory quantities, like the Basic stock method, Stock to sales method, Weekly supply method, Percentage variation method etc. These are discussed later. Planned retail reductions These reductions need to be made in case the product does not sell. Markdowns, employee discounts and inventory shrinkage come under this. These three figures affect the gross margin and hence, they need to be considered while calculating profitability. They also affect inventory levels, therefore, they need to be projected to ensure that enough merchandise is on hand to attain the forecasted sales levels. Planned markdowns are deductions in price may occur due to various reasons like bad quality of merchandise, competitive products, changes in trends etc. Employee discounts are given to employees for buying company’s products. Shrinkages refer to loss of merchandise due to theft or pilferage. There can be other reasons for reductions like inventory shortage, shoplifting, employee theft, damaged merchandise and record keeping errors. Planned purchase levels This is the quantity of each product that needs to be procured from the market during any given period. This is calculated by using the following formula: Planned purchase = Planned sales + Planned reductions + Planned end of month – Planned beginning of month Planned gross margins and markups This is the difference between sales and cost of goods sold including reductions for markdowns, shrinkage and employee discounts. This is the retailer’s contribution to the overall profitability of the company. To determine gross margins, all purchases and inventories must be converted to cost price. Assume that there is a 10% markup on merchandises, then, to calculate the cost price, we would need to multiply the inventory and purchases by 10%. Generally, markups are determined on the basis of the type of product and target audience. Markups must allow retailers reasonable profit after paying all operating costs, reductions, cost of goods sold etc. Most retailers have a target markup to start with. This markup percentage is calculated by dividing the markup in rupees by the retail price. Markup in rupees is the difference between the cost price and the selling price. A pen that has been bought for Rs. 5 and that sells for Rs. 10 has a mark-up of 100%.

Category Management and Merchandise Budgeting 51

SIX MONTHS MERCHANDISE BUDGETING Merchandise budgeting is typically done for six months or for a year. Budgeting for the next six months is a common industry practice as doing it for longer period may make the forecast unrealistic. Developing a merchandise budget requires a series of steps to be followed. These have been enumerated as follows: Step 1 Assume that the retailer wants to do a budgeting exercise for first six months of the year 2009. He first needs to get the data for the same period for the last year, i.e., the January – June Sales figures of the year 2008. Assume that the sales figures are as follows:

Sales - 2008

Jan

Feb

Mar

Apr

May

June

Total

100000

90000

80000

100000

90000

80000

540000

Step 2 For the last year, calculate the monthly sales as a percentage of the total sales. This helps in understanding the effect of seasonality. Assume that the same seasonality will be repeated in the next year.

% of Total

Jan

Feb

Mar

Apr

May

June

Total

18.52%

16.67%

14.81%

18.52%

16.67%

14.81%

100

Step 3 Assume that no major change in sales is expected in the next year and overall there is an expected growth in sales of 10%, i.e., the total sales are expected to increase by 10% while the monthly percentages remain the same. Thus, the projected overall sales will become: 540000 ´ 1.1 = 594000. The month wise sales will be as follows: Planned Sales for the month = (Planned Sales Percentage for the month) ´ (Planned Total Sales)

Projected sales 2009

Jan

Feb

Mar

Apr

May

June

Total

110009

99020

87971

110009

99020

87971

594000

Step 4 The stock to sales ratio and percent of retail reductions for every month need to be estimated (Reductions are from markdowns, employee discounts and shrinkages etc). As described earlier, Stock sales ratio = Stock on hand at end of month (EOM)/Sales for the same month

Stock sales ratio % of reductions

Step 5

Jan

Feb

Mar

Apr

May

June

Total

1.8 20

1.5 20

1.5 15

1.8 25

1.5 25

1.5 15

100

Monthly reductions need to be calculated from the total reductions estimated. Planned Retail Reductions for the Month = (Planned Sales for the month) ´ (Planned Retail Reduction Percentage for the Month) For the first month: Reductions = 59400 ´ 20/100 = 11880

52

Supply Chain Management for Retailing Jan

Feb

Mar

Apr

May

June

Monthly reductions % 20 Monthly reductions 11880

20 11880

15 8910

15 8910

15 8910

15 8910

Total 100 59400

Step 6 The beginning of the month (BOM) stock requirements and the end of the month (EOM) stock requirements need to be calculated. The EOM stock for one month is the BOM stock for the next month. Only the end of month (EOM) inventory for the last month, i.e., June ’09 needs to be projected. BOM Stock = Monthly Sales (as calculated in step 3) ´ Stock to sales ratio BOM Stock for Jan = 110009 ´ 1.8 = 198016 As discussed, the end of month (EOM) inventory for the last month, i.e., June ’09 needs to be projected. Assume that the June ’09 EOM stock is 210000. This gives us the following table:

BOM stock EOM stock Stock sales ratio Sales

Step 7

Jan

Feb

Mar

Apr

May

June

198016

148530

131956

198016

148530

1.8 110009

1.5 99020

1.5 87971

1.8 110009

1.5 99020

131956 210000 1.5 87971

Total

Planned EOM Stock for this month = Planned BOM Stock for the Following Month

BOM stock EOM stock Stock sales ratio Sales

Jan

Feb

Mar

Apr

May

June

Total

198016 148530 1.8 110009

148530 131956 1.5 99020

131956 198016 1.5 87971

198016 148530 1.8 110009

148530 131956 1.5 99020

131956 210000 1.5 87971

Step 8 The monthly retail reductions need to be added as the quantity lost due to shrinkage, employee discount and markdowns also need to be replenished. Planned Purchases at Retail for the Month = (Planned Sales for the Month) + (Planned Retail Reductions for the Month) + (Planned EOM Stock for the Month) – (Planned BOM Stock for the Month) Addition for Jan = 110009 + 11880 + 148530 – 198106 = 72233

Monthly additions to stock

Jan

Feb

Mar

Apr

May

June

Total

72233

94326

162941

69433

91356

174925

Feb

Mar

Apr

May

June

Total

99020 20 11880 148530 131956 94246

87971 15 8910 131956 198016 162941

110009 15 8910 198016 148530 69433

99020 15 8910 148530 131956 91356

87971 15 8910 131956 210000 174925

594000 100 59400

Thus, the merchandise plan will look as follows: Jan Projected sales Monthly reductions % Monthly reductions BOM stock EOM stock Monthly additions to stock

110009 20 11880 198016 148530 72233

Category Management and Merchandise Budgeting 53 Once the merchandise plan has been created, it gives the buyer an indication of the net merchandise requirements for the next six months, the amount of purchases that need to be made at the beginning of every month and the amount of inventory needed in each month. The buyer should not exceed these amounts. The buyer needs to know the finances actually available to him/her to buy the products/merchandise required. Open to buy ensures that there is control on the function of merchandise buying. Points to remember while creating a merchandise budget: The following points need to be kept in mind while creating this plan: l Plan must be planned for a short period of time A six months perioid is the norm used by most retailers. If you budget for very long periods, the difference between the Budgeted vs. the Actual figures will be high as it is always more difficult to forecast what you will sell one year later as compared to what you will sell after one month. l Easy to understand and Flexible The language of the budget should be easy to understand. The budget should be flexible enough so that changes are possible. l The merchandise cycle needs to be remembered The merchandise budget should be prepared in advance of the selling season, taking into consideration the time taken for ordering and the time taken by the supplier to supply goods. The merchandising cycle for each product can be different. Winter jackets would have a separate merchandise cycle than rainy season clothes. l Space constraints need to be kept in mind while budgeting The budget prepared in the earlier example needs to be validated with the space available in the store. There is no point in budgeting for something and procuring it if there is no place for displaying it in the store. Every time the store is remodeled, this available space may change. l The merchandise budget needs to factor in what the competition is doing Plan on what to spend and where based on a knowledge of what the competition is selling.

OPEN TO BUY CONTROL Open to buy (OTB) is a merchandise control system that controls merchandise procurement in a way such that stock availability at the retail store at any point, matches planned sales as closely as possible and ensures that the planned closing stock levels at the end of the period is not exceeded. Thus, OTB refers to the amount that a buyer can currently spend on merchandise, without exceeding the planned amount stock. Figure 2.11 explains the concept of OTB. Advantages of the open to buy system: l Depending on the sales for the month and the reductions, the merchandise buying can be adjusted. l It acts as a financial restriction upon the buyer that ensures that the company will not be exposed to a stock level greater than planned. l It ensures that sufficient amount of stock is available at the right time to maximise sales potential. l Planned relation between the stock and sales can be maintained. l Limits overbuying and under buying. l Prevents loss of sales due to unavailability of the required stock. l Maintains purchases within the budgeted limits. l Reduces markdowns that may arise due to excess buying. Inputs for open to buy: l Forecast sales Estimate of future sales.

54

Supply Chain Management for Retailing

Fig. 2.11 l

l l

l

l

l

Open to Buy (OTB) Control

Period cover Period cover means that the retailer has enough stock to meet the requirements of a particular number of periods, i.e., ‘a 3 month period cover’ means that the retailer has sufficient stock to sustain the next three months and need not order anything to meet the requirements of this period. There can be different types of period covers like, a flat cover or a forward cover. In a flat period cover system, if a retailer has coverage for 3 periods and the forecast for the current month is 100, then the stock requirement will be 3 ´ 100 or 300. In the forward period cover system, if a retailer has coverage for 3 forward periods, then the system will add up the next three periods’ sales, i.e., for the next three periods, if the sales forecasts are 100, 200 and 300, the forward cover will produce a requirement of 600. Flat coverage is suitable when demand in every month in almost uniform and a little bit fluctuation of demand can be taken care of by a safety stock. Forward coverage is more commonly used and is suitable in cases where there is a fluctuation in the demand or in cases of seasonal merchandise, where sales in every month are not uniform. Opening stock This is the physical stock at the beginning of the period. Intake requirement This is calculated by subtracting the opening stock from the stock requirement. If the retailer needs 500 units of an item and he has an opening stock of 100 units, it means that he has an intake requirement of (500–100), i.e., 400 units. On order This term refers to items already ordered and due for delivery. This information generally comes from the purchasing system. Out of a 400 intake requirement, if the retailer has already ordered for 200 units, 200 is on order. Open to receive This is calculated by subtracting the on order quantity from the intake requirement. At any point, the open to receive quantity may be ordered in any number of preceding periods, depending on the lead time. In the earlier case, open to receive quantity = Intake requirement – On order = 400 – 200 = 200. If the supplier needs a 3 weeks lead time to supply the material, then the retailer needs to order these 200 units at least 3 weeks before the actual requirement. Closing stock This is calculated by taking the opening stock, subtracting the sales from it and adding the on order and open to receive quantities. In the earlier example, if the retailer had sold 300 units during the current month, then,

Category Management and Merchandise Budgeting 55 Closing stock = Opening stock + On order + Open to receive – Sales i.e., Closing stock = 100 +200 + 200 – 300 = 200 In the OTB system, the closing stock for the first period is a result of adding the opening stock, on order and open to receive quantities and then subtracting the forecast sales. The closing stock then becomes the opening stock for period two and so on.

OTB Calculations OTB is calculated as follows: Open to Buy = Projected EOM stock – Planned EOM stock In the six months merchandise budget example, the OTB for the various months would be calculated as follows: Jan Projected sales Actual sales Monthly reduction Actual reduction BOM stock Actual BOM EOM stock Actual EOM Monthly additions to stock Actual additions On order

110009 100000 11880 10000 198016 195000 148530 150000 72233 70000 70000

Feb

Mar

Apr

May

June

99020

87971

110009

99020

87971

11880

8910

8910

8910

8910

148530

131956

198016

148530

131956

131956

198016

148530

131956

210000

94246 90000 75000

162941

69433

91356

174925

OTB is always calculated for current and future periods. Assume that the current month is February. Then actual data is available for all data points of January. OTB for the month of February is: Projected EOM stock = Actual BOM stock + Actual additions to stock + Actual on order – Planned monthly sales – Planned reduction for the month Actual BOM stock for Feb = Actual EOM stock for Jan = 150000 Actual addition to stock in Feb = 90000 Actual on order in Feb = 75000 Planned monthly sales in Feb = 99020 Planned monthly reductions in Feb = 11880 Projected EOM stock for Feb = 150000 + 90000 + 75000 – 99020 – 11880 = 204100 Planned EOM stock for Feb = 131956 Open to Buy for Feb = 204100 – 131956 = 72144 Thus, the OTB system gives an idea to the merchandiser about how much actual money is available to him for making purchases. The next step is to decide which items to purchase and in how much quantities. This process is called Assortment planning and is covered in the next section.

Conclusion In this chapter, we discussed Category management, Merchandise forecasting, Budgeting and Merchandise budget control process, i.e., Open to Buy control process.

56

Supply Chain Management for Retailing l

l

l

l

Category management is an important retail process where retailers manage each category as a separate SBU. The first challenge in the process is category definition, followed by identifying category role, developing a strategy for each category and building category specific KPIs. Retailers need to plan other elements of merchandising management like assortment, pricing etc., to achieve category objectives. Successful category management also requires a proper support structure to be in place, i.e., a suitable organisational construct, performance indicators etc. However, category management also poses several challenges to the retailer in terms of new SKU proliferation, brand management, etc. These days, several information technology solutions are available to retailers for effective category management. Merchandise forecasting is a long term planning process for Merchandise management. A statistical forecasting process can improve a retailer’s forecasting accuracy. There are several univariate and causal models in statistical forecasting that a retailer can use. Consensus planning is the most common approach as it takes inputs from the various stakeholders of the retail business while forecasting. Merchandise budgeting is based on five key inputs: sales plan, stock support plan, planned retail reduction, planned purchase level and planned gross margin/mark-up. A six months merchandise budgeting process has been explained in this chapter. Open to buy control is a merchandise budget control process where the retailer tries to have a control mechanism to ensure that the quantity that he is buying for the next season is in line with what he is selling and that the closing stock remains under control. The OTB process has been explained in the chapter.

Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

What is category management and what are its benefits? How are categories defined? What are the ground rules for defining a category? What are the different category roles? How are category strategies defined? What is meant by category tactics? What are the available category tactics? What are the enabling components of category management and how do they facilitate category management decisions? List some issues with the category management process? How does information technology help the category management process? What are the five inputs required for the Merchandise budgeting process? Explain the steps that need to be followed for a six month merchandise budgeting process. What are the things to be kept in mind while developing a merchandise budget? What is open to buy control process? What are its advantages? Explain the steps that need to be followed in open to buy control.

Assignments Study an organised retailer. Study his forecasting process for future stock requirements and fund requirements for procurement. What kind of checks and balances does he use to control his procurement if the actual sales are not in line with the budget/forecast.

[CHAPTER]

LEARNING OBJECTIVES

Assortment and Space Management

3 In this chapter, we will explain the following concepts: 1. The concept of Assortment management and benefits of better assortment planning 2. Assortment management framework 3. Assortment strategy and objectives—Role of category management 4. Assortment selection process—Adding and deleting items in assortment 5. Assortment planning—Planning product line, depth, breadth, range and model 6. Role of data and information technology in assortment management 7. Store clustering 8. The concept of space management, Benefits and integration with assortment 9. Different stages of space planning 10. The concept of Planogram and the process for planogram management 11. Issues in space management 12. Role of information technology in space management

58

Supply Chain Management for Retailing

What products should you stock in each store? Which sizes should you have in stock? In which place should you display these items? How much space should you allocate for each item? How much weightage should you give to local preference? How can I differentiate my store offerings from other stores? How can my assortment provide the required profit and return on my investment on space? These are the questions which every retailer faces. For a large organised retail chain having hundreds of stores and thousands of stock-keeping units (SKUs), these decisions are much more complex. This chapter on retail assortment and space management will discuss the approach that a retailer needs to take to solve these issues.

THE CONCEPT OF ASSORTMENT MANAGEMENT Assortment is a process where a retailer decides what kind of products he will store in his stores, in what quantity and what varieties he will offer to his target customer. The main purpose is to create a balanced assortment for the target customer so that the customer has a range of SKUs (different colours, sizes, fashion, and brands and price points) to choose from.

Defining Assortment According to best practices report, an efficient assortment is defined as: ‘A cooperative retailersupplier process of determining the optimal product offering within a category that achieves target consumer satisfaction and enhanced business results.’ There are two parts to this definition: l Cooperative retailer-supplier process Assortment is a collaborative process where retailers and suppliers need to bring their capabilities together. While the retailer has a good understanding of consumer wants, what sells in his store, the local market, the financial performance of the various SKUs in his store and the productivity performance of the SKU in terms of inventory turnovers, the supplier brings in market perspective, national perspective, consumer data, product development knowledge etc. l Determining the optimal product offering Assortment is an optimisation problem where the retailer’s objective is to maximise customer satisfaction and profitability and he works under several constraints like that of the procurement budget, retail shelf space available to him etc. Figure 3.1 explains the components of Assortment management. Except for size and pack planning, all other components are described in this chapter. Size and pack planning is described in Chapter 12.

Fig. 3.1

Assortment Management

Assortment and Space Management 59

Benefits of Better Assortment Planning A successful assortment planning can help both the retailer and the customer in different ways, like: l The customer has better choices and range available, which increases his satisfaction l Retailers and suppliers have faster stock-turns, lower out-of-stocks and better ROI l Assortment can differentiate a store from others

ASSORTMENT MANAGEMENT FRAMEWORK Let’s first understand the assortment management framework. The starting point of this framework is having an assortment strategy. The assortment strategy sets the high level direction for the retailer, which is based on the needs of its target customers and provide guidance for corporate, financial and category objectives for the assortment. Based on this detailed plan, detailed plans for assortment selection and for product line (depth, breadth, range, model and quantity of each SKU) need to be worked out. The initial assortment plan gives an indication of retail space requirement to accommodate this assortment. Based on actual availability of space and the planogram plan, the assortment needs to be finalised.

60

Supply Chain Management for Retailing

ASSORTMENT OBJECTIVES As we have discussed earlier, the starting point of the assortment framework is the Assortment strategy. There are three key elements in the assortment strategy: l Corporate objective and store positioning strategy l Category objectives of the assortment l Financial objectives of the assortment Corporate objective and store positioning The assortment objective is based on the business objective and the kind of positioning the retailer wants for his store and his target customer. Obviously, the assortment plan for a fashion retailer or a retailer wants to maintain exclusivity will be different from that of a mass retailer. How store positioning affects assortment—An Indian example: Wills lifestyle may plan their men’s wear assortment based on high end brands and prices starting from Rs 999, whereas Big bazaar men’s section can have a variety of both high end and economy brands and prices may start from Rs 299. Category objectives of the assortment The assortment needs to meet the category performance objectives. There can be several category objectives for an assortment like: l Choices offered in the assortment may be required to be aligned with the category structure and the decision hierarchy of the consumer. Let’s try to understand this with an example: A customer comes to a retail store to buy soap. He first decides what type of soap he needs to buy (Normal, Medical, Glycerine, Ayurvedic etc); the next decision would be about the brand (HUL, Godrej etc.). Next, he will decide the price point he would prefer (High value, Low value etc.) and the final decision will be about the SKU size (75 gm, 150 gm etc.). Based on this decision hierarchy, the retailer needs to ensure that there is enough variety available in the store to offer choice to the customer. The retailer needs to ensure that he has different types of soaps, a number of brands under each type, brands at different price points (Premium, Economy), performance segments and a variety of SKUs. Figure 3.2 explains the concept of a customer decision tree.

Fig. 3.2 l

Customer Decision Tree/Hierarchy

Provide a balanced assortment Another objective of a retailer can be to provide a number of options in each segment/group. In the earlier example, if you have ten soap varieties available with you and out of them, eight are in the high value/premium segment, one in the

Assortment and Space Management 61 mid segment and only one in the economy segment—the assortment is not balanced. Balanced assortments are built from ground up, segment by segment, and then by asking how many choices the consumer needs within a segment (how many SKUs need to be offered). This strategy ensures something for everyone. l Category performance objective While making the assortment decision, the retailer needs to look at the category objective. If the category objective for a mass retailer is to pull more customers to the store through this category—the assortment may have more offerings at the entry range/economy segment. How category objectives can affect assortment—Example: Category objective

Impact on assortment planning

Increase gross margin of the category Increase turnover of the category Category is a destination category for the retailer Category is a traffic building category

Have high margin SKUs in the assortment Have high turnover SKUs in the assortment Provide wide assortment. Give sufficient space in the retail shelf

Category is a transaction building category

Provide wide assortment in economy segment. High market coverage for household penetration SKUs Provide higher coverage for SKUs or segments that have a large transaction value

Financial objectives of assortment An assortment plan needs to meet the ultimate financial objectives of the retailer like: his profitability targets, turnover target, return on asset targets, etc.

ASSORTMENT SELECTION Six step efficient assortment process for product introduction and item deletion Retail supply chain best practices suggest a six step approach for decisions regarding adding, retaining or deleting SKUs. Figure 3.3 explains the steps. These six steps are as follows:

Fig. 3.3

Assortment Selection

62

Supply Chain Management for Retailing Step 1 Step 2 Step 3 Step 4

Step 5 Step 6

Market coverage

A target % of market turnover coverage for category segment is chosen to start the process of examining individual SKUs for ultimate assortment Deletion validation SKUs falling below the market coverage target are passed through screens of market, retail and consumer measures to judge for deletion Retention validation SKUs slightly above the market coverage target are passed through screens of market, retail and consumer measures to judge for deletion Addition validation SKUs not carried by the retailer but falling above the market coverage target are passed through screens of market, retail and consumer measures to judge for addition Assortment finalization The result of the previous steps Assortment quantification Measuring assortment performance

Step 1—Market coverage In this step, the retailer decides how much percentage of the segment turnover he should carry as percentage of his offering—whether all the SKUs in the category (100%) or only the popular SKUs (which may give a market coverage of 60%). Market coverage equals the cumulative percentage of shares in the market, calculated by adding the largest share SKU to the next largest etc., based on value or volume. An example of this can be: A retailer may decide that all kinds of body care soaps should be part of his assortment or he may decide that he will keep only the most popular brands like: Lux, Lifeboy, Cinthol etc. This may not give him full market coverage as he does not have premium or medical soap brands but as he is keeping only high turnover brands—this may give him a better chance of retail space utilisation. Market coverage exercise needs to be done at sub-category or segment level and not at total category level This is because each segment represents a specific consumer need that has to be considered. By contrast, conducting the exercise on a total category basis could result in an entire segment (consumer need) being removed from the final assortment list if all the SKUs happen to fall below the market coverage level of the total category. Extending the earlier example: The personnel care soap category can have different sub-segments like: Normal soaps (Brands like: Lifeboy, Lux, Cinthol etc), Medical soaps (Like: Dettol), Glycerin soaps (like: Pears), Soaps at higher price point (like: Dove), Sandal wood varieties, Ayurvedic varieties etc. The market coverage exercise need to be done at all these sub-category levels separately, as there may be specific needs and target customer for each of this sub-category. If this exercise is done at the overall category level, several of the sub-categories like: Ayurvedic, Glycerin and sandle wood soaps would be dropped from the retailer’s assortment as in terms of market coverage, they may account for just 1–2% of the overall volume. Concept of category fragmentation A category is more fragmented than another if it requires more SKUs for the same market coverage. If category A requires 5 SKUs to have 80% market coverage while category B requires 15 SKUs for the same purpose, then category B is more fragmented. Typically, it makes more sense to attain high market coverage in less fragmented categories because of the cost associated with storing too many SKUs. Thus, in this example, we may choose to have 80% market coverage for category A but only 60% for category B. In most categories, a few popular SKUs account for a large percentage of market coverage whereas a large number of less popular SKUs account for very small market coverage.

Assortment and Space Management 63 Step 2—SKU deletion validation In this step, the SKUs that are below desired market coverage in each segment are short listed for deletion after passing all the SKUs through a series of consumer and retailer performance measure screens. According to retail best practices, deletion validation passes each SKU currently stocked by the retailer and below market coverage through two evaluations: 1. Consumer performance evaluation These include measurements like: loyalty, worth of a consumer, exclusivity (percentage of consumers using only this SKU in the segment) and substitutability (the number of SKUs consumers consider as an alternative for the SKU in question). The rule is that a SKU below the market coverage cutoff with above average segment loyalty, consumer worth, exclusivity and below average substitutability should probably not be deleted because this has the risk that the consumer may go somewhere else. 2. Retailer performance evaluation These include measurements like: percentage of market availability, average rate of sales in the marketplace, average rate of sale at the retailer, turnover, retailer and supplier profit, retailer and supplier productivity or ROI. The rules is that a SKU below market coverage cutoff, but having above average rate of sale in the marketplace, above average rate of sale at the retailer, above average turnover, profit contribution and productivity (ROI) should not be deleted. Step 3—SKU retention validation SKUs that are within the desired market coverage and are currently stocked by the retailer are evaluated for consumer and retailer performance. SKUs are kept if their performance measures are relatively good and their market coverage is important. Step 4—Addition validation In this process, a recommendation is made on a possible addition of SKUs within the market coverage desired, which are currently not a part of the assortment of the retailer. SKUs are added to the assortment if their consumer and projected retailer performance are good and they are stocked by major competitors of the retailer. Step 5—Assortment finalisation In this step, a quantitative and qualitative comparison of the retailer’s ‘current’ assortment is made with the proposed, ‘new’ assortment. The assortments are compared in terms of the number of SKUs offered by brand and by size, flavour etc. The desired market coverage in the new assortment is compared with original coverage goal. The reason for adding or deleting each SKU is identified. When an SKU is deleted, check to ensure that an adequate alternative exists for the consumer. The assortment needs to be finalised after reviewing all the important consumer characteristic in the market, like price point, package type etc., to ensure that consumer has sufficient choice within each characteristic. Step 6—Assortment quantification In this stage, the final assortment is recommended after comparing the current and proposed assortment on a variety of performance measures and this final assortment plan is used for developing tactics in pricing, promotion, shelf presentation and product supply. Old and new assortments are first compared in terms of: market share of the segment, number of SKUs, market coverage, indices of loyalty/consumer worth etc. Then, the assortments are compared on various retailer performance measures, like: Turnover, Profit, Inventory, GMROI, ROA etc.

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ASSORTMENT PLAN Concept of Product Line, Breadth and Depth of an Assortment This is an important concepts in assortment. Let’s try to understand this with an example. Assume that a footwear retailer is planning for the men’s footwear category. His first consideration will be, which product lines to consider. A product line is a broad category of products having similar characteristics and uses. Thus, in men’s footwear, the different product lines can be formal shoes, sports shoes, gum boots, leather chappal, chappal for rainy season, ethnic chappal, accessories like socks, laces, shoe polish etc. Some footwear retailers have even extended their product lines to other leather products like purses, leather bags etc. Once the product lines are decided upon, next he has to determine the breadth and depth to be offered under each product line. The breadth refers to the number of brands carried within each product classification. Under the sports shoe product line, the retailer may offer breadth in terms of brands like Addidas and Nike. Under the formal shoe product line, breadth can be offered in terms of brands like Liberty and Bata etc. Depth on the other hand, refers to the number of choices offered to the consumer under each brand, like the different sizes or different colours offered (like, Black, Grey etc). Example of Product line, Breadth and Depth for an Indian Footwear retailer

Planning for Range Range planning aims at giving the consumers sufficient options so that they can make a choice that makes them happy by offering it within a price range affordable to them. While determining the range, the sales and profit objective of the stores need to be kept in mind as that decides the styles and options needed to achieve the right sales and margin mix. Thus, the decision on which style, colour or size is to be kept is based on a variety of inputs, like past historical sales data of each style, colour or design, prices at which they were sold, seasonal factors, space available in the store, etc. Current trends also influence range and breadth planning. Range may also cover some items that may not have high sales volume but that help in creating a desired image for the store. An example can be some styles kept in the store for window dressing only; or a technology retailer keeping a high end plasma T.V. in the store. The customer expects to find it in the store but it may not sell much. On the other hand, there can be items like cables or connectors, which do not help in improving a store’s image much, but they are high margin products with high stock turn.

Assortment and Space Management 65 Figure 3.4 shows how a retailer can plan several variants and plan ranges for rollouts during different times of the year. Rollouts consist of SKUs and styles that ship at the same time and are developed to sell with each other. Each rollout has a different fabrication, colour and style, which would not match with the previous rollout. This is very common in women’s clothing and that for young adults, who want highly fashionable clothing that is only in style for a short period of time, until the next new fashion emerges. Another reason for rollouts is that retailers often want to change the presentation of their departments to feature new and exciting styles to entice frequent shoppers to purchase new items.

Fig. 3.4

Variant and Rollout Planning

Planning for Model In this step, the retailer makes the decision about what to buy and in what quantity. This model plan gives the exact SKU names and quantities that need to be purchased. To arrive at the final model plan, the retailer needs to understand the consumer’s decision hierarchy while buying the product, i.e., the way in which the consumer evaluates the product attributes while taking the decision. The retailer allocates his total buying budget among the various SKUs on the basis of a balanced distribution of these attributes. Assume that for buying a T.V., the consumer evaluates the following attributes: l Screen flatness: LCD, Flat, Plasma, Regular l Screen size: 20 and less, 21–25, 26 and more l Brand: Sony, Panasonic, Videocon, Philips, LG, Samsung l Budget: Less than 10 K, between 10 K–15 K, between 15 K–25 K, more than 25 K Once this is done, the total purchase budget is allocated in units, among these item categories. Units recommended are in direct proportion to the estimated demand patterns, i.e., a retailer may decide to allocate most of his resources to the Regular 21–25 inch T.V. category and very less to the Plasma category. However, it is important to have some Plasma T.V. stored as there are customers for this category and more importantly, this is important from the store’s image point of view.

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If the retailer goes deeper in identifying more and more attributes, the chances that the customer’s demand will be met exactly increses. In the earlier example, once the basic attributes are covered, the next level can be: Options in number of speakers (2, More than 2), Speaker power (100 watts, 200–500 watts, more than 500 watts etc). However, as the number of attributes increases, the number of SKUs and the cost of carrying inventory also increases. So, a trade-off needs to be made at some point, on the basis of the retailer’s budget/available space and the customer service level he wants to maintain.

ROLE OF DATA AND INFORMATION TECHNOLOGY IN ASSORTMENT The decision of efficient assortment is very much data driven as retailers need to understand the relationship of the item with the remaining assortment, since sometimes adding an item means removing another. Figure 3.5 explains these different data elements and these are explained in detail below: l Consumer data: This data helps a retailer determine the importance of an item to a specific customer segment and the impact of product addition and deletion. Examples of such data are: SKU loyalty, SKU substitutability, Consumer worth, Loyalty, Frequency of procurement etc. l Market data for SKU: These kind of syndicated data give insights to the retailer about what consumers are buying from his store and other retailers in the locality. Examples of these are: Market share, Turnover etc. This data also helps the retailer understand how his assortment compares with that of the market and helps him in taking a decision about the addition and deletion of SKUs. In India, market research firms like IMRB (Indian Market Research Bureau) provide such data. l Financial Data for SKU: This includes: Turnover value, Profitability, Gross margin, Unit volume etc. It is important for judging an SKU’s performance. l Productivity data for SKU: This includes a retailer’s KPI data like: Turnover/sq ft, Profit/sq ft, GMROI, ROA, etc. Some softwares can help in simulating assortment scenarios, such as adding or removing items or changing the number of facings or shelf space, and in understanding their impact on the assort-

Fig. 3.5

Role of Data in Assortment

Assortment and Space Management 67 ment—its turnover, profitability, space utilisation etc. Some softwares also help in understanding cross elasticity of data. If an item is removed from an assortment, it can help in predicting the loss in sales due to this and the gain in sales due to customers buying its substitute. This cross elasticity analysis helps the retailer to understand the overall impact on assortment turnover and profitability and hence, helps him in taking a decision.

STORE CLUSTERING Store clustering means: ‘Create a small number of store clusters that provide maximum differentiation between clusters, while minimising differences among stores within the same cluster, i.e., stores in a single cluster should be fairly homogeneous, while the clusters themselves should be different from one another’. Store clustering categorises stores into groups or clusters, on the basis of some common characteristics or attributes like volume, store size, store layout, store location such as downtown vs. suburbs, target customer such as resort, retirement etc.

Why Store Clustering Ideally, every store should meet local customers’ demand and should be set individually. Though this is theoretically perfect, it is difficult and expensive to implement and maintain as this means store specific merchandise planning, assortment design, space planning, planograms and pricing and promotion plans. That’s why store clustering is required, which helps in identifying store similarities and differences and based on this, similar kind of category management, merchandising and assortment plan can be designed, which meets the specific needs of a group or cluster of stores. Consumer needs are different in each cluster and that means that to manage the needs of an entire target customer set, a few groups of stores need to be managed instead of trying to optimise each individual store. Thus, clustering helps achieve economies of scale. Some benefits of store clustering can be listed as follows: l Efficiency and economies of scale and optimising allocation of resources. l Keep both local interest in mind and the trends in the market while designing the cluster level category, assortment and merchandising plan l Once clusters have been defined, the retailer can then tailor his marketing and promotion to better appeal to customers within each cluster type. It provides a basis for developing customised store assortments and addressing micro marketing. Stores that are a part of the same cluster may get the same assortment l New stores are easily assigned to a cluster, helping them to grow quickly. l Older stores can be reassigned to better align the store with the local market. l Ongoing monitoring of store clusters is easier l Helps generate lists of trial stores for new products to better fit with likely consumers l Offers insights when selecting new store locations

What can be the Basis of Store Clustering and How Clustering is Done? There is no one rule for defining a store cluster and it can be based on a variety of factors. Demography is something which retailers have been using for a long time. Some common demographic attributes are income, age, ethnicity, customer shopping patterns etc., based on which clustering can be done. Other clustering factors could include regionality, store location types, store size,

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layout, site characteristics etc. For defining store clusters, an understanding of the character of the trade area can be an important input. For example tourist/entertainment areas, down town vs. suburb locations can each have their unique customer behaviour patterns. Most retailers use one or two attributes such as geography, store format, sales volume or demography to cluster their stores. Nowadays, sophisticated statistical tools are used for clustering. The tools analyse consumer purchase data and can recommend clusters on the basis of a variety of parameters like, Sales volume, type of items procured etc. They can also define dynamic clusters, i.e., facilitate shifting stores from one cluster to another for an upcoming season or over time. There are two approaches for defining clusters and they are the Top down approach and the Bottom up approach. Top down methodology uses parameters like store size, geographic location, demographics and proximity to distribution centers. These methods do not reflect the buying pattern of the consumers. Bottom up clustering on the other hand, clusters stores based on buying behaviour, for example ten stores that experience particularly high demand for a certain brand of cold drinks may be in the same cluster. However, the problem with bottom up clustering is that it does not look at logistics issues. For instance, in the above example, the supply chain may not be able to meet the demand of two stores due to their distance from the distribution centre. So, a combination of the top down and bottom up approaches is needed for efficient clustering.

Types of Store Clusters There can be three different types of store clustering: l Complete standardisation All store locations are essentially treated equally from the branding, advertising and merchandising perspective. One standard marketing and merchandising plan is used for all stores. This approach is rarely followed. l Hybrid standardisation This allows the retailers to realise economies of standardization, while at the same time, providing many of the profit boosting benefits of localisation. This approach advocates limited localisation for addressing some significant variations between stores. This is most commonly followed as it tries to fulfill the local needs to the extent possible while addressing economies of scale as well. l Complete localisation This refers to assorting and configuring each location one by one so that each location has a unique brand, advertising and marketing mix. This is very good for one-to-one marketing/micro marketing needs as this format exactly suits the requirements of individual target customers in the locality. However, it results in unlimited variation in the marketing and merchandising plan for each store and puts a lot of pressure on the retail supply chain in terms of economies of scale. In following this approach, most of the benefits of clustering is lost.

How Technology can Help in Store Clustering There are several applications that support retailers in the store clustering exercise. Vendors like Galeria (Tool: Micro cluster planner), JDA and Oracle offer softwares that support store clustering. These tools can support clustering by using a variety of data, like: demographics, geography, forecasts, historic sales information, consumer purchasing behaviour, causal factors, and data to identify consumer demand patterns at the store level for products, price points, brands, etc. These support clustering by following both the top down and the bottom up approaches. The system performs a number of iterations to arrive at an optimal number of clusters to satisfy the retailer’s objectives and constraints. Tools can support cluster specific marketing strategies. Nowadays, software vendors are using analysis and data mining for determining how stores and categories should be clustered.

Assortment and Space Management 69 Instead of making top down clustering rules, such as ‘every city store will be in the same cluster’, technology can look at multiple attributes and selling patterns to determine the best clusters. Clusters are recommended based on a bottom-up analysis, i.e., based on actual consumer demand and they are then modified to work with a top down analysis, i.e., based on overall company policy. With modern analysis, clusters can be defined on the basis of multiple variables or by maximising a variable such as profitability or merchandise turns.

THE CONCEPT OF SPACE MANAGEMENT AND ITS BENEFITS Space is the most precious asset for a retailer. Increasingly, success in retailing is getting decided by how well a retailer is using his space and more and more retail performance measures are getting aligned with space. Retailers realised the following benefits from better space management: l Increase in revenue as space is reallocated to higher velocity items, assortment is more tailored to local demographics and the stock position improves. l Improvement in profit by identifying higher profit items and ensuring that these items get better store space allocation. l Reduction of inventory through removal of non performing SKUs or giving lesser space for SKUs making less profit or fewer turnovers.

Why Assortment and Space Planning Need to Happen Together If space planning is done after assortment planning, it always leads to a problem. In assortment planning, which SKUs will be kept and how much of each will be there in store is decided upon. Sometimes, this planning is done without regard for the actual space available in the store. When this assortment plan is converted to store level space plan requirement, the problem starts as the store may not have enough available space, i.e., we end up trying to fit an assortment into the available shelf racks or fixtures. This may lead to a lot of problems like: items may be left out due to a lack of space, high turnover items may not get enough facings because of limited space, etc. This can also lead to out-of-stock situations and lower profits for the retailer. So assortment and space planning should be done together so that space is taken into considerations while building an assortment, i.e., planners would be able to know when their assortment is too large to fit in a given space. This kind of planning that combines space, inventory velocity and assortment depth can create a much better assortment.

DIFFERENT STAGES OF SPACE PLANNING There are three stages of space planning: 1. Space planning—macro/Planning space for each department Apparel and department stores are using more macro space planning to plan space for departments. An example of this can be an apparel store allocating space for different departments, like the Men’s section, women’s section, kid’s section—Boy and Girls etc. This allocation can be based on store profitability (more allocation of space to the categories that are most profitable) or how the store wants to differentiate itself (more space to destination categories for the store). Apparel retailers and department stores use this predominantly for visual merchandising, to analyse floor layout etc. They want to make sure they drive the sales they need for the floor space they allocate to each department or merchandise area. Reviewing margin, sales and volume by floor space allows them to more properly allocate space by departments. A macro space planning improves floor space layout and shelf space by identifying how much each category or department needs

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in the first place and align space at the category or department level to a retailer’s financial objectives and customer demands. 2. Space planning—category In this case, an optimal planogram is created for a merchandise category. This planogram is used as a template for future space assignments. An example of this can be a chain of grocery store creating one template planogram for fresh fruits and vegetables. This standard planogram can give directions like: which rack should be allocated for what (Fruits to be kept in higher rack or vegetables to be kept in lower rack), which fruit should be kept beside what, what should be keep in front and what should be at the back, which products should get maximum facings etc. Any particular store can follow this overall guideline and modify a bit as per the actual availability of shelf space and local requirements. For any new store, the same template can be followed to start with. Category roles and associated business rules play a big role here, i.e., more space assignment for SKUs in a destination category. If the store is known for fresh fruits, the template planogram will give more facings to these. 3. Space planning—Micro/Rack and shelf planning These are final planograms that are store specific, based on the exact available space in store rack, optimised for SKU positioning on the shelf as well as providing an appropriate number of facings. This takes care of local tastes. Category specific planogram, as it was referred to in an earlier section, is the starting point for generating this and it is further detailed out after taking in inputs like: the exact rack space availability in a particular store, local variations required, number of facings required for a particular SKU etc.

THE CONCEPT OF PLANOGRAMS The placement of merchandise that is arriving to the store can be planned out on paper by using a Planogram before the products actually arrive to the store. A planogram is a retailer’s drawing (blueprint), which visually communicates how the merchandise physically fit onto a store fixture or window to allow for proper visibility and price point options. A planogram is a diagram that shows how and where specific retail SKUs should be placed on retail shelves, racks, fixtures or displays in order to increase customer purchases. Planograms are developed using several information about products like: inventory turnover, volume of sales per square foot of retail space, past and current sales patterns etc. A planogrammer can make successful recommendations about the number of ‘facings’ a certain product should have on a retail display, how high or low it should be on the display, as well as which products should surround it. Figure 3.6 and Figure 3.7 show a planogram design for the beauty and apparel section of a Supermarket.

Processes for Planogram Management These can be categorised into the following: l Planogram creation: Process that supports generation of planograms l Planogram maintenance: Updating and communication of planograms (sometime from Head office to stores) and publishing l Planogram compliance: Processes for managing planogram compliance, ensuring planograms are followed in stores. A. Generating store specific or cluster specific planograms Ideally, these should be created by a planogrammer, while taking into account several factors like: local available space, replenishment needs and required assortment depth etc. For example, a retailer may want to specify

Assortment and Space Management 71

Fig. 3.6

A Planogram Design for a Supermarket Beauty Section Source: www.transworldretailconsulting.com

Fig. 3.7

A Planogram Design for a Supermarket Apparel Section

that a certain category, which is his destination category, needs a wide assortment, while another one must avoid stock-out at all costs, i.e., the convenience category. Based on these inputs, a planogrammer creates a planogram assigning the right number of facings of each product on the shelf. The requirements can vary from store to store and category to category. B. Planogram maintenance Once the planograms have been created, the next task is to send them to the stores. Using paper based planograms is expensive, especially if they change often

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and the store is not sure whether they have the latest version. As nowadays, planograms are most often created collaboratively, where the head office and the store, both give their inputs, several versions of the planograms are created before one of them is finalised. Some companies use the web to send centrally designed planograms to stores as this is cost effective. C. Monitoring planogram compliance Implementing planograms in the stores is the toughest part of the process. Retailers need to ensure that the new planograms and floor plans are being implemented. This is called store compliance. Only if it is implemented, can the store and headquarter management track status and judge the impact of a new store layout. Planogram compliance should be reported back to merchandising and category management as well. Sometimes, planograms are simply not executed in a store because central plans fail to match the needs of local consumers or they do not fit into the size of the available space. In such cases, store managers make their own decisions that better reflect their experience of local demand patterns. Low compliance to planograms means that the head quarter does not know exactly what is happening at the point where the customer chooses to buy a particular product—the shelf edge. All downstream systems which rely upon information communicated through a planogram will be seriously flawed.

ISSUES IN SPACE MANAGEMENT 1. Knowing the space inventor The obvious first point of space management is knowing how much merchandise space you have, down to the last fixture, and this space inventory needs to be kept up to date, i.e., whenever there is a change in a fixture configuration or location, or new racks are added (fixtures may get added or there might have been some remodeling in the store which changes the available merchandise space) then the record must be updated. These records are called space inventory records (records which contain records of floor space, racks, fixtures etc). Figure 3.8 shows the details of every fixture needed to be maintained by the retailer. 2. Controlling space planning locally or centrally This is always an issue for retail chains. Both of these approaches have advantages and disadvantages. Advantages of central space management are: the planograms can be created centrally and all downstream processes (like store replenishment) can be managed centrally. Another obvious advantage of this is that this gives better control to the

Fig. 3.8

Having Correct Retail Space Inventory is most Critical

Assortment and Space Management 73 head quarter, who sometimes, wants to stay up to date on what is going on at the store level. However, the major disadvantage of this is that store assortment can not take care of local tastes, i.e., micro merchandising/one-to-one marketing is not possible in this approach. More importantly, the planogram designed centrally may not fit into the actual space available in a store as a central planogram design is generally based on an average store rack size—the actual availability of space in a store may be different from that. Most retailers produce planograms by first clustering stores together, usually by size, geography and demographics, and then by isolating a generic fixture sizes for a number of different stores. These centrally produced planograms are created according to the space requirements of a ‘generic’ store. In reality, there are very few stores that will actually match up. Planograms often fail to fit because the fixture illustrated do not match with the actual ones. So, to make this work, as soon as there is any change in a rack / fixture at the store level, it should be conveyed to the head quarter and their approval should be taken. Any reduction in the space means that the staff would need to take decision on the fly, based on perceived needs of customers and on what can physically fit into the fixtures. But, in this process, the central merchandising strategy is compromised and the information flow from the store to the head office becomes muddled. The advantages of doing space planning locally are: Ability to utilise the space as per local requirement, tailor planogrammes to an individual store’s space requirements and to local demand curves and facilitate micro merchandising. Local managers can do a lot of value addition in this. This approach works well for stores requiring visual merchandising, selling fashion products and for retailers having a large number of stores in varied geographies, having different preferences/tastes. Large retailers like Walmart, ask store managers to fill out surveys to collect events and characteristics that are local (e.g. when there is a university homecoming etc). The obvious disadvantage of local space planning is that there are too many store specific planograms, assortment and replenishment plans, making the whole process very costly. It takes a lot of time and effort to complete such planograms and it is only possible by automating the production of planograms by using technology. Therefore, it is better to have a hybrid central/decentralised model for space planning and management, which capitalizes on the strengths of the corporate as well as the local managers. Store managers are allowed to experiment with space in certain categories. It is monitored whether those local changes are beneficial, and if they are, then they are replicated in like stores. This also brings us to the issue that for which categories should micro merchandising be done. Some categories can benefit from store level planning; Others may require cluster level planning or chain/region level planning. The example of the first one can be planning for men’s shirt for 10 stores together, which show similar sales trends. The example of the second one can be dividing all food stores of Food World into two different clusters: North and South India, and storing items as per the food habits of North and South India. Generally, categories that are most important to retailers should receive the bulk of micro merchandising effort, i.e., the categories the retailer is known for, categories that the retailer wants to differentiate and the categories that are highly dependent on local consumer characteristics. 3. Integrating floor database to replenishment systems. Inventory turnover is an important element when retailers plan space for a particular SKU. The less space a high inventory turn item has, the more times it must be replenished from the store backroom. Some retailers have linked their space database to their store replenishment systems. The replenishment system is then aware of the facings or space the item has been allocated and can adjust replenishment policies correspondingly. Advanced space optimisation tools go a step further by suggesting how many facings are required to avoid stock-outs.

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4. Designing KPIs around Space. It is important to have KPIs on space productivity across categories (like: GMROIS—Gross Margin Return on Investment and Space).

ROLE OF INFORMATION TECHNOLOGY IN SPACE MANAGEMENT Technology helps in different areas of space management. There are several vendors who provide applications for retail space management, like: SAS, Galleria, JDA, A C Neilson, SAP, Oracle etc. Some of the common areas where technology can help are as follows: l Creating Planograms Manually creating store specific or category specific planograms is extremely labour intensive as the rules may vary from store to store, from category to category, making the sheer volume of calculations well suited for computer technology. Planogram software is available for a few hundred dollars. On the high end of the market, a planogramming component is also included with other larger space planning and retail space management software applications. Sophisticated planogram technologies can automatically create planograms based on a variety of inputs and client defined business priorities. Marks and Spencer and Tesco, both U.K. retailers, have deployed solutions that allow them to create storespecific planograms automatically. Tools from SAS MarketMax and Galleria are used by them. Galleria’s automatic macro space planner uses the expertise and knowledge captured in a generic merchandise planogram, and tailors this logic to a cluster or store specific level. Together with a Automated Micro assortment planner, this combination solution gives the retailer the ability to execute optimised customer specific assortments, matching local demand and space restrictions of individual stores. l Monitoring planogram compliance Some retailers like Tesco, are using technology to monitor compliance. They use a portable handheld scanner to scan the facings on the shelf. By additionally scanning the fixtures, the consolidated facing information can be automatically checked for compliance against current planograms in the database. l Maintaining and updating space inventory Software tools are used to maintain the records of space, racks and fixtures in the store. This database needs to be updated regularly.

Conclusion In this chapter, we explained how a retailer decides on the two important subjects of what to keep in his store (Assortment) and how to arrange that in retail shelves (Planogram and space management). These two decisions need to be aligned with the corporate, financial and category objectives of the store. The kind of image the retailer wants to create for the store, expected inventory turnover and profitability and category objectives like balanced assortment, all together, drive the assortment strategy. Based on the assortment strategy, assortment planning is done. During assortment planning, the retailer follows a bottom up approach, segment by segment, consumer need by consumer need, and then asks how many choices the consumer needs within a segment. This helps him in deciding what product lines he should offer and the breadth and depth within each product line. This process also necessitates an addition of SKUs if they are not already a part of his current offering, but which have a good market coverage. Similarly, he may delete some SKUs from the assortment if they are not meeting the performance objective targets (like: Turnover, Profit etc.) and are not a must for the retailer’s target customers. There is a six step process recommended as per retail best practice for addition and deletion of SKUs.

Assortment and Space Management 75 Once the initial assortment is decided upon, the retailer needs to do an initial calculation of space requirement to hold this assortment. He also needs to do planogram planning, i.e., how the assortment will be displayed in the store. Retail space inventory information, i.e., how much square feet of shelf space is available in the retail store, plays an important role here. Based on these three informations (available space, initial assortment plan, planogram plan), the retailer works out an optimised assortment plan which ensures proper selection and display of assortment based on the retailer’s objective (Turnover, Profit etc.) and space constraints. So, the assortment plan needs to be integrated with the space plan. Space planning is a detailed process, starting from planning at a much higher macro level, to the most detailed planogram level. These days, planogram creation is a highly automated process. However, the major challenge here is planogram compliance, i.e., whether the planograms are actually used at the store level. To ensure high planogram usage, many retailers prefer to do space management locally. However, local space management has other issues like resulting in too many planograms. Store clustering, i.e., designing planograms for a cluster of similar stores is a good compromise. Space is becoming such an important issue for retailers that these days, many retailers measure KPIs designed around space. These KPIs are explained in a later chapter. These days, information technology plays a major role in assortment and space management. The chapter had provided an overview of the areas where information technology can make a difference for the retailer.

Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9.

What is the importance of assortment? How is category management related to assortment management? What tools are used in assortment planning? Explain the concept of product line, breadth, depth and model planning. How are assortment and space planning integrated? What is a planogram? What are the processes in planogram management? How can IT help in this? What are the issues in space management? How does data help in better assortment management?

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Study an organised apparel retailer. How are assortments planned and what factors are considered during assortment planning by him? Study an organised grocery retailer. Study the approach he takes for managing the store space and what kind of considerations does he take into account while allocating space to a particular category or SKU.

[CHAPTER]

4 LEARNING OBJECTIVES

Retail Pricing

In this chapter we will explain the following concepts: 1. 2. 3. 4. 5.

Retail pricing challenges Managing retail promotions Managing retail markdowns Personalised pricing/one to one pricing Information technology for managing price, promotion and markdowns

Pricing, Promotion and Markdown are sometimes viewed as sales and marketing tools. In this chapter, we discuss these three topics and their effect on retail the supply chain. The retailer needs to ensure that he has enough inventories before announcing a new promotion scheme. Similarly, before taking a markdown decision, the retailer needs to have a fair idea about his inventory carrying cost to decide whether it would make more sense to hold inventory for some more time or to take a markdown. Retail pricing also determines the kind of image that the retailer is trying to create for himself and the type of target customer he is looking at.

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RETAIL PRICING CHALLENGES Pricing in retail is a complex task, consisting of a number of challenges, as shown in Figure 4.1. These are discussed in detail below:

Fig. 4.1 Price Determination is a Complex Process l

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Huge number of articles There are a few thousands articles involved, the costs of the articles is changed frequently by suppliers, the retailer needs to adjust his price according to the competition he faces and finally, there are promotions, markdowns etc. that have a direct impact on the prices. Image of the retailer/store The image of the retailer and that of the store play a big role in pricing. A retailer with upscale product lines, assortment, services and facilities that serve a higher income demographic will demand premium prices. Conversely, the customer will expect lower and more competitive prices in a discount store or an outlet with reduced services, or one that serves a lower wage demographic. The facilities being offered, the service, quality and assortment are primary business differentiators. For example, the same Arrow shirt may be priced differently at a Pantaloon store (A departmental store), a Big Bazaar store (A Hypermarket store) and a Future Brand factory (A value store). Figure 4.2 explains how stores of different formats stand in terms of price and service image.

Fig. 4.2 Different Retail Formats Fall at Different Points of Price Service Continuum

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Price of the category/basket The retailer also needs to keep in mind that each pricing decision may affect the movement and profitability of other items, of the category as a whole and of other categories of the basket. For example, people may pick up monthly pulses (like rice, dal etc.) together, from the same shop. If one of them, say rice, is not competitively priced, people may not buy the whole pulse category from that shop. Price changes frequently Pricing may change everyday, during the day, during a particular week of the month or during particular periods of the year. Walmart is known for its Everyday Low price (EDLP), Big Bazaar offers special prices in the first week of every month for grocery items in Food Bazaar stores for monthly grocery purchases and it is also known for marking 26th January as ‘Sabse Sasta Din’ (the cheapest day of the year). Price sensitive items Generally, retailers can manage prices of less than 10% of the items that are classified by him as price sensitive. This may have an adverse effect on the price image the retailer is trying to create as he actively manages only a small subset of the items carried by him. Leading retailers use price as a powerful tool, in conjunction with supply chain management capabilities, to shape supply and demand. Dell changes computer prices on its website to limit demand in response to a supply shortage. Price is one component of retail mix It is important to remember that pricing is just one component of a retailer’s value proposition and to compete efficiently, retailers must combine pricing with other factors—location, service, assortment etc.—that appeal to their target customer segments and differentiate their stores from other retailers. As value is always important from a buyer’s point of view, if the buyer cannot correlate the value the product or service offers him as compared to other alternatives available to him, the price will always appear high or not justified to him. So, from the retailer’s point of view, it is important to communicate all sources of value to the customer. Figure 4.3 explains how price is just one component of a retailer’s value proposition. A good example of this is organised coffee retailing in India—the starting price of coffee at a Coffee Day is almost ten times that at a roadside tea/coffee shop.

Fig. 4.3 Price is Just One Component of Retailer’s Value Proposition

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However, Coffee Day was very successful in India—as the value proposition was clear—good service, excellent ambience, lot of varieties and making the experience of having coffee altogether different. l Acceptable price band Another important point to remember is that when consumers compare shops in terms of price, they do not compare all products or brands in the same way— for example, while comparing grocery items—you perhaps compare prices of rice, salt, sugar, dal, oil etc., i.e., of things you buy regularly, but you may not compare the price of mayonnaise or pasta or special spices or RTE (Ready to eat) foods, i.e., things you buy very infrequently. Comparing the prices of such regular items gives you a feeling about whether the retailer is charging reasonably or is charging extra. So, retailers need to identify these sensitive products, i.e., those products that are purchased frequently across outlets. Consumer demand for these items can be highly elastic. The demand for items and brands that consumers do not compare across outlets, like impulse purchases, incomparable goods or harder to find items, is relatively inelastic. Prices of these sensitive items must be within an acceptable price band width and this should support the retailer’s image of fair pricing. On the other hand, the retailer can set up his own pricing rules for inelastic items and can generate higher margins through them. l Attractive opening price point Frequently, retailers adopt the proven strategy of offering an attractive opening price point for each category, i.e., aggressively pricing one product in each category. An example of this in the case of an electronics retailer can be offering laptops at a starting price of Rs. 24,999 or offering digital cameras at Rs. 2,499. Mostly, retailers introduce a private label brand or a lesser known brand for such aggressive pricing. The idea is to pull traffic to the shop. In most cases, however, the consumer does not settle for the promoted brand and becomes ready to pay a slightly higher price for a known brand with the desired features. A good example of this in these days, in retail banking, is where banks offer credit cards at zero charge or open a savings or demat account with zero balance. Contrary to our belief, value retailers (like Wal-Mart and Big Bazaar in India) need not necessarily offer the lowest price for each item, but they undertake a series of activities to maintain their price image. l They identify and aggressively price the brands and items that the largest segment of shoppers care about and are likely to remember. An example of this can be Food Bazaar offering an attractive price option for cooking oil. l They offer attractive prices on image enhancing brands and items l They declare opening price points in each category, mostly through private label brands. For example: Big bazaar offering their own brand of air conditioners at a special price before the season starts, or a computer seller selling laptops at a starting price of Rs. 24,999. l They establishe a highly visible discount price on unique or limited items. An example can be an electronics retailer offering digital cameras at Rs. 2,499 for the first hundred customers on a particular day. l They offer large sizes and value packs. l They communicate an everyday low price to establish their low price credibility and communicate frequently through various media. l They declare special prices during hours when the sales are traditionally low—say between 2 to 4 P.M. on working days during summers and name it as ‘Happy shopping hours’. This special price improves the footfall in the store and can encourage housewives or elderly people to come to the store.

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Private label pricing is a critical component of a retailer’s overall pricing strategy. A complication here, which is faced by many retailers, is the deep and frequent promotions of certain national brands. These sometime calls for ‘price shielding’, i.e., the private label needs to be priced lower than the discounted national brand for the duration of the promotion. Pricing is becoming a challenge with manufacturers putting up their own factory outlets for national brands. For example, almost all men’s apparel brands have factory outlets in cities today. This forced national players like the Pantaloon group to come up with value retail models like ‘Brand factory’, where apparels are sold at a discount throughout the year. These kinds of discount stores are increasingly becoming a part of many retailer’s strategy with Reliance, Future group and Madura Garments already showing interest. It is important that every retailer establishes a set of foundational price strategies on which all merchandising, pricing and promotional decisions can be based. Rules should be tied to the overall business strategies. An example of such a rule could be that prices cannot go up by more than 3% at any given time, or that certain popular products may stay within 5% of the direct competitor’s price.

Tactical and Strategic Price Change A tactical price change is a change brought about in the price in reaction to a vendor cost change or a recent competitor price change. Mostly, retailers resort to price changes of this kind. This is a reactive price change and more tactical. In a strategic price change, the retailer needs to consider the following factors: l Does this price change support the retailer’s differentiation policy? l Will this price change result in cannibalisation of sales of a similar item offered by the retailer, which is a part of the same category/basket? l Will this price change result in more or less profit? l How will this price change affect the sales volume and profitability of the items? l Is this price change consistent with the retailer’s established price strategy? l How will this price change affect the consumer’s price image?

Different Pricing Strategies There are different pricing strategies that can be adopted by the retailer, like the following: l Consumer driven pricing, which attempts to align the pricing of a product with the amount buyers are willing to pay l Competitive driven pricing, which lets competition dictate the pricing l Value based pricing—Generally adopted by value retailers. A common example of this is the Everyday low pricing (EDLP) strategy adopted by Wal-Mart and some other large retailers or Discount retail pricing l High-low pricing.

Price Elasticity This is defined as the relationship between price and unit movement for a single product. Price Elasticity = Percent Change in Quantity demanded/Percent Change in Price If the demand pattern changes as soon as there is a change in the price, then the product is called price elastic. If the demand does not change with a change in the price, then the product is called price inelastic. An item that sees a 25% boost in shipments after a 5% price reduction is said to have an elasticity of 5: (+25%/–5%) = 5

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Another product which sees sales fall by 10% after a price increase of 25% has an elasticity of 0.4: (–10%/+25%) = 0.4. Goods that have price elasticity of below 1.0 are called inelastic goods, and the consumers are said to be price-insensitive. Some typical inelastic goods are food, tobacco and gasoline. When the prices of inelastic goods rise, consumers cut back on the quantity purchased. However, an increase in the price does not discourage consumption enough to decrease revenue. Goods with price elasticity of above 1.0 are called elastic goods, and the consumers are said to be price-sensitive. When prices rise, consumers cut back on their consumption. However, the reduction in the quantities more than offsets the price increase, so the total revenue falls. An example of elastic goods is restaurant meals, travel. Elasticity is often a reflection of the necessity of an item. Inelastic items are usually basic elements of everyday life. Staple foods usually have very low elasticities because there are few substitutes for them. In contrast, items with high price elasticity are less essential items or are items that have a wide range of substitutes, and they are frequently considered luxuries. Testing times like times of recession are difficult times for retailers selling price elastic items like high end fashion retailers, jewellery retailers, durables retailers etc., and they need to relook at their merchandise and category management strategies to attract customers to their stores; whereas basic staples and grocery retailers may not find much challenge.

MANAGING THE RETAIL PRICING LIFE CYCLE The price of a product in a retail store changes throughout its life—it starts with an initial price when the product is introduced, after which, the price gets adjusted throughout its life due to different promotion strategies or to adjust to the competition, and it can end with a markdown price that finally drives its clearance from the retail store. A retailer needs to manage this entire life cycle of pricing. l Initial pricing: The initial prices are finalized on the basis of the product cost and corporate objectives like maximising margins or improving market share. Retailers also need to manage price on an ongoing basis and make necessary adjustments as and when required, on the basis of their competitors’ prices. l Promotion pricing: Based on an analysis of the results from past promotions and their effectiveness, promotion plans need to be worked out throughout the different phases of the product life. This includes the timing of event, product selection, offers, locations and promoted price. l Markdown pricing: The retailer needs to determine the best method for clearing inventory at the end of the season or the life of a product. He needs to decide the best timing and the depth of either temporary or permanent price markdowns. Thus, managing the pricing life cycle of an article means a lot of activities for the retailer, viz., managing regular prices, deciding on what items to promote and at what price, determining how best to markdown short life cycle products, finalising promotional calendars and event development. Promotions are often driven by supplier offers, for example, consumer goods companies like ITC or Nestle running promotions at Big Bazaar stores. For such kind of promotions, retail category managers need to assess the financial impact of the proposed deals on cost as well as on the projected sales and margin. This analysis helps retail managers to negotiate with the suppliers effectively by driving the promotional agenda (calendar, places of display inside the store etc.) collaboratively and by securing better deals to optimise promotional events.

MANAGING RETAIL PROMOTIONS Retailers and their suppliers frequently use promotion to boost sales and profitability. A European promotion effectiveness survey by PWC shows that on an average, 38% of the turnover of manufac-

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turers and 52% of that of retailers involves some form of promotion incentive. It is important to understand why retailers use promotion tools, measures of promotion and the kind of promotion tools available at the retailer’s disposal.

Objectives for Retail Promotion Retailers use promotion for defending their current market share from the competition or for increasing their market shares by generating additional sales. Typical objectives of promotion for a retailer or its supplier are shown in Figure 4.4 and can be explained as below: l To increase purchases within a short span of time (Example: Sabse Sasta Din Campaign of Big Bazaar for 26th January) l Defend market share, i.e., when a competitor has reduced price and the company is responding to that (Example: a popular example of this is the Cola War, i.e., Coke and Pepsi reducing their prices in response to each other’s tactic) l Encourage product trial, specially for new products (Example: A retailer bringing a new private label in a category, say Big Bazaar trying to establish ‘Tasty Treat’, in competition of ‘Frito Lay’ as snack food). It is a common practice for consumer good categories to come up with small packs/sachets to encourage such product trials l Reward brand loyalty so that loyal customers get something extra at regular intervals.

Fig. 4.4

Promotion Objectives

Promotional Measures and KPIs Based on the promotion objectives mentioned earlier, retailers can design measures to determine the effectiveness of their promotions. Retail promotions can have different effects, for example, an increase in the sales can happen due to brand switching, category switching, stockpiling etc. It is important to measure the effectiveness of retail promotion. Retail promotions are generally measured in areas mentioned in Figure 4.5. These are explained in detail below: l Item lift Comparing daily sales before the promotion starts and during the promotion. This increase is compared in percentage terms. It is important to know that sales during the promotion period are not uniform—once the promotion is announced, sales increase gradually as more people come to know about the schemes. The sales volume gradually reaches its peak during the last few days of the promotion. During the promotion period there can be a

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Fig. 4.5 Promotion Measures and KPIs

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cannibalisation effect on related products/brands that are not promoted, in cases where brand loyalty is not very strong; for example a retailer may find a drop in the sales of Annaporna brand of atta if Aashirvad is heavily promoted during the same week. Just after the promotion, sales may drop as people might have purchased and stored more than required during the promotion period. ROI for promotion It is important to not only calculate the sales lift but also to compare the increase in the sales with the additional investment made during the promotion in terms of reduced price, cost of communicating different promotion schemes, etc. Some companies calculate the ROI of every scheme separately so that only the successful ones are repeated— however, this becomes difficult if several schemes are running at the same time, i.e., one scheme is running nationally and on top of it, the local store is also running another scheme. In such cases it becomes difficult to determine how much lift happened due to each scheme. Store traffic count One of the objectives of promotion can be to increase the store traffic. This is common when a new store opens in a locality or products are promoted during off peak hours to increase the footfall. This requires counting the footfall during promotion period and comparing that with the footfall during the off-peak period. However, this alone does not mean much if higher traffic does not get converted into higher sales and profit. So, this measure needs to be looked at along with the earlier two measures. Average basket size One of the objectives for retailers is to increase the overall basket size, i.e., to increase the value of the purchase of the individual customer, i.e., to increase the bill amount for every bill. A retailer can adopt a variety of strategies for this, like, promoting only the large value packs, bundling products, offering discounts with higher number of unit purchases (one free with every three purchases etc.). Category sales, profit and penetration Sometimes, promotions are done to increase sales and penetration for particular categories, like a promotion to increase sales of men’s wear. KPIs need to measure the increase in sales and profit percentage, change in the market share etc.

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Promotion Tools A retailer can use different types of promotion tools depending on his objective. He can also use different forms of price promotions, such as temporary price reductions coupons, multi item promotions etc., and combine them with non price promotions like features, displays and other point of sales material. Price incentive is the most common form of promotion used by both manufacturers and retailers. Manufacturers and retailers can have different objectives for promotions. A manufacturer’s main objective for a price cut for a product can be to increase the sales of that product, whereas a retailer may take this opportunity to use that product as an entry platform for increased sales for the entire category. There can be different promotion tools for manufacturers and retailers. For non price promotions, the most preferred strategies for retailers are value packs, multi packs, loyalty rewards etc., whereas for manufacturers, common non price strategies are special events, contests, premiums etc. The different promotion tools are explained in Figure 4.6.

Fig. 4.6

Promotion Tools

Examples of types of promotion can be: Promotion category

Promotion type

More popular with

Non price promotions

Special events Contests Premiums Loyalty rewards Free gift wrapping Multi packs Value packs Free trial samples Displays Price discounts Rebates Coupons (Discounts, Give away, Buy one—get one free etc.)

Both Manufacturer Retailer Retailers Retailers Retailers Retailers Manufacturers Retailer Both Both Both

Price promotions

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Major Decision Points for Retailer while Planning Promotion Retailers need to take a few critical decisions while planning a promotion, as shown in Figure 4.7 and these are: l What products/categories to promote? l Whom to promote/who is the target customer? l Which promotion tool to be used? l How deep to promote, i.e., how much percentage discount can be offered, for how long etc.? l How often to promote, i.e., whether the promotion will run once in every quarter, or once in a month, etc.? l When to promote, i.e., planning the starting and ending dates of the promotion. l How to communicate the promotion, i.e., which media to use?

Fig. 4.7 Decision Points for Retailer while Planning Promotion

Let’s understand this in detail now. What to promote? For certain product categories and certain times, this can be a simple decision; for eample, consumer durables are promoted during festive season, clothing is promoted during year end in the form of ‘Year end sales’ in India, seasonal products are promoted in off seasons etc. However, in most cases, the decisions is not so straight forward. They need to be planned after taking care of the following considerations: l Knowledge of what the retailer’s target shopper cares about and how specific items rank in terms of consumer preference, i.e., if your shop has an image of a destination for trendy customers and you are promoting men’s wear—perhaps you will like to promote the categories of T shirt and jeans. l Items promoted should have the ability to drive the retailer’s price image. Retailers generally prefer to promote main items and not accessories for this reason.

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A thoughtful analysis of such information helps retailers determine category, brand and item level promotion strategies. Brands/items that are favourites of the target customers drive price image and can encourage higher store traffic. They are generally chosen for promotions. Understanding how consumers shop and the way they make their choices helps in determining the sequence and depth of brand promotions. A ground rule that can be followed is that if the analysis of loyalty card data shows that a major percentage of consumers who bought product A also bought product B during the same visit, then these two brands should not be promoted at the same time. Whom to promote? This was discussed in the earlier section. Before starting the promotion the retailer needs to know his target customers whose behaviour he wants to influence through this promotion. Which promotion tool? We had discussed different promotion tools under the earlier heading. In the promotion planning process, once the retailer has decided what items to promote and to which customers, the next step is to identify which promotion tool will be most effective to meet the objective—whether it would make sense to have a price promotion tool or a non price tool or a mix of both. Generally, retailers follow a mixed approach, i.e., they offer a value pack—giving discounts and offering loyalty rewards at the same time. How deep to promote? An example of this can be deciding whether it would be better to give a 5% discount or a 10% discount. To a certain extent, consumers’ reaction to past promotions can predict how they will behave in the future, if enough history exists. If you have the data available about the sales and investments made the last time you ran a scheme with 5% discount and another with 10% discount, it could help you to quickly take a decision. A few leading retailers use sophisticated statistical analysis tools for measuring such elasticity. How often to promote? This talks about both the frequency and duration of the promotion, i.e., whether it makes more sense to promote once every month for consecutive seven days, or twice a month for three consecutive days every time. Understanding the purchasing cycle can help here to define this duration and frequency. Generally, for a long promotion cycle, there is a high impact early on and towards the end of the cycle. In between, there is a trough of demand as shoppers consume the items they purchased at the beginning of the event. A more effective strategy can be to hold two shorter promotions, separated by the average consumption cycle. The Food and grocery section of Big Bazaar stores (i.e. Food Bazaar) runs promotions of regular grocery items in the first week of every month, for seven to ten days—typically, it starts from 30th and 31st of every month and continues upto 7th or 10th of the next month, ensuring that there are at least two weekends covered. This is very much in sync with a middle class household’s purchasing cycle—who typically buys the ration for a full month in the first weekend, after obtaining their monthly salary.

The decision on the frequency and duration of a promotion needs to be based on a study of how a person actually buys during a promotion period. It has been seen that for long promotion cycle (say 15 days long), there is good impact in the beginning, say for the first two days, and then, towards the end of the cycle, i.e., the last weekend or the last 2 days, when people do not want to miss out on this promotion, and in between, there is a lull period. Due to this, sometimes, people hold two shorter promotions, separated by a consumption cycle, like in the last example, Big Bazaar separated two promotions by 20–22 days, matching with people’s monthly consumption cycle. When to promote? As discussed earlier, for some categories, this decision is simple and almost taken as industry norm sin India—like, consumer durables during Diwali, garments in West Bengal during March—April, i.e., the Bengali year end, ‘Buying Jewellery during Dhantheras’, cars during

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year end as year change has an impact on car resale value etc. Sometimes, a promotion may coincide with the arrival of monthly pay cheques, as shown in the Big Bazaar example. In other cases, this decision may depend on various other factors like a retailer’s understanding of past sales trends, stock availability, etc. How to communicate promotion? The last step of promotion planning is deciding the method of communicating the promotion. There can be different ways like: External methods: l TV l Print Media l High road banners l Leaflets Internal/In-store promotion display methods like: l Banners inside the store l Store T.V./Digital signage l Kiosks l Bulletin boards These need to be thought through by the retailer. The retailer also needs to plan how the merchandise will be presented during the promotion and how the promotion display tags will be presented—on the shelf only, off the shelf etc. This may also call for training the store staffs on different schemes etc., so that they can explain them properly to the end customer. It is a common practice among retailers to keep the promoted items in front of every section so that these have high visibility, and to keep tags mentioning their normal price, the promotion price and how much the consumer will save, on top of them. Communicating promotion is the most important part of the process as even with a good promotion plan—if the message of customer benefits cannot be communicated clearly—ultimate sales will not happen. Trade Promotion The concept of Trade promotion is explained in Figure 4.8. These are various kinds of incentives paid by consumer products manufacturers to retailers for merchandising support. In most cases, trade promotions constitute a significant percentage of the marketing budgets of most of the consumer good companies and this is a concern area for most manufacturers as they cannot be sure about how much of this is effectively used and what is the ROI on this investment. Sometimes, a part of this is passed on directly to the consumer and in some cases, the retailer jointly works with the supplier on this budget and work out plans on how this amount can be effectively used to boost the sales of the item.

Fig. 4.8

Trade Promotion

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Information used for Planning Promotions When planning for promotions, retailers predominantly use past promotion and financial data. In addition, EPOS data and loyalty card data is also used for promotions. Information used for planning promotions is: l Past promotion data to check effectiveness of earlier promotions l Financial data to know how much investment can be made in the promotion in terms of discounts, advertisements, making store banners etc. l Actual sales data from point of sales systems. Monitoring this data on a regular basis is important to determine whether the sales are really increasing as intended or a mid course correction in strategy is required. l Loyalty card data—Analysis of this helps in understanding which set of customers bought what kind of products under the promotion. This helps in redefining the target customer segment for future promotions. l Panel data from consumers—This data helps in understanding the effectiveness of different promotion schemes. These are mostly syndicated data. Ideally, most promotions should be jointly managed by the manufacturer and the retailer. Analysing the effects of past promotions; understanding which schemes worked and which did not; what was the percentage sales increase during the different schemes is theoretically, the best way to plan future promotions. However, getting this data is always a challenge and once obtained, cleaning it is another big task.

Promotion Execution Promotion execution is as important as promotion planning as only effective execution will ensure that sales lifts really happen during the promotion period. This can include things like: l Workflow for promotion approval, i.e., the promotion proposal created at the store level may need to be approved by the head office. In cases of collaborative promotion initiatives by the retailer and the supplier, the proposal may need to be approved by the supplier. l Creating and maintaining a system that can record these promotion events and analyse performance during and after promotions. l Ensuring that new promotion prices are applied at the POS and displayed on the product. This may not be an easy task as there may be a few thousands of articles where the retailer may want to make the change. l There can be a lot of other manual tasks that the retailer needs to perform before starting a promotion, like arranging displays at different places in the store, erecting signage, etc. Ensure that back end supply chain can deliver The most important challenge of promotion is ensuring that the back end supply chain can deliver enough stocks on the store shelves to meet the increased demand during the promotion period. If there is any supply chain constraint, then this needs to be accounted for while planning the promotion—otherwise people will come to the store for the advertised items and will not find them on the shelves. Such a situation would not benefit the retailer, would upset the customers and create a bad image for the store. The news below illustrates this point. Retail chain Big Bazaar’s ‘Sabse Sasta Din’ initiative of offering merchandise at rock-bottom prices on Republic Day created chaos, with a number of outlets closing down after being unable to handle the deluge of customers. Across the

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city and in Nashik, the stores downed shutters or cancelled the sale. The rush to Big Bazaar outlets in Lower Parel, Mulund and Kandivli caused serpentine queues, frayed tempers, and even held up traffic. Big Bazaar’s response was that the response was overwhelming and the retailer had never expected it and they had to shut down some of the outlets because they could not accommodate that many people. However, industry analysts believe that the company paid more importance to marketing the initiative than stocking enough goods. Big Bazaar officials claimed that outlets were amply stocked but on an average, they have a footfall of about 3,500 daily, but during this time, they got about 30,000 to 35,000 people and they were not prepared for such a huge rush. This incident also highlights the security issues of such events, where large numbers of people congregate at one location. Police claimed that the Big Bazaar authorities should have made proper arrangements before announcing such a big offer. People were carrying TVs on their heads because their trolleys were full. Big Bazaar staff members were announcing that the sale would continue for a few more days, hoping the news would at least carve a path for those exiting to make their way home. Source: ENS Economic Bureau. Mumbai, January 28, 2006.

Promotion Optimisation Process and Tools These processes and tools attempt to predict sales lift of the item, its category and the total market basket, and therefore, optimise the use of promotions. Sophisticated algorithms for predictive modeling, simulation and what-if capabilities help better predict the lift of an item. Cross elasticity is calculated to determine the impact on other items, allowing the retailer to analyse the impact of the promotion on an entire category and market basket. For example, a promotion on a specific brand of soft drinks will probably cause a sales increase for that brand, but a competing brand or even a substitute such as juice, may suffer decreased sales volume. Promotion optimisation is a technique for determining optimum promotions at the most appropriate price levels, which can help retailers increase profit uplift and reduce sales cannibalisation. This uses historical sales and event data to predict promotional lifts, optimal promotion types, timing and discounts. An optimisation solution enables a retailer to deliver the best promotional mix that maximises margin and sales by evaluating different promotion scenarios. Promotion optimisation helps retailers in three main areas: l Prediction Estimating sales lift on the promoted item as well as the promotion’s impact on related items, such as substitutes or complementary items. This will try to answer things like what would be the lift on the promoted items, by how much would a substitute loose sales, how would items in other categories be impacted or what would be the impact on the market basket and the full category. By analysing store/SKU market basket data, promotion optimisation tools can identify affinity and substitution relationships between items—within a category and across all categories. This is important in managing overall store performance and avoids optimizing one category at the expense of others. l Optimisation Allows retailers to design or optimise a promotion for a specific goal, such as single item volume lift or increased market basket spend. It is not only about sales and margin lift, but can have more specific goals such as traffic generation, market share protection and an increased market basket spend. These tools provide retailers with what-if capability. Optimisation can also be used to time promotions properly and to choose the regions/clusters where promotions are likely to accomplish the intended goals. l Identifying and prioritising Identifying which items to promote and deciding how to promote them can be also be challenging. Promotion optimisation tools can prioritise promotions, given a limited amount of circular space/promotional budget.

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Promotion optimisation tools can also help retailers in: l Reacting to competitive promotions Category managers can use promotion tools to simulate ‘what if I match or beat a competitor’s promotion offer’ situation. l Execute strategic category plans Promotion optimisation tools can help identify the promotion events required to execute the plan and help determine the timing and amount of the promotion. l Boost market basket spend To design promotions that improve overall market basket spend, rather than the sales of individual categories at the expense of others. l Take advantage of vendor funding offers These tools help retailers evaluate vendor deals, i.e., trade funds. They help to determine which offers support their category’s role. l Evaluate post promotion impact Promotion optimisation tools can also help in estimating how much the sales will fall once the promotion is over, due to consumers having bought the items in large quantitities and therefore, not buying post promotion, causing the sales to drop. l Arranging inventories for promotion As optimisation algorithms can predict sales uplift post promotion, retailers can make themselves ready with inventories so that there is no stockout situation when the promotion is running.

MANAGING RETAIL MARKDOWNS Markdown Overview Markdown is a common phenomenon in our daily life. A well known example of a markdown is in the airline industry, where two seats on the same flight on the same day can be marked as different products by segmenting customers into value driven leisure travelers and schedule driven business travellers. A similar example is available in everyday life where hard cover books are followed after a few months, by cheaper paperback editions. Even in your nearest vegetable market, fresh vegetables in the morning are sold at a higher price than in the afternoon. The common theme in all these examples is differentiation. What changes is either an attribute of the product, the vehicle of delivery or a combination of both, catering to different groups of customers with different willingness to pay. In the retail industry, a firm tends to extract maximum value for its inventory investment by selling its products at full retail price early on, and taking markdowns later in the season. This practice of differentiated timing of pricing helps in an effective partition of customers in price sensitive, time insensitive and price intensive, time sensitive segments. This is a common practice, especially in the apparel industry. However, retailers need to be careful with markdowns as there may be a loss of margin if the discount is too deep, resulting in early sell-outs much before the end of the markdown period. Alternatively, if the items are discounted too slowly or not enough, it would result in excess inventory on hand at the end of the sell-through period. Excess inventory can result in last minute, deep discounting, which can lead to lost margins. In order to clear out inventory profitably, the key issues to be taken care of are: l Which products or group of products to mark down l By what amount those items should be marked down l In which locations the markdowns should take place l When to conduct the markdown For an effective markdown, a retailer needs to decide: l The items to markdown for maximum impact—Which items

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Timing and duration of the markdown and specific stores and markets—When and where Markdown depth—How much percentage of markdown is desired Modern retailers use sophisticated markdown softwares that provide price discount recommendations in order to profitably clear out inventory within a specified period. This can maximise profit by analysing the trade-offs between discount given and inventory carrying cost in case there is no markdown. In making these recommendations, such systems consider the cost of capital, cost of price changes and salvage values. This analysis can be based on critical factors such as inventory levels, base sales volume, price elasticity and local demand or preferences. The system also monitors the performance of markdown events in progress and makes recommendations for corrective action if necessary. Collaborative markdown planning with suppliers is important when the supplier is phasing out an old product and introducing a new one. Suppliers often want to ensure that old inventory is flushed out of all channels before introducing a new product, to avoid cannibalisation. In some cases, suppliers may subsidise markdowns through trade funds to distributors and retailers. Modeling different alternative ‘what if’ markdown simulation scenarios helps a retailer to design the optimal markdown plan. Examples of such simulation scenarios can be: l Whether it would be more profitable to take a markdown than to carry the inventory for some more time. l Markdown program duration—The retailer can assess the budgetary impact of changing markdown horizon or markdown percentage l Simulating with different targets for inventory clearance l Simulating different timing and price point options for markdown l l

Markdown Performance Measures Typical measures to assess markdown performance are as follows: l Markdown timing and discounts l Expected unit sales l Expected revenues l Expected gross margin on units sold (%) l Expected markdown budget consumption l Markdown net margin l Projected end inventory l Salvage value

PROMOTION MANAGEMENT MATURITY MODEL Figure 4.9 explains the maturity model of promotion management. In the most basic level, the retailer needs some promotion planning and execution capability. In the next level, the retailer needs some decision support capability and optimisation tools for promotion and markdown optimisation. In the third level of promotion maturity, retailers work with suppliers for promotion collaboration, and in the final level, the retailer uses all tools together, i.e., planning, optimisation and collaboration together, for complete revenue optimisation.

PERSONALISED PRICING/ONE TO ONE PRICING This is the final aim of retailers, i.e., to price products on the basis of individual customers’ past

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Fig. 4.9

Promotion Management Maturity

buying pattern and to provide discounts on the basis of individual customers’ preferences. Retailers are using technologies like CRM for this. Store managers can adjust prices by better understanding the purchasing behaviour of each customer. Retailers can examine past behaviour for patterns and uncover clues about their customers’ future buying decisions. Most retailers already track their customers’ shopping habits through loyalty programmes, but this data needs to be converted to knowledge with the help of analytical tools. Imagine a situation where a customer enters a store. He or she approaches a kiosk and inserts a loyalty card to receive a coupon that is not only tailored to his/her product preferences and price sensitivities, but also designed to maximise profits per store. Personalised pricing tools in the background, mines the data collected in past transactions at a particular store or chain of store to model each customer’s buying pattern. This make the concept of one-to-one marketing a reality, where the tool sets the price based on an analysis of the individual customer’s past buying pattern, rather than appealing broadly to demographic clusters of customers.

IT FOR MANAGING PRICE, PROMOTION AND MARKDOWN Information Technology Applications for Managing Price Price optimisation applications These determine the most profitable price for a product or the target margin for a product category. By analysing both current and historical demand curves, as well as cost data and competitor pricing, price optimisation tools generate suggested initial prices for products to meet goals for sales, margin and competitive positioning. Deciding on an optimised price for price optimisation engines requires a variety of data from several sources, like: l Costs data from accounting systems l Supply data from inventory management applications l Demand data from Point of sale applications l Several other data like seasonality, competitor’s price data, wholesale costs, promotion schedules, trade allowances, price change history, business rules, activity based costs, stock-outs etc. Price execution applications Once a merchandiser sets his price, he needs a way to roll it out to stores and monitor the results. Price optimisation applications require features that existing ERP systems lack: A pricing engine that delivers data to POS terminals and analysis tools that enable

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merchandisers to monitor the impact of pricing decisions on sales and margins. These applications can be of three types: l Workflow optimisation that approve prices l Pricing engine that delivers prices and promotions l Analysis engine that measures and refines pricing decisions This is an area which is getting a lot of focus these days. There’s no point optimising prices if they never make it to the shop floor. Instead of having store employees manually make price changes, retailers can install wireless receivers that send price changes from the revenue management systems to the electronic shelf labels. We discuss two leading pricing applications now.

SAP Khimetric Pricing Optimiser SAP Price application looks at customer demand patterns and price sensitivity down to store SKU level and price products. A variety of approaches can be used to set everyday price, like: competitive pricing, markup rules or manufacturer suggestions. The key functions of a price optimizer are: l Business rule management This builds a comprehensive rules library to support different pricing strategies. At any level in the product hierarchy, rules can include margin, price movement, competitor, associated product, ending number rules and more. l Price optimisation Selects the best combination of everyday prices. l Deal optimisation This enables the user to negotiate the best deals with the vendor, armed with an accurate ‘what-if’ analysis, based on vendor cost reduction and corporate strategies. With SAP price optimisation, the following things are possible: l Determine the best role for categories: Profit builder, Turf protector and so on—given shopper preference. l Maintain category objectives by adjusting regular everyday prices in conjunction with promotions and clearance on markdown prices l Improve decision support with ‘what if’ analysis to see the impact of pricing on sales, profit and price image for any SKU across the assortment Source: www.sap.com (accessed on 15th June 2009)

SAS Pricing Optimiser This helps retailers establish and maintain optimal everyday prices based on costs, demand patterns and competitive price information, to maximise category margins and volume goals. Retailers can predict the impact of proposed price changes on revenue, unit volume and profitability, as well as estimate the price elasticity of different items and groups based on sales, price or causal data. Source: www.sas.com (accessed on 10th April 2009)

Information Technology Applications for Promotion We discuss two leading promotion applications under this now.

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SAP Promotion Optimisation l l l l l l l l l l l l

With SAP Promotion optimisation, the following activities can be performed: Create promotions to meet event objectives Manage event length through a single calendar Measure results of historical ad placements Integrate with ad planning systems and processes Leverage data from customer loyalty programmes Negotiate trade fund offers and optimise use of trade funds Create promotions with the best combination of items and offers to meet event objectives Analyse vendor deals in conjunction with promotion planning Measure results of promotions prior to execution Easily manage concurrent promotions in multiple price zones and languages Forecast sales and perform analysis to optimise future promotions Promotion optimisation scorecard enables a user to predict and measure factors like: Overall category sales and profitability, Cannibalised products, Affinity relationships, Vendor fund effectiveness and Consumer price perception

Source: www.sap.com (accessed on 15th June 2009)

SAS Marketmax Promotion Optimiser This provides retailers with the ability to maximise margins and revenue through improved promotion planning. It helps in determining which items or groups of items to promote, in which locations, at what price points and through which promotional vehicles. Leveraging the advanced demand modeling and optimisation tools, the tool helps retailers predict incremental lift from planned promotions, develop and implement promotional plans, support inventory planning decisions and maximise return on potential investments while avoiding cannibalisation. l Analyse the effectiveness of promotional events l Understand how promoting products through different vehicles will impact revenue and margins l Gain an understanding of demand patterns l Determine base volume and expected lift in demand and revenue l Decide how much to discount items based on vendor offered promotional costs and sales targets l Reconcile expected promotional revenue and margin with category financial plans l Accurately determine which items or groups of items to promote, in which locations, at what price points and via which promotional vehicles. Source: www.sas.com (accessed on 10th April, 2009)

Markdown Applications We discuss two leading markdown management applications now.

SAP Khimetric Markdown Management This consists of three processes: 1. Markdown planning and analytics Markdown analytics offers the ability to understand the business results of markdown activities. Measurement and predictability are visible in configurable views.

Retail Pricing

Sales and inventory performance against expectations Price compliance analysis l Product/store markdown schedules l Markdown unit deviation analysis 2. Markdown optimisation Markdown optimisation determines the optimal markdown schedule to meet the goals and objectives defined in the strategy management process. Demand insight and the impact of price changes on the demand (elasticity) are used to deliver maximised margins and drive to a desired inventory position. l Markdown business rules l Markdown price optimisation l Markdown unit forecast l Optimise allocation of remaining DC inventory 3. Markdown management and execution This reflects the tactical process of identifying and maintaining markdown price at the store level in order to maximise revenue and margin in highly competitive markets. l Markdown budgets l Rule based markdowns l Slow seller management l Release markdown proposals With SAP Markdown optimisation, the following markdown planning can be done: l Create category, zone and store level markdown plans l Assess competitive pricing and markdown strategies l Identify opportunities to reduce inventory l Develop and manage complete seasonal sales plans l Target markdown horizons and user defined timeframes l Review all pricing, promotional and markdown activities through single calendar l Evaluate the impact of vendor funding l l

Source: www.sap.com (accessed on 15th June 2009)

SAS Markdown Optimisation l

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l l

l

SAS markdown optimisation allows retailers to: Forecast incremental lift in demand from planned clearance events so that pricing actions can be balanced against available inventory levels. Monitor performance of products that have been marked down. Deliver alerts when progress deviates from goals. The solution will recommend corrective actions to get markdowns back on track. Analyse performance of past markdowns against set targets Create optimised markdown scenarios (price schedules) based on user defined business rules and constraints Predict the demand generated from any user defined markdowns, as well as the resulting impact on inventory, revenue and margin

Source: www.sas.com (accessed on 10th April 2009)

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Conclusion 1. Retail pricing is a complex process with numerous issues, like, frequent price changes from suppliers, regular promotions and end of season markdowns. Planning for optimum initial price, promotion and markdown requires a lot of data support and analytical tools that can predict customer buying pattern and the expected uplift. Promotion planning presents a big challenge to the management of the supply chain. It also requires that right materials are available during particular days of promotion. In this chapter, we discussed approaches for planning an initial price, promotion and markdown. We also discussed the concept of one-toone marketing, which will become a reality in the future, with advanced use of information technology.

Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Why is retail pricing complex? What kind of strategies do retailers take to maintain their price image? What is the difference between tactical and strategic pricing? What is the concept of price elasticity? What is meant by retail pricing life cycle? What are the objectives of retail promotion? What are promotion KPIs? What are the price and non price promotion tools? What are the promotion related decisions a retailer takes? What kinds of information are used for planning a promotion? Why is promotion execution important? Explain the concept of promotion optimisation. What is markdown planning? What are markdown KPIs? How can IT be used for pricing, promotion and markdown? What are the leading applications in this space?

Assignments l l

l

Study the pricing strategy of a fashion retailer, a mass retailer and a value retailer. Study a retailer—how he decides about a promotion—which product—timing etc? What are the factors he considers? Study a fashion retailer—how he plans his markdowns—what factors he considers etc.

[CHAPTER]

LEARNING OBJECTIVES

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In this chapter we will explain the following concepts: 1. 2. 3. 4. 5. 6.

Product Design and Design challenges Private Labels Retail Packaging Shelf ready packaging (SRP) Green design and packaging Information technology for retail product life cycle management 7. Product development best practice case study

PRODUCT DESIGN Product design is increasingly becoming part of the retailer’s supply chain process. For certain kind of items like apparel, footwear, jewellery, home furnishing items etc. where style, design and fashion matters a lot and where private labels dominate, design capability decides a

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retailer’s success/failure. Even for items like grocery or packaged food items, today private labels are becoming popular as capability of designing efficient packaging is important. Retailers are turning to the development of private label collections for ensuring customer loyalty, sustainable margins and product differentiation. For a high end apparel retailer, private labels may mean a degree of exclusivity whereas for a grocery retailer this may simply mean better value and a lower price point. Building private labels need capabilities in terms of design creative, collaboration with chosen suppliers and managing complex supply chain processes across geographies and multiple time zones. This is because typically manufacturing is outsourced to third world countries where the work is entrusted to hundreds of suppliers and factories across the world. This requires managing their production schedule and quality to ensure that the right product reaches the retailer’s shelf at the right time.

Product Design Challenges for a Retailer A retailer needs to face challenges in product development. These are shown in Figure 5.1 and are detailed below. l Today’s product development process is spread across the globe The last decade had seen the growth of low cost country sourcing—today almost every apparel and footwear retailers are getting their manufacturing done in countries like China, India or Bangladesh. This brings complexity in the supply chain in terms of design collaboration in distributed environment, logistic issues, in compliances of global trade and supply chain visibility. l Retailer needs to store a wide variety of design in different format Design process for a retailer involves a variety of documents like sketches, computer aided design (CAD) drawings etc. These documents need to be stored for variety of reasons like for the next year when the same base design may be used with little variations as per the market feedback or the retailers may store these designs as a catalogue and keep it in the shop—all of these physically may not be available in the shop. However a consumer can order from this catalogue and goods may be delivered to him after few weeks. This is specially common in items like jewellery and

Fig. 5.1

Product Design Challenges

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furniture. This is not only about capturing and storing all product data, CAD drawings etc. in a central repository to maximise use of all product information but a retailer needs to manage multiple versions of products and specification changes. Product design is an iterative process so need design collaboration Designing a product is not a straight line process, there are typically lot of iterations where the retail designer first makes a concept and sketch, based on which the supplier comes up with the first draft. Then there are further inputs from both sides and the final design is selected after multiple interactions. This needs strong collaboration between the retailer’s design team and that of the supplier. Typically this collaboration happens over phone, fax, e-mail etc. for which today’s leading retailers are deploying the available technology. Speed and quick response is the name of the game Just think about a fashion retailer— he needs to come out with new fashions every year within a particular period—if he is late then sales for the season is lost and the merchandise needs to be sold at year-end discount sales. The success in certain retailing business like apparel, footwear, jewellery, fashion etc depends on how quickly a retailer can bring new products into the market based on the latest market demand. The need for a speedy response puts pressure on product development process. Supply chain visibility and visibility in product development The retailer’s manufacturing process is globally distributed—he needs visibility in the manufacturing process for its major suppliers and in the logistics process to take preventive action in case there is a major shipment delay. Retailers also need visibility in the product development process to feed its supplier with last minute changes if required, based on dynamic market changes. Managing collections and line Another important aspect for apparel and footwear retailer is the ability to manage large collections/introducing a new line altogether. An apparel retailer typically will not work with one product but with an entire range of collections i.e. ‘styles of fall’ or ‘ladies collection for winter’. This means the design sourcing team of the retailer and design manufacturing team of the supplier need to work with product groups or multiple projects. These product groups need to go to the retail shelves at the same time and their pricing also need to be worked out within a defined range so that if the consumer does not like something within say price range X and Y, he has something to choose from within price range Y and Z. Introducing a new line may be more complex as it may mean hundreds if not thousands of styles and SKUs. Retailer needs to manage a large set of samples For private labels, retailers need to manage large set of samples. In a typical private label manufacturing process, based on retailer’s initial concept, the manufacturer provides samples and the product goes for mass scale manufacturing once the sample is approved. This needs tracking capability for the retailer i.e. which sample he had approved for mass production, quality inspection with reference to approved sample, resampling issues etc. Each year thousands of such samples need to be managed. Managing quality Managing quality is another challenge for the retailer where sources are spread across the world with thousands of articles and corresponding number of specifications, several sampling plans and samples etc.

PRIVATE LABELS In Indian retail, the private label is emerging as a new business model. Most retail chains in the country are increasingly relying on private labels to bridge the

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gap in their product mix and are targeting specific needs of consumers. Though, private labels at present constitute about five percent of the organised retail business, experts feel they can grow up to 30 percent once retail brands develop in the country. Retailers like Pantaloons, Shopper’s Stop, More, Reliance and Vishal Megamart are expanding their range of private label products from cosmetics and food to clothing to improve the profit margins of their stores. Retailers have realised that by having top quality private labels they can differentiate themselves from other stores and become destination stores. Private labels also give retailers a chance to bring in unique products in their supply chains that have not been branded before and it’s a win-win situation even for the producers who get a chance to display their product. In fact, when PepsiCo’s Frito-Lay withdrew from Pantaloon’s Food Bazaar due to business differences, the latter introduced its private label Tasty Treat in the ready-to-eat segment. Today, the brand has over 16 percent market share of the ready-to-eat snack brands in the country. Similarly, at Reliance Retail, about 15 percent of the hypermarket brands comprise private labels. TruMart, the supermarket chain of Piramyd Retail Ltd. launched a private label in the grocery segment under the brand name Uttam, which sells pulses, cereals, flour, sugar, whole spices and masala powder. The Tata Group has developed Trent as a business model purely on private labels, especially in apparel. Private labels are brands owned, merchandised and sold by retailers themselves. They are also called in-house brands. From apparel, healthcare products and furnishings to consumer items, private labels are making their presence felt in a variety of retail items in the country. Private labels are unique to a specific retailer and they can be divided into a number of groups where the retailer’s name is evident on the packaging. In fact, private labels in Europe have become very dominant. They account for 45 percent of the total products sold and in the US they account for about 25 percent. Private labels are used to provide products with a lower price range. In Europe, private labels cost 10–20 percent less and in the US some private label products are 25 percent cheaper than the branded ones. In the US private labels are expanding in all product categories and they make a good product mix. Most retailers in the country are exploring private labels so that they do not have to be at the mercy of big manufacturers. Moreover, private labels are generally introduced to get higher gross margins from branded products. Besides, they place the retailer at a competitive advantage over the branded FMCG players who have been historically heavy-handed with retailers. For example, the two big organised durable chains, Next and Hypercity, have selectively launched private labels, which are 20–25 percent cheaper than branded ones. Both the retail chains import private label durables mainly from China and Thailand. Source: The Financial Express, 22nd May, 2008; The Hindu Business Line (online edition) (accessed on 27th September 2007); www.businessworld.in (accessed on 3rd July 2009)

The news item above has indicated the gowing importance of private label among retailers in the country. Private labels are large in developing markets and they account for 40 percent of Wal-Mart sales and 50 percent for Tesco. There are well known private label only retailers in the west like Ikea, Toys ‘R’ Us, Zara etc who only sell private label brands. In India, perhaps the only example in the last category is Westside. Globally private labels are growing faster than manufacturer brands and have evolved over the years from cheap substitutes to quality products that offer a strong value proposition to the consumer.

Definition Private label is defined as brands that are owned, controlled, merchandised, advertised, priced and sold by the retailer in his own store. The name of the private label can be as per the store’s own

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name (like Foodbazaar, Foodworld etc. and most of the private label only retailers like Ikea, Zara, Westside etc.) or names created by the store (like Food Bazar’s Tasty treat). A private label can be of different types like: 1. Store brand: This carries the retailer’s name such as Westside, Foodworld, Zara, Ikea etc. 2. Umbrella brand: When a common brand name is used across several categories for example Amul retails several categories of dairy product under one umbrella brand. 3. Individual brand: When the particular brand name is created for particular market segments and categories.

Advantages Successful private labels help retailers in different ways: 1. Private label provide retailers better bottom line Historically this is the reason private labels first came into existence. Typically the manufacturer’s product goes through different nodes of supply chain (i.e. wholesaler, distributor etc.) where each node adds their margin, inventory carrying cost etc. In private label—the retailer does away with all such costs, which helps them to make more margin and yet offer the product at cheaper price. 2. Private label gives retailers exclusivity, differentiation and store loyalty The particular private label is usually only available at the particular retailer’s store whereas national levels are available at all the stores—a succesful private label builds store exclusivity and thereby builds customer loyalty. It differentiates the store from other competing retailers as the retailer can now offer a unique differentiated product in the marketplace. For example, in home furnishing the name which always come to mind is IKEA which had built an exclusive private label over years. 3. Private labels helps retailer to close the existing gaps in the marketplace Globally private labels are successful where there are not many national brands. For example in India in women’s apparel there are no national brands—so private labels are fairly popular here. 4. Retailers have better control on pricing and deliveries of private labels Retailers control the entire supply chain of private label—hence can dictate pricing and delivery terms which is not possible in case of national brands. 5. Having strong private labels helps retailer to negotiate with manufacturers of national brands If retailers have strong private labels that can compete with manufacturer brands, it allows the retailer to better negotiate with its national suppliers or it gives them increased bargaining power.

Disadvantages 1. Higher investment In terms of product development, R and D, design, packaging development, in manufacturing process, quality control systems, marketing expenses etc. 2. Issues related to global sourcing, visibility and higher risk For retailers in developed countries sourcing of private labels is generally from third world countries—this raises global sourcing issues like global visibility, import and customs documentation, compliance issues etc.

Evolution of Private Labels Private labels have evolved over the years. Figure 5.2 shows this path of evolution. This is detailed below. l Historically private labels started as low price alternative of national brands, sometimes as seconds quality compared to the original brand. You can still find private labels in food and grocery segment in India in these categories. l However growth in private labels in the last decade has changed this philosophy. Today private labels are created more to address the gaps of consumer requirements and to create uniqueness,

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Fig. 5.2

Private Labels—Moving up the Value Chain

exclusivity and a differentiator for the store and in certain cases they may be costlier than national brands. Some of the high fashion retailers in Europe (like Zara) and even in India (like Westside) are selling only private labels. Though they are not cheap, Zara and Ikea have become destination stores. Retailers do not mind spending on such premium private labels— they design a better product, advertisers through television and do everything possible. Tesco is a good example of combining the value and premium strategy for private labels. Tesco in Europe has a range called the Tesco Finest line. It does have a Tesco Value line, which is cheaper, but the Finest line only sells premium products at premium prices. Tesco’s Finest chocolate, sells at a premium compared to national brands like Cadbury’s. Similarly, its yogurt sells at more than 50 percent premium over Danone and other yogurts. Source: www.retailrise.com (accessed on 1st February, 2009)

Supply Chain Decisions in Private Label l

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Identifying the gap/white space in the market and designing the new product offering keeping target customer and price point in mind. The product packaging also needs to be worked out. Sourcing decision regarding the private label needs to be taken—whether the retailer will make it fully, or the retailer will outsource the manufacturing keeping only product design and quality under its control. There are example of succesful retailers for each of these. Among European apparel retailers Zara is an example of the first one (manufacturing inhouse) and H and M is an example of the second one (outsourcing). Decision regarding vendor needs to be taken (for outsourcing manufacturing or for sourcing the full item). This can be quiet complex if the vendor is in another country say low cost country manufacturer. Design needs to be developed in consultation with the vendor as the vendor will be asked to develop the sample.

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The sample needs to be approved by the retailer as the retailer gives a go ahead for mass scale production. Once the products are sent to the retailer, the retailer does quality check before putting the material on store shelves. Table 5.1

How supply chain in private label is different from national brand

SCM Characteristic

National Brand

Private Label

Product Design Sourcing of raw material

Done by manufacturer Done by manufacturer

Manufacturing

Done by manufacturer— Retailer is not allowed to influence Done by manufacturer

Done by retailer

Done by retailer along with supplier Done by either retailer or supplier— In either case retailer can have preferred source Done by either retailer or supplier— In either case retailer can dictate manufacturing plan, schedule and priority Can be responsibility of retailer or supplier depending on who is doing manufacturing—in either case retailer can have quality standards to follow Done by retailer

Done by manufacturer

Developed by retailer jointly with supplier

In process quality control

Incoming quality check during store receipt Packaging

RETAIL PACKAGING The INDIASTAR Award 2008 In year 2008, Food Bazaar bagged INDIASTAR Award for Best Packaging Innovation in India. This was given for its private label brand Fresh And Pure Chakki Atta. This award aims to promote and encourage excellence in packaging design, innovation and technology and is considered as the most popular and premier event for India’s packaging fraternity. This year there were around 357 entries and the participants had to submit a sample of their designs for selection. With this award, Pantaloon Retail (India) Limited becomes the first Indian Retailer to win the prestigious INDIASTAR Award. Source: www.pantaloon.com (accessed on 1st April 2009)

Retail packaging has come a long way in India. The huge number of entries in this award category simply proves that although there is little doubt that packaging adds to the overall cost of the product, retailers are taking it more seriously then ever before. There are many examples in the FMCG industry where the brands are built on packaging innovation. Frooti is a case in point. Before Frooti, the market was dominated by glass bottles which had to be returned to the shopkeeper after finishing the drink. A person who wanted to be on the move with his drink found it restrictive. Frooti addressed this need by bringing out a tetra pack. Another example is the introduction of sachet for shampoos and conditioners—it made the products available to masses at Re 1 and encouraged them to buy. These packaging innovations helped to create new markets. Packaging can also help in what the marketer is trying to communicate—Colgate endorses suraksha chakra, the sign that emphasises the promise of complete protection and Rin depicts safedi ki chamkar through a strip of lightning. All

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these show how innovative packaging has helped consumer goods companies to create new market or to effectively communicate. Packaging of merchandise is important from the retail supply chain perspective for following reasons: l For private labels, the retailer needs to take all responsibility of packaging—package design, getting it developed by third parties, delivery of packaging materials etc. l For items supplied by other consumer goods companies, the retailer may not be able to change the primary package design; however he can influence the secondary packaging—by asking them to supply their merchandise in a particular way. l For items which are imported/travelling long distance or for fragile items, the retailer needs to ensure that materials are properly packed before despatch. This is more important if the payment term is ex works i.e. the retailer needs to pay at the point of despatch from the supplier’s factory.

Purpose of Retail Packaging Before we get into the details of packaging in retail, let us first understand the purpose of packaging in general: Table 5.2 Purpose of packaging Purpose

Details

Contain merchandise Protection

Packaging need to contain the merchandise Protect the merchandise through the distribution system without damage. The retailer needs to ensure minimum expenses for packaging while ensuring necessary protection Packaging helps to identify the merchandise quickly—need to have visual marking on the exterior of the package(s) to locate the merchandise quickly Packaging can be used as a platform for sales promotion where packaging of the merchandise communicates price discount, free merchandise details, quantity discounts etc. Packaging needs to be designed in such a way that the packaging material can be reused or recycled so that it does not generate unnecessary waste in the system A package with inadequate stacking strength takes up extra ground space in a warehouse. The material in which a product is packaged also has a direct bearing on transportation costs i.e. higher the density, the lower the transportation cost. Packaging in small quantities lowers the density for shipping and adds extra cubic volume and weight to storage requirements. This adds to the costs. This requires innovative solutions like partial assembly of machines, use of square bottles, use of flexible packaging materials etc.

Identification Help sales promotion

Reusable—Recyclable

Bring distribution efficiency

Points to remember while selecting packaging: l Standard packs and pricing: Products are always packed according to size or type but they may be sold in assortments or sets. Pricing policies should encourage customers to buy the products in packaged quantities that will produce the most efficient distribution system. The packing of products in units which sell is more important than packing them in convenient units of dozens and half dozens or multiples of say, five or ten.

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Packaging must meet the requirement of various laws and regulations, such as marine laws, railway rules, and central and state government rules. These laws regulate the strength of packaging on the one hand and display of information relating to contents etc. on the other. l Tests of packaging are performed mainly to determine its compatibility and transport worthiness. The various tests carried out are to determine tensile strength, breaking load, burst factor, tearing strength, resistance to humidity and vibrations, drop strength etc. The Indian Standards Institution has developed various standards for packaging. Common packaging materials used for retail goods are: jute, packaging paper and board, glass, tinplate, aluminium foils, plastics, laminated jute packaging, polyethylene coated paper, shrinkable films etc. l

SHELF READY PACKAGING SRP (Shelf Ready Packaging) is an innovation in retail packaging. According to retail best practices, SRP is defined as ‘a product that comes in a ready merchandised unit which is easy to identify, easy to open, can easily be put onto the shelf and disposed of, allowing an optimisation of shelf replenishment and enhanced visibility. SRP is also known as FRM (Floor ready merchandise). SRP covers all types of packaging which goes to the retail outlet, including promotional displays, pallets, trays, crates etc’. SRP improves l Productivity (shelf replenishment effectiveness) l Business opportunity (on shelf availability improvement, improvement in product recognition in the shelf by the shoppers facilitating in shelf product identification) l Make shelf more appealing l Help draw attention to new products The production, use and disposal of packaging have an impact on the environment. These requirements pertain to the prevention of packaging waste (i.e. limitation of packaging volume and weight), its reuse, recovery (recycling, energy recovery) or disposal in an environmentally sound manner, as well as limitation of hazardous and noxious substances. SRP tries to achieve this objective as well.

Five SRP Functional Requirements As per the ECR best practices the critical functional requirements of SRP are: 1. Easy identification—Easy identification helps in selection of right product and reduces errors during the handling at warehouses and stores. Product attributes that assist in easy identification of the product are as follows: (i) Product visiblity through the packaging. (ii) Product code, product name, contents, variants, best before dates should be clearly displayed, preferably on at least two sides. (iii) Simple user instructions: To the extent possible simple pictures should be used that does not create complications for people of different languages. (iv) To facilitate handling, the product code should be bar coded and the product name printed in a size and text to ease its readability. (v) Product labels are easily accessible and scanned by the staff during handling. Figure 5.3 and Figure 5.4 give some examples of this. 2. Easy open—SRP should be easy to open and facilitate the in-house supply chain execution; however it should be sufficiently robust in up stream supply chain operations. (i) Use of tools, consumer safety and item damage: Use of tools (e.g. knife) for opening should be avoided to prevent damage to the consumer units and their contents. If tools

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Fig. 5.3

Shelf Ready Packaging—Easy Identification—Some Examples

Fig. 5.4

Shelf Ready Packaging—Easy Identification—Some Examples

are required, clear instructions to be provided by using pictograms. The SRP unit should be protected against damage during opening to maintain its aesthetic presentation. Where tearing is required to open the SRP unit, suitable design should enable the unit to be held and gripped easily. During or after opening, no sharp edges should exist that could pose a danger for either staff or shoppers. (ii) Quick opening: Opening should not require more than one person, and the number of handlings required to open should be minimised. Opening time should contribute to a quicker and simple replenishment process resulting in time saving per consumer unit. These Shelf ready packaging can be opened easily without a cutter. It increases the sales attractiveness of products significantly (shelf impact) and can easily be disposed off once it is no longer required. Figure 5.5 gives some examples of this.

Fig. 5.5

Shelf Ready Packaging—Easy Open—Some Examples

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3. Easy shelf—SRP should facilitate replenishment, shelving and display of product. (i) Packaging stability: The unit after the removal of any unwanted secondary packaging, must remain stable during shelving or display process. To avoid this, weight of the loaded product should be considered. (ii) Optimise space: SRP should be designed in such a way that it facilitates optimum shelf fill and good cube fill through the supply chain. Cube utilisation is a key contributor to optimum supply chain performance and to directly reducing transportation costs. (iii) Ease of handling: SRP should support in-house staff through the inclusion of handles/ hand holes or other mechanisms, if this will make the handling process easier. Figure 5.6 gives some examples of this.

Fig. 5.6

Shelf Ready Packaging—Easy Shelf—Some Examples

4. Easy disposal—Ease of disposal is vital to keep aisles free and open to support the shopping experience for the consumer. (i) Easy to collapse: For one trip SRP units i.e. packaging which is used only once, the packaging should become flat with minimum effort and handling steps. Where ever possible instructions/pictograms to be added to collapse box. (ii) Returnable/reusable/Recyclable: Simple instructions need to be provided for reuse/ recycle. For returnable plastic crates, there need to be clear instructions for reusage and crates need to be stackable to secure efficient transport and handling in-house. 5. Easy shop—The attributes that facilitate and promote the shopping experience for the consumer have been grouped into ‘Easy shop’. These are visual aspects and help the consumer to identify a product and the correct variant. (i) Assist identification and enhanced appearance: Some easy guidelines on this issue are: The shopper facing the portion of the unit should not include bar codes, technical labelling or any other information that is not intended for the shopper. The name of the product and/or its brand/manufacturer’s logo should be displayed on the front of the SRP unit to ensure quick recognition and visibility to the shopper. The SRP should be colourful to attract the attention of shoppers. Product variants could be highlighted through use of colours. (ii) Simple to handle: The unit should be easy to handle, or held in place, so that ease of access for the shopper is reduced. (iii) Does not degrade: The product remains stable as the SRP unit is shopped and to prevent the product from falling over where applicable.

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Benefits and Issues with Shelf Ready Packaging Benefits of SRP l l l l

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Reduced use of tools for opening and hence safer Shopper satisfaction increases as the product can be found quickly No congestion in the floor and a isle SRP is cutting cycle times from order to delivery reducing transit inventory. In SRP, merchandise preparation (like putting bar codes, hangers, security tags, packaging in cartons etc.) responsibility shifts from retailer to consumer goods manufacturer. This enables cross docking at retail distribution centres and direct store delivery and thus reduces distribution cycle time from consumer goods manufacturer to store. SRP reduces total distribution costs and improves stock availability. Recent initiatives of shelf ready packaging body VICS is to reduce packaging materials to optimum quantity that is enough to protect the product. Reduction of packaging is environment friendly, reduces material cost and reduces labour cost.

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Standardisation Different retailers require different information formats, different level requirements, different packing requirements, different hangers etc. For consumer goods manufacturers, accommodating such a variety of requirement increases cost. Consumer goods manufacturers can accommodate SRP request from different retailers only if there is some standardisation. VICS committee had defined several SRP standards for consumer goods manufacturers to achieve this requirement. Privacy SRP initiatives may mandate providing some information on product, that the retailer otherwise will not like to provide (like price) because of competitive situations and because of frequent changes (like almost daily variation of price for certain items). Infrastructure SRP initiatives need space in factory and warehouse for consumer goods manufacturer. Some manufacturers do not have processing ability to fully process merchandise to a marketable state in their present warehouse and DCs—they do not have required space. Additional cost Making the merchandise marketable may involve additional cost—some consumer goods manufacturers charge for such SRP services and include it in the cost of goods sold. Retailers may not like to pay this additional cost.

Problems Identified by a Pharmacy Retailer in Medical Packaging l

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Readability Reading instructions on the strip or bottle is an extremely difficult task even for younger patients. Often, the print is too fine and many express the need to highlight important information in bolder lettering. Ergonomic difficulties Structural issues like opening, dispensing and closing the pack can be a real issue with elderly patients. Convenience Many patients prefer to keep their medication in their wallets. A random survey of male patients revealed that as many as 75 percent of them carry their multi-dose medicines in their wallet. Pocket size packs can be of great help. Something as simple as a square blister of nine tablets can help in a big way than a regular rectangular strip of 10’s. Compliance Among the many reasons for non-compliance, the most common is not remembering which medicine to be taken when. The elderly also need to take much medications simultaneously. This could lead to confusion about the different medicines and schedules.

Source: Article by Gauri Chaudhri, Brand Consultant, FCB Ulka Advertising (Expresspharma – 30th November, 2007); www.pharmabiz.com (accessed on 1st May, 2009)

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GREEN DESIGN AND PACKAGING There are several initiatives retailers are taking these days to reduce carbon footprint, become more environment friendly and designing products and packaging items to meet those objectives. These are discussed under ‘Designing the product’ and ‘Packaging innovations’.

Designing the Product Following design aspects are important from the green point of view: l Materials selection l Energy efficiency l Durability l Ease of disassembly l Recyclability l Disposability Similar to the concept of ‘design for manufacturability’ or ‘design for serviceability’ ‘design for environment’ is getting important these days; the design which takes carbon footprint and emissions into account. Let us check what leading retailers are doing on this front: l Wal-Mart is planning to sell more compact fluorescent light bulbs (CFLs) annually and working with suppliers like General Electric and Philips to reduce the amount of toxic mercury in the bulbs. l Tesco is working with manufacturers to make energy saving light bulbs that do not just cut carbon but also cut fuel bills. l Some home furnishing retailers are working with furniture design manufacturers like Herman Miller for designing products for the environment with an emphasis on high-quality, durable furniture. These durable furnitures need replacements less frequently and contain recycled content, some as much as 80 percent. Many Herman Miller products and components are recyclable; parts made of polypropylene, steel, and aluminum are 100 percent recyclable. These products can easily be disassembled. l A retailer is working with an appliance manufacturer to develop a new line of Dishlex dishwashers that use fewer than 18 litres of water for a full load. The manufacture of the new dishwashers requires fewer materials, with each unit weighing up to seven kilograms less than previous models. Plastic components are coded to make recycling and disassembly easier; other major components are designed for easy disassembly. l Wal-Mart is working with Toshiba to acquire personal computers that are compliant with the EU Restrictions on Hazardous Substances (RoHS) directive as part of its efforts to carry more environmental friendly electronics. l Wal-Mart’s electronics scorecard will assess suppliers’ products on criteria like durability, energy efficiency, upgradeability, use of innovative materials, packaging, and end-of-life solutions.

Packaging Innovations Packaging is a major component of solid waste that a retailer generates in the environment. Plastic bags consume natural resources, create problems in marine life and very few of them are recycled. In recent times green packaging is a focus area for almost all retailers i.e. to design packaging that is more environment friendly, to use more environment friendly packaging material and to reuse/ recycle it.

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Supply Chain Management for Retailing Grocery retailers around the world are looking at eco-friendly packaging for items like milk as this is one of the retailer’s highest selling product. Several retailers in UK and US had invented something called Green Bottle. This is a new type of packaging designed for liquids and is made from 90 percent recycled material, primarily from waste office paper. The packaging consists of a pulped recycled cardboard outer similar to what is used to make egg cartons and a corn-based bioplastic bag liner. This is biodegradable in about six weeks. After the milk is poured out, the bioplastic bag can be removed and composted/disposed of, and the outer shell can be recycled or composted. Unlike pouch, this milk bottle is robust, practical and fit for purpose. Sainsbury had done series of packaging innovations: Introduced a new bag made mostly from recycled material, task measures to reduce the use of carrier bags, reduced transit packaging through the supply chain using collapsible crates etc. Wal-Mart used biodegradable packaging for organic food, created thinner packaging for some items and started forcing electronics suppliers on packaging reduction and recyclability. Glass is the single biggest contributor to the packaging weight. Tesco along with suppliers developed lighter weight wine bottles thus reducing carbon. Tesco helped customers to recycle paper based food cartons in stores and aimed to reduce the number of carrier bags issued. Marks & Spencer had built a plastics recycling plant to recycle polyethylene terephthalate (PET) from water, soft drinks and cosmetics bottles into material for food packaging. M&S sends all plastic waste from its stores to the plant for recycling and encourage its suppliers to source recycled plastics from the plant to make M&S packaging. Walmart had developed a ‘Packaging scorecard’ which assesses the sustainability of a supplier’s packaging based on criteria like product to packaging ratio, recovery value of raw materials etc. This scorecard evaluates each product’s packaging against nine sustainability metrics, including cube utilisation, recycled content, CO2 per ton of production, recovery value etc. Wal-Mart’s suppliers are asked to use the scorecard to see how their packaging innovations, environmental standards, energy efficiencies, and use of materials are rated relative to their peers. This scorecard tests the company’s ability to use less packaging, utilise more effective materials in packaging, and sourcing of these materials more efficiently relative to other suppliers.

IT FOR RETAIL PRODUCT LIFE CYCLE MANAGEMENT Information technology tools help in building capabilities in various areas of product life cycle management. Figure 5.7 shows the areas of information technology which are of interest for leading retailers. These are detailed below. Collaborative product design A typical design process for a new product or a new style involves lot of iterations between retailer and their supplier with inputs floating from both sides. Typical design planning for an apparel retailer for a particular season say, fall, or autumn will start by depicting the trends, colour, pattern, collection etc. that influences the decision on how many lines and new styles the retailer should have. Once the number of styles are identified designers from retailers, technical designers from manufacturer’s side, pattern makers start collaborating to come up with the final design. Information technology helps in making this collaboration platform available. Most of the leading PLM applications in market like SAP, PLM, PTC provide such platform.

Retail Product Lifecycle Management

Fig. 5.7

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Product data management (PDM)/Specification management A retailer needs to manage thousands of product specifications, bills of material data, drawings, cost sheets etc especially for it’s private labels which need to be delivered to the vendor. The retailer needs to ensure correct version management of these so that he always has the latest version in hand. Versioning is also important for the sake of cost comparisons or design decisions. These documents can be in different formats like word, excel, PPT, CAD drawings, VISIO, sketch files etc. Information technology is typically used for storing and version management of such documents. There are document management solution vendors like Documentum, Hummingbird who specialises in this area. Retailers also can build their homegrown database for the same. Managing multiple project calendars A retailer at any point is managing several new product developments. It is not uncommon for an apparel retailer to have thousands of new fashions which he wants to bring to the market in the new season. This calls for managing several projects, programmes, calendars and milestones. Each retailer needs to define and monitor a set of critical review and approval meetings and deadlines that define its product development process. Retailers need help from information technology solutions to track the status of thousands of such projects, milestones and deadlines and display the current status at any given time. For example, one retailer needed to coordinate with global partners across 23 calendars on 10,000 materials and 5,00,000 samples each year and had taken help of IT. Managing workflows Workflows are needed to authorise the approval of a sample or costing during a new product development process. This is also helpful for routing alerts and notifications for completion of a particular event or in case there is some issue. Capability of planning new lines Line planning is a typical requirement mainly for apparel and footwear retailers where line plans define how many items or styles will be created including colour and size for each product category and provide high level financial planning for products i.e. costs, initial markup etc. Line planning is typically integrated with merchandise and assortment planning

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because merchandising section needs to budget for this and plan space for them in the store once the product arrives. Other softwares supporting product development There can be variety of softwares in these categories like CAD design applications, Colour management systems, Pattern and marker tools etc. Product life cycle management applications support most of the requirements from an IT solution specified earlier. PLM applications had its origin in complex manufacturing industry like aerospace, automotive etc, but nowadays PLM applications are equally popular in soft goods manufacturing. Soft goods like apparel, footwear etc., may not have much complex materials or thousands of parts like aerospace but here the challenge is introduction of hundreds (or thousands) of new products in each season. Here the number of final product iterations is far greater than any other industry. For one footwear manufacturer, 75 percent of its product line is new every quarter. Zara’s design department produces 10,000 fresh items each year, before accounting for size and colour. The importance of being on time is very important here as on an average there is 30 percent of lost sales/ markdowns in apparel industry.

Case Study Product Development Best Practice Now we discuss the story of a leading European retailer who made product development as a process of competitive advantage for them and differentiated it from other retailers in this space. Zara, a leading retailer based at Spain and part of Inditex Group, have more than thousand stores around 70 countries across the world. Globally Zara is known as ‘Fast fashion retailer’ i.e. it can complete from conceptualisation to development and delivery to stores of a new apparel line within two to three weeks. This is something other retailers find very difficult to match. Before understanding how Zara does it, let us see how other retailers manage the product development process. How other retailers do product development. Assume a retailer is planning for winter. The typical process is as follows: l They first get the information on new fashion requirements from different market research agencies, trade shows, feedback from stores, sales staff etc. and over a period of four to six months. l The ideas are developed and some of them are converted to physical samples. l Costing of samples are then done. l Samples and cost estimates are sent to higher management—some of the samples may get accepted and some get rejected. Cost estimates and margin decisions are modified. l Sales budgets and stock plans are developed. These are all developed based on informations available may be almost a year ahead of the sales cycle of the targeted style. l After this if the retailer wants to source it from outside the orders get placed with vendors in one or more countries around the world. l Vendors take a few weeks to months to produce fabrics. l These are approved by retailers. l Vendors produce samples.

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Retailer approves samples. Vendors put the style in production. The entire process may take anywhere between 9–12 months for a typical retailer and the retailer needs to make decision almost one year in advance. Since multiple factors are involved there are several meetings where a buyer/merchandiser, a designer, a technologist, a sourcing specialist and others may get involved together. l l

How Zara does It Before getting into how Zara does it, let us understand three building blocks that helps Zara in faster development of products. These are detailed below. A. Zara’s Approach to Product Development Zara’s approach for product development is based on following three strategies: l Reducing lead time Zara can quickly identify and catch popular winning fashion trends. Traditionally retailers forecast the style and the quantity that is needed for the next season whereas in most cases Zara does not forecast, its product development starts against an e mail or phone call received from the stores i.e. Zara is actually responding to an actual order/ enquiry or need rather than forecasting for 9–12 months in future. l Making new fashions available in small quantities so that there is always short supply Zara produces less quantity in each style and instead of more quantities per style, Zara produces more styles, thus reduces its exposure to any single product and creates an artificial scarcity thus making it more desirable. If a style does not work well, there is not much to be disposed when the season end sale does happen. l Making more styles and more choices Zara can offer more choices in latest current fashion than many of its competitors. It delivers merchandise to its store twice a week and since reorders are rare the stores look fresh every three to four days. l Selective outsourcing Once you are at Zara’s store in Toledo, Spain, you can find at the ground level, where ones women’s fashions are located, over 80 percent of all items are made in Spain. As on the basement level, where children’s garments are stocked, less than 20 percent are made in Spain, and the rest is sourced from countries like Thailand, Vietnam, and China. Zara understands the products which the customers are looking for the high fashion for which they are ready to pay a premium and where they will not do so. These helps Zara to cut down on the discounts. B. Zara’s Strong Design Capability Zara has a dedicated design team in northern Spain who make close to 1,000 new styles every month. Ideas for new designs come from constant market research and a daily stream of emails and phone calls from stores to head office. Zara have designers who can identify fashion conscious people and the kind of styles they are wearing which can appeal to the huge market. Each style is made in small quantities compared to other retailers. It spends its ‘design’ effort on interpreting rather than creating afresh. Zara constantly copies from top designers and delivers fashion when it is hot at a fraction of the price charged by designer brands thus spending less on product development. This needs a capability to understand design, recreating and the capability to distribute that design in large volumes quickly and profitably. They follow quickly; have the

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capability of growing it quickly to a certain scale, and then dropping it to catch another trend because at that point many other competitors had adopted it. C. Zara uses Information Technology Innovatively for Product Development Zara uses IT in product development for following things: l Storing information on consumer needs: Sales trend information from store-flows daily and is fed into a database at head office. The designer uses this information to create new lines and modify existing ones. This is also the basis for deciding with the commercial team on the fabric, cut and price point of the new garment. l Standardisation of product information: Zara warehouses the product information and specifications with common definitions, allowing it to quickly and accurately prepare designs, with clear cut manufacturing instructions. How Zara does Product Development With store demands in hand coming from different stores, Zara’s commercial managers and designers sit down and conceptualise what the garment should look like, what fabric it will be made out of, how much will it cost and what price it will sell. The designer then actually sketches the garments out and details the specifications. l Zara buys undyed fabrics and trims and as all these are already in Zara’s warehouse, sampling takes very little time. Samples are quickly approved as the entire team is located at the same place. Zara, largely concentrate on forecasting efforts on the kind and amount of fabric it will buy, which is much better then finished goods forecasting as the same fabric can be turned into many different garments. Zara buys semi processed or uncoloured fabric that it colour dyes close to the selling season based on the immediate need. l Once approvals are received, instructions are issued to cut the appropriate fabric. The cutting is done at Zara’s own automated cutting facilities. l The cut pieces are distributed for assembly to a network of small workshops in and around Spain. These workshops have a set of easy to follow instructions, which enables them to quickly stitch up the pieces and send to Zara’s garment finishing and packing facilities. Thus, what takes months for other companies do not take more than a few days for Zara. l

Source: An article by Devangshu Dutta, CEO of Third Eyesight (www.3isite.com)

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Product design capability which was traditionally important for certain categories of retailers has now become important for most of the retail categories due to the popularity of private labels. Product design poses several challenges for retailers which are discussed in this chapter. Private labels are retailer’s own brands that he sources, merchandises and sell inhouse. Private labels started as low cost alternatives in the beginning but now they are introduced to address specific market demands or exclusivity of the store and may not be a cheaper option. Private labels give retailers better opportunity for negotiating with manufacturers. Introduction of private labels bring several complexities in the retailer’s supply chain. Packaging is an important P of retailing (Product, Price, Promotion and Packaging). Retailers need to concentrate on primary packaging (in case of private labels) and secondary packaging

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(in case of most branded products). Ready to sale merchandising is an important innovation for retail. Consumer goods manufacturers may charge some additional cost to deliver SRP— however this reduces the overall cost for the retailer in terms of less space in store, no indirect labour, lead time of putting the product in shelf etc. However SRP will require some industry standards for packaging to evolve, as a single consumer good manufacturer can not supply 50 different retailers with different packaging standards. As new packaging materials are coming to market almost every year, selecting the right material after a trade off analysis of cost savings and distribution efficiency will always remain a retailer’s challenge. The concept of green design and packaging is gaining importance these days. Several retailers are taking measures to design product and packaging that is environment friendly and reduces carbon footprint. Information technology can bring benefits to several areas of product development like data storage, BOM and specification management, workflow, collaborative designs etc. Leading PLM vendors offer applications in this space.

Review Questions 1. 2. 3. 4. 5. 6. 7.

What are the challenges of product development for a retailer? What are the advantages and disadvantages of private labels? What additional complexities private labels bring from supply chain perspective for a retailer? What is the purpose of retail packaging? What is meant by shelf ready packaging? What are the five functional requirements of SRP? What are the benefits of SRP? What are the main considerations of green design and packaging? Give some examples on this— what leading retailers had done? 8. How information technology can help in product life cycle management? 9. What are the lessons from Zara’s product development process?

Objective Type Questions 1. Five SRP principles are: Easy _________, Easy _________, Easy __________, Easy _________ and Easy ________. 2. SRP stands for __________________________. 3. SRP is also known as ______________________. 4. PDM stands for ___________________________. 5. Six green design considerations are __________, ____________, ____________, _______________, _______________ and ______________. 6. Bio degradable milk bottles are called _________ bottle. 7. CFLs reduce __________ ___________ in the bulbs.

Assignments 1. Study private label strategy of three leading retail chains in India? Compare the reasons for private label introduction—low cost, exclusive products or to address a market gap. Compare

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the reasons for success and failure of some of these private labels? How private labels stand in terms of quality perception, cost etc? 2. Give some examples of shelf ready packaging in Indian context—how consumer goods’ companies had adopted these five principles of SRP? 3. Study product development process of a leading apparel retailer. Identify the areas of improvement.

[CHAPTER]

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LEARNING OBJECTIVES

Retail Distribution and Replenishment

In this chapter we will explain the following concepts 1. Retail Distribution 2. Different replenishment models l Retailer driven replenishment l Supplier driven replenishment l Collaborative planning forecasting and replenishment 3. Direct Store Delivery 4. Home Delivery 5. Information technology for retail distribution and replenishment 6. Measures for distribution and replenishment

RETAIL DISTRIBUTION Efficient distribution of merchandise from the supplier factory to the final retail store is an important element of a replenishment system. The different models of this distribution process are:

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Figure 6.1 shows four basic retail distribution models 1. Factory ® Store 2. Factory ® Manufacturer warehouse ® Store 3. Factory ® Retailer warehouse ® Store 4. Factory ® Manufacturer warehouse ® Retailer warehouse ® Store

Fig. 6.1

Retail Distribution Models

There can be bulk/pack breaking or down binning at manufacturer’s or retailer’s warehouse.

Delivery from Supplier to Retailer Steps in this process are as follows: 1. Supplier’s warehouse management system checks inventory and manages order picking, packing and despatch activities in warehouse. 2. Supplier’s truck scheduling and routing determines the most efficient route and timing that the goods and the transport have to follow. 3. Before the order is actually shipped, supplier sends a despatch advice to the store. This is called advance shipping notification or ASN and generally sent electronically. This allows the store manager to know which materials are coming, the quantity and expected arrival time. This information allows him to prepare his staff to receive them, and to cross check the delivery with the order. In case the shipment is happening to RDC and not to the store, the ASN is sent to retailer’s RDC allowing the RDC manager to get ready to receive the goods and to cross check the delivery with the order. 4. When the shipment arrives, the goods are checked and the info about the receipt of goods is stored in the system. For leading retailers, electronic store receiving system with the help of scanner scans all incoming products and updates inventory in the perpetual inventory system.

Retail Distribution and Replenishment 123 5. The merchandising at store level can be managed by the retailer or the supplier, depending on the product category, and consists of replenishing the shelves. Space management system optimises store layout, shelf space allocation and shelf visibility. 6. For leading retailers the receiving advice message is sent from the retailer to the supplier and the despatch advice triggers the invoice. This eliminates the need for a separate invoice message and self billing process is initiated. When goods received do not match with the ones described in the despatch advice, the retailer sends a receiving advice via EDI to the supplier informing him about the discrepancies between goods received for entering the invoice of the goods despatched. The supplier can then begin to investigate the discrepancies to send the correct invoice.

RETAIL REPLENISHMENT Retail replenishment has evolved over the years. The most common retail replenishment model is retailer driven replenishment programmes where typically the retailer generates the order and sends it to the supplier. This is called Retailer driven replenishment (RDR). Using information systems for such kind of ordering is very common so it is also known as computer based ordering system. Over time some leading retailers and their suppliers changed this practice and designed a model of collaboration. Here instead of the retailer, the supplier takes full responsibility of managing stocks at retail shelves. This is called vendor managed inventory (VMI) system. As replenishment happens on a continuous basis linked to sales and inventory information at retail stores it this is also called continuous replenishment programme (CRP). Sometime it is also referred as supplier driven replenishment (SDR) programme. The most advanced model of retail replenishment is known as Collaborative planning forecasting and replenishment (CPFR). Here the retailer and the supplier jointly do annual business planning, jointly forecast and plan for replenishment. Figure 6.2 explains the trust requirement among supply chain partners increases as we move from RDR to CPFR kind of arrangement.

Fig. 6.2

Evolution of Retail Replenishment Models

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Retailer Driven Replenishment/Computer Based Ordering (CBO) This is a computer based retail ordering system that automatically generates store replenishment orders either when the shelf inventory falls below a level which is pre-determined or based on sales recorded at checkout/billing counters by Point of Sale devices. Figure 6.3 is a pictorial representation of such an ordering system. The steps in this process are as follows:

Fig. 6.3

Retailer Driven Replenishment/Computer based Ordering

1. The computer system in the store maintains inventory of all items in the store, adjusting for receipts and sales. All sales happen through point of sale scanning and this ordering system is integrated with POS. The system computes the shelf stock for each product, based on point of sale data and goods received data for that day. 2. The store computer assisted ordering system compares the stock level shown on the periodic inventory system with a pre-defined reorder level. 3. After comparison, the CBO system generates orders i.e. purchase orders that specifies relevant quantities, dates and location for delivery. The replenishment order quantity is created using information such as sales forecast, stock on hand, safety stock, lot sizes etc. 4. These order proposals are then is reviewed by store procurement personnel and transmitted to the retailer’s headquarters. 5. After the headquarters’ approval this P.O. is sent via EDI to the supplier. 6. The supplier’s system processes the order and checks whether the order can be delivered from the stock or the quantity has to be produced. For creating order proposals, CBO system requires the following information:

Retail Distribution and Replenishment 125 Sales forecast In order to calculate an order, the system needs to know the expected sales till the next order i.e. the need to create a sales forecast upto the next replenishment cycle. Forecasts are generated on the basis of past sales history recorded in point of sales system, planned sales promotions, considering seasonality effect, holidays, weather conditions etc. Order quantity = Sales forecast upto next replenishment – Stock in hand – Previous orders placed but not yet delivered. Anticipated sales upto next replenishment is also called cycle stock l Safety stock Replenishment order generated needs to take care of safety buffer. l Lot sizes The system first calculates the theoretical quantity and then rounds this to logistically efficient orders in multiples of full truck load, full pallet etc. Delivery via RDC (Retail Distribution centre): In case ordering is not done directly between individual store and supplier but between retail RDC and supplier, than there are two orders, one from point of sale (POS) to RDC and the other from RDC to the supplier. These two ordering processes are supported by EDI message. l Inventory system at store keeps updated information of stock status of each product based on sales and receipt data (goods received from the RDC at the store). l The CBO system compares this stock level with a defined reorder point, rounded to a logistically efficient purchase order which is sent to RDC via EDI. l RDC purchase order management system consolidates the orders received from stores, compares this aggregated demand together with RDC inventory, and calculates RDC replenishment order which is sent to the supplier via EDI. l The supplier processes the order and checks whether the order can be delivered from the stock or if the goods have to be produced. l

Vendor Managed Inventory (VMI)/Continuous Replenishment Programmes (CRP) VMI Defined Vendor managed inventory is a process where the supplier i.e. manufacturer/distributor, makes inventory replenishment decisions for the customer. The vendor monitors the buyer’s inventory levels and makes replenishment decisions i.e. which items to send, how much quantity and on what date. For the supplier to plan, the customer sends demand and inventory information on a prearranged schedule which is typically daily. The APICS Dictionary defines vendor managed inventory as ‘a means of optimising supply chain performance in which the supplier has access to the customer’s inventory data and is responsible for maintaining the inventory level required by the customer’. VMI was popularised in late 1980s by Wal-Mart and Procter and Gamble and later on by Campbell Soup and Johnson & Johnson. The success of Procter and Gamble’s programme with WalMart helped VMI a practice of ECR. Frito Lay’s drivers/sales persons stock the shelves for their small retail customers to keep the shelves full, the product fresh and the paperwork simple. There are some other versions of VMI which are very similar but not exactly the same. Some examples are: Consignment APICS dictionary defines consignment as ‘the process of a supplier placing of goods at a customer location without receiving payment until after the goods are used or sold’. Under consignment, it makes no difference whether product remains in the customer’s warehouse or shelves

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for five days or five months, as the supplier receives no payment until it is used or sold. So it is important that the supplier makes sure that the consigned inventory moves rapidly through the customer’s inventory. Customers are particularly fond of this arrangement because there is no better guarantee of on-time delivery than to have the goods available in their facility with no ownership of inventory by him. Ownership of the inventory is typically transferred from the supplier to the buyer at the time inventory is removed from the inventory location for consumption, use or benefit of the buyer. Co-managed inventory (CMI) This refers to joint/shared responsibility for management of inventories by both the supplier and the buyer. The activities necessary to support effective management and replenishment of inventories are assigned to both the parties based on which party can execute which task more effectively. JIT2 The supplier allocates one of his employees to a customer’s location to manage replenishment of inventory. The Bose Corporation had done this for years under a programme they call as JIT 2. Under this type of arrangement, the supplier monitors the inventory and places orders when needed. Figure 6.4 is a simple representation of VMI scenario.

Fig. 6.4 Vendor Managed Inventory

VMI/CRP Process In VMI/CRP, the retailer does not generate a P.O., instead the supplier drives replenishment of products and creates the order. The retailer sends the store inventory, POS sales data and promotion information to supplier via EDI message the supplier from his own database also gets promotion information. Based on these three information from the retailer (sales, inventory and promotion) and supplier’s information about promotion, the supplier generates order on behalf of the retailer. For calculating order quantity, the supplier needs to calculate forecasts for each SKU of the store based on which CRP system calculates the order. The CRP order generated by the supplier is rounded using a load building procedure i.e. to the nearest truck load. This is one of the advantages of CRP system over CBO as the supplier has intimation of next few day’s orders and can plan for pulling orders from future dates to make full truck load, whereas in CBO system, the supplier needs to go by the exact quantity as mentioned by the retailer. Once the order is generated, the order is taken

Retail Distribution and Replenishment 127 up by supplier’s fulfillment system for order processing. The supplier sends invoices to the customer. Payment is made by an electronic fund transfer from the customer’s bank. Figure 6.5 explains the process of CRP.

Fig. 6.5 VMI/CRP

EDI is commonly used in CRP but it is not a must for it. There are companies like Frito-Lays which used CRP long before EDI as technology matured. However electronic data transfer increases the speed and accuracy of transaction. Bar coding is another technology which helps CRP by facilitating material receipt and issue at distribution centres. It is important to understand that identifying right vendors to start CRP programme is extremely important as once a CRP program is established with time and effort expended on building a EDI interface—it binds customer and supplier—customers no longer will be interested to change the supplier. That is why CRP system requires high level of trust between partners to operate and succeed. There can be different models of CRP. CRP may be operational between the retailer’s head quarter i.e. RDC (regional distribution centre) and the supplier or between particular store and RDC. Between RDC (regional distribution centre)/warehouse of retailer and supplier the process works in the following way: 1. Retailer’s RDC (regional distribution centre or warehouse) sends aggregated sales data (Daily sales data of different stores are sent to RDC via EDI) of different stores under it and RDC inventory report on daily basis to supplier. 2. Stock at RDC is now managed by supplier.

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3. CRP system run by supplier calculates the order rounded to using a truck filling optimisation procedure i.e. orders rounded to full pallets and truck loads. 4. Order sent electronically both to the supplier’s production site (for production) and the retailer (as advance shipping notification). 5. Delivery happens from supplier’s production site to RDC. Instead of CRP system operating directly between store and supplier, it is recommended to have CRP operating between supplier and RDC, as in store the day to day demand pattern varies widely across different product groups and only the RDC has a good overview of store requirements and supplier constraints. Between store and RDC. Here CRP POS system eliminates the need of ordering at store. This reduces lead time further between RDC and store. As store need not order any longer, this will improve store productivity. The store sends its sales and inventory data to RDC via EDI, and the RDC system determines the quantity and items which will be part of next delivery to store.

Advantages of CRP 1. Eliminating Bullwhip effect CRP reduces the variability of order in the supply chain. Variability is introduced in the supply chain due to lot size and batching at every node—the retailer orders the supplier in a particular lot size, the supplier sends material to RDC in full truck load, from RDC to store, material comes in full pallets—all these amplify variability. Reasons like forward buying; promotions etc can further increase variability. Studies have shown that a retailer experiences 10 percent variation in actual customer demand—RDC may experience 30 percent variation and the supplier can see a variation upto 50 percent. This is called Bullwhip effect. Figure 6.6 explains the concept of Bullwhip Effect—how a little change at the

Fig. 6.6 The Bullwhip Effect

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retailer’s end can cause a huge variation for the manufacturer. With CRP, exact demand based on daily sales is communicated upstream i.e. from retailer to RDC to supplier’ all these upstream entities do not take independent decision to change these quantities to add their own buffer and to take care of lot sizing etc. The quantity which reaches the final supplier is the exact sales figures of store, based on which supplier calculates to decide replenishment quantity and at the final level, he can look at transport lot sizes (i.e. full truck load or pallet) before making the shipment. This substantially reduces fluctuations along the chain. Uniform production for supplier When a critical mass of supplier’s business is operating under CRP conditions, i.e. a number of retailers of this supplier follow CRP for most of the items, reduced shipment variations will lead to less peaks and troughs in production demand resulting in better productivity. Less spare capacity need to be planned in production system and lower buffer stocks required to meet changes in demand. The supplier can pass on this benefit to the final consumer. CRP system is successfully operating between P&G and Walmart, assume like Walmart, P&G’s customers work on CRP, in that case the company gets uniform demand on its factories on daily basis (as one retailer’s peak get adjusted with the other’s valley) and need not plan for extra capacity and buffer stock to meet demand fluctuations. Lower administration cost Administration cost reduces as customer spends no time in ordering and there is no paper work. Many CRP programmes have significantly reduced or eliminated invoicing for individual replenishments by providing summary billing at periodic intervals—typically monthly—saving administrative labour for both buyer and supplier. Lower transportation costs CRP eliminates less than truckload (LTL) shipments. This is achieved by allowing the supplier to coordinate the re-supply process instead of responding automatically to the orders as they are received. Lower inventories The supplier takes on the responsibility of product availability so the customer need not maintain safety stock. CRP orders are true reflection of actual customer demand, thereby reducing variability of demand. Inventory reduction is only possible if substantial percentage of business is on VMI Increased sales and service Chances of buy out of stock is less as inventory of right quantity is at the right location and this increases sales and improves customer service. With CRP, coordination of replenishment orders and deliveries across multiple customers helps to improve service. A non critical delivery can be diverted for a day or two to enable a critical delivery to another customer. CRP replaces forecast with hard data. Suppliers know real market demand information CRP helps in knowing the real product demand in the market from the actual consumer. Without CRP, the suppliers do production based on RDC orders which is not a real representation of market demand. Quantity is adjusted to achieve full pallet quantities, or to make a full truck load to obtain rebates or sometimes even forward buying is done for the future or to take price advantage. Actual market demand is especially important with new product introduction.

Cautions about CRP 1. CRP performs best in a stable pricing environment and not suitable for promotions. Promotions can disrupt regular flow of product because suddenly high volumes of materials are required for very short period. Promotion volumes at RDC warehouse need to be synchronised with the planning of routine deliveries to store in order to optimise the use of store delivery vehicles. Promotions influence the day to day ordering of the store, and CRP forecasting system

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has to handle this. A poor promotional forecast can disrupt regular CRP order and delivery patterns. 2. CRP requires critical mass A critical mass of the supplier’s business needs to be on CRP. If only very few suppliers are on CRP, it does not help suppliers in terms of stabilising market demand or getting real demand information from market. 3. Manufacturer takes one time volume reduction Inventory is withdrawn from the supply chain which reduces production requirements.

VMI/CRP In 1987, P&G and Wal-Mart pioneered the concept of VMI and laid the foundation for ECR. P&G makes the main inventory and replenishment decisions for Wal-Mart. P&G monitors Wal-Mart’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping and timing. Transactions customarily initiated by Wal-Mart (like Purchase order) are initiated by P&G instead. Barilla Spa, the Italian pasta manufacturer was another successful case for VMI implementation. In 1990 Barilla was organised into seven divisions: three pasta divisions (Narina, Voiello, and Braibanti), the Bakery Products Division (manufacturing medium to long shelf life bakery products), the Fresh Bread Division (manufacturing very short shelf-life bakery products), the Catering Division (distributing cakes and frozen croissants to bars and pastry shops), and the International Division. They started obtaining sales data directly from distributors to decide on delivery sizes based on that information (as opposed to allowing distributors to independently decide on order sizes). This made Barilla different from 2,000 other Italian pasta manufacturers.

Collaborative Planning, Forecasting and Replenishment (CPFR) History of CPFR Collaborative planning, forecasting and replenishment started as a vision for some of the large retailers like Wal-Mart in 1990s. They found the biggest problem of retail supply chain is that the retailer and their supplier do not work with the same forecast numbers and execute replenishment using their numbers. Collaboration between the retailer and the supplier is key for effective forecasting and replenishment planning. Another major challenge is when only a few retailers are interested in collaborating with a large supplier; it does not bring any benefit to the supplier. For example, a large supplier like P&G or Unilever who supplies to many retailers. If only Wal-Mart is interested in collaboration, for certain product categories, this may not mean even 10 percent of business for the supplier. It does not make much financial sense to get into this kind of agreement. So this has to be an industry wide phenomenon to reach a critical mass. So Wal-Mart turned to an industry standard body VICS (Voluntary Intra Industry Commerce Standards) to adopt CPFR as an industry guideline and standard. CPFR as an industry standard is sponsored by VICS as well as adopted by Global Commerce Initiatives GCI. In addition the UCC, Uniform Code Council is now funding the VICS CPFR working group. Although CPFR was originally started by retail/CPG industry, other industries such as transportation, healthcare, automotive etc., joined such collaboration programmes. The success of CPFR rollouts at Wal-Mart caused Target, Sears, Kimberly Clark, Procter and Gamble, Sainsbury’s, Tesco to ask their trading partners to join CPFR programme with them. Leading technology companies like SAP, Oracle, JDA, i2 etc., developed CPFR software solutions and got it certified in accordance with VICS standards.

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Difference between VMI and CPFR VMI is a one way process where vendors seek information (stock and forecast) from retailers at regular intervals—often this information does not consider last minute changes like promotions etc. Another point is VMI typically operates between RDC/retailer’s warehouse and the supplier so the replenishment quantities calculated by the supplier is based on aggregated forecast at warehouse level. This may result in stock depletion at individual store. The basic problem is that replenishment quantity calculation is a one way process and not something agreed by the retailer. Using CPFR, retailers and suppliers submit their own individual forecasts, then both forecasts evolve into one mutually acceptable forecast. The joint forecast is created through sharing POS information, existing inventory, and stock out information, promotions and supplier production constraints. CPFR is not restricted to only collaborative forecasting and replenishment and can extend to areas like collaborative product development, transportation, store design and shared logistics strategies.

CPFR: Nine Steps VICS has developed a nine step approach for CPFR starting from collaboration arrangement to performance assessment. Figure 6.7 talks about these nine steps. Each of these steps is described as follows:

Fig. 6.7 The Nine Step of CPFR

Step 1: Establish collaborative relationship Here the buyer and the seller establish the guidelines for collaborative relationship and co-develop a general business arrangement that includes the overall understanding and objective of collaboration, confidentiality agreement, data to be shared, and resources to be employed throughout the CPFR process. At the end of this process a blueprint document is prepared which defines the process, the roles of each trading partners, performance parameters and readiness of each organisation. This has the following steps: l Develop CPFR arrangements and statements l Determine CPFR goals and objectives l Discuss competencies, resources and systems l Define collaborative points and responsible business functions l Determine information sharing needs l Include experience of previous collaborations l Define service and ordering commitments l Determine how to resolve CPFR disagreements l Determine review cycle for collaboration agreement l Communicate collaboration arrangement to top management to get their feedback Step 2: Create joint business plan Here the seller and the buyer exchange information about their corporate strategies and business plans and develop a joint business plan. The retailer and the

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supplier can jointly develop a partnership strategy, category roles and objectives, item management profiles (e.g. order minimum and multiples, lead times, order intervals) for items to be collaborated etc. The steps are as follows: l Identify corporate strategy l Develop partnership strategy l Develop category roles, objectives, goals l Develop joint category and promotion plan l Develop item management profiles l Develop business plan l Develop item management profiles l Agree to joint business plan Step 3: Create sales forecast Consumption data is used to create a sales forecast that supports joint business plan. The steps here are as follows: l Analyse current joint business plan l Analyse causal information l Collect and analyse point of sale data l Identify planned events: Openings/Closings, Holidays, Promotions/Ads, New product changes etc l Update shared event calendar l Gather exception resolution data (Output of collaboration) l Generate sales forecast Step 4: Identify exceptions for sales forecast This step identifies the items that fall outside the sales forecast constraints set jointly by the seller and buyer. Output of this step is a list of exception items. l Retrieve exception criteria l Identify changes/updates by seller/buyer in the joint business plan l Apply constraints to sales forecast l Compare the value against exception criteria l Identify exception items Step 5: Resolve/collaborate on exception items This involves resolving sales forecast exceptions. Exceptions can be resolved by querying shared data, email, telephone conversations, meetings etc., between partners which may result in changes in sales forecast. Steps here are as follows: l Retrieve exception items and decision support data l Selection desired exception criteria/values l Research exceptions l Heighten collaboration l Submit changes to sales forecast Step 6: Create order forecast Shared sales forecast, causal information and inventory strategies are combined to generate a specific order forecast. The result of this step is a time phased, netted order forecast. The short term portion of the forecast is used for order generation, while the longer term is used for planning. The order forecast allows the seller to allocate production capacity against demand while minimising safety stock. The steps are as follows: l Provide sales forecast

Retail Distribution and Replenishment 133 l

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Provide data (Such as POS consumption data, store openings—closings, new products, promotion, inventory positions—on hand, on order, in transit etc) Analyse historical demand, shipment data and current capacity limits (supplier, production, and transportation) Retrieve additional item management profile data (order minimums and multiples, lead times, order intervals, frozen time fence, safety stock rules etc) Gather order filling/shipment execution feedback data Gather exception resolution data Create order forecast—generate a time phased, netted order forecast with forecasting tools

Step 7: Identify exceptions for order forecast This step determines such items fall outside the order forecast. Here the steps are as follows: l Retrieve exception criteria (Such as: customer service measure, order fill rate, forecast error) l Identify changes/updates (example: change in number of stores) l Determine impact on order forecast and apply constraints l Analyse exception items l Identify exception items Step 8: Resolve/Collaborate on exception items Similar to Step 5—the process is repeated for order forecast. This involves resolving order forecast exceptions. Exceptions can be resolved by querying shared data, email, telephone conversations, meetings etc., between partners and this may result in changes in order forecast. The steps here are as follows: l Retrieve exception items and decision support data from buyer and seller l Selection desired exception criteria/values (items with inventory levels >110 percent as target) l Research exceptions using shared event calendar and supporting information l Heighten collaboration through e mail, phone etc l Submit changes to order forecast Step 9: Generate order forecast This step marks the transformation of order forecast into a committed order. Either the seller or the buyer can handle order generation depending on competencies, systems and resources. The created order will consume the forecast. The steps here are as follows: l Extract frozen forecast from the order forecast based on the time fence, as agreed to in the collaboration agreement l Deploy frozen forecast l Create order l Transmit order acknowledgement

CPFR Cases of large scale deployment of CPFR are limited in number and there is at present no Indian retailer who was matured to this level. However there are successful pilot projects initiated by few leading retailers and their suppliers. The nine step CPFR model is the most ideal CPFR case—however most retailers did not target all the nine steps in one go and tried with few steps to begin with, stabilise on those and then venture into the next step. WalMart and Sara Lee are much talked about CPFR cases. Source: www.vics.org (accessed on 1st March 2009)

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WalMart and Sara Lee Branded Apparel CPFR Pilot This pilot project addressed three phases of CPFR: Creating the Sales Forecast, Identifying Exceptions to the Sales Forecast and Collaborating and Resolving Exceptions to the Sales Forecast. The pilot project started with 23 branded women’s underwear items, most of which are distributed across 2,400 stores. The project started in July 1998 and still running successfully. The collaboration focused more on identifying exceptions and resolving the exceptions than on creating a sales forecast. WalMart’s existing Internet-based vendor communications system was used as collaboration platform and VICS-EDI 830-transaction set was the data vehicle used to transmit data like sales forecast between companies. Metrics used for this pilot are: In-stock, Weeks on hand at store level, Forecast accuracy and Lost sales. The pilot project achieved several business benefits within six months of implementation like two percent improvement in retail store in stock, reduction of store level inventory, increase in sales, and an increase in retail inventory turns on the pilot items. Various people from both companies participated in the pilot project like people from forecasting/replenishment team, logistics, marketing, supply chain, sales etc. WalMart’s Retail Link Decision Support System was also used for drill down analysis. Source: www.vics.org (accessed on 1st March 2009)

DIRECT STORE DELIVERY (DSD) Direct Store Delivery is a term used by retailers to specify products that are delivered directly to the retail stores and placed on the shelves by a distributor and sometime by the manufacturer as well. DSD currently accounts for 25 percent of sales volume for U.S. supermarkets and a higher percentage for convenience stores. DSD is generally available for the following product categories: l Soft drinks l Bottled Water and Mineral Springs l Juice l Beer l Spirits l Ice creams The advantage of using DSD is that the manufacturer estasblishes direct contact with the customer’s store at the Point of Sale which can be used to improve customer retention and customer relationship through personal service. Besides this, he can realise additional sales opportunities and obtain first hand information about the market. DSD scenario is very common in soft drinks industry where a van loaded with soft drinks leave Coca-Cola or Pepsi factory directly delivers soft drinks to retailers, restaurants etc. There can be different scenarios like: l Delivery driver scenario: Here the van driver delivers pre-sold orders. l Pre-seller scenario: Here the delivery van not only delivers pre-sold orders but also takes orders for future period (in advanced countries mobile devices are used for such order booking) l Van seller scenario: Sells and delivers directly from the van without pre-sold orders. In DSD scenario the van driver can play an important role by providing information on promotion to retailers, cross sell—up sell during the delivery process, accept small changes in customer order, and fulfill additional orders for goods from truck stock if stock permits. Some companies have even gone to the extent where they use the van drivers to check promotion display compliance at customer outlets.

Retail Distribution and Replenishment 135 Route accounting Direct stores delivery systems require good ‘Root accounting process’. Route accounting process covers delivery of materials to customer, collection of returns and empties if needed, collection of cash or credit payments, if required and finally route settlement. The advantage is managing large complex routes from a central point, reduced material losses through tighter control, driver accountability and increased driver productivity, if all transactions are done through a mobile device. During the settlement process, materials and payments are balanced, differences are reconciled and charged to the appropriate accounts, goods issued and receipts are posted, and finally customer and driver accounts are credited or debited on the basis of a day’s delivery. Handheld devices If drivers are equipped with handheld / mobile devices, the efficiency of direct delivery process further goes up where the driver can perform following functions with this device: l Taking of orders for future delivery l Entries of deliveries of pre-sold orders l Payment collection entries l Recording of driver expenses l Recording tour and visit activities l On truck inventory management l Up and downloading of daily information at the end of the day to some back end software Four basic types of direct store deliveries can be defined: l One stop: The consignment is delivered directly from one manufacturer’s shipping point to one retailer’s dropping point. l Multi drop: The consignment from one manufacturer’s shipping point is delivered at three to five drop points belonging to one retailer’s organisation. l Multi pick: The consignment is loaded in more than one loading point and distributed to one retailer’s drop point. Multi pick and drop: The consignment is loaded in more than one loading point and distributed to more than one drop points.

MANAGING RETAIL HOME DELIVERY Overview of Retail Home Delivery Home delivery by retailers is an age old concept. Traditionally the small kirana stores in your locality had always done it for you when you had done your monthly purchase worth a handsome amount. This is also common for certain retail categories like white good retailers, furniture retailers etc., where it is difficult for you to carry the item. The retailer takes the responsibility of delivering the item to your home and in some cases help you in installing or fitting (in some cases specially for white goods it is done by manufacturer’s own staff). However the concept of home delivery was revolutionised by some food retailers like Pizza hut and Domino’s whose business model was built around this concept. Home delivery, within specified time, became their best value proposition. These days most of the large supermarkets and hypermarkets offer home delivery even for grocery items, if the purchase is worth a particular amount and the destination is within a particular distance from the retail store. It is important that the retailers have clearly defined policy for home delivery which is widely displayed at the store so that consumers are aware of it. Home delivery has separate set of logistics challenges for the retailer. He needs to make transport arrangements and drop boxes of relatively small sizes for hundreds of homes which have to be reached within a particular time. The consignment needs to travel during working hours of the day and within thickly populated city limits.

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Home Delivery Policy Retailers need to have clearly defined policy for home delivery. Policy may include things like: l Home delivery is applicable for categories like white goods, furniture, grocery etc. l Merchandise will be delivered only within X km (Example: 3 km) radius of the store l There should be a minimum purchase worth of Rs Y to be eligible for home delivery l Goods will be delivered within 24 hours l Perishable, dairy and some liquid products will not be part of home delivery (Example: fresh foods and vegetables, milk—butter, oil etc) l Consumers need to show the original bill while receiving the goods at his place. There can be specific home delivery policy depending on merchandise category. For example in the case of furniture the retailer may accept the responsibility for fixing the item as well free of cost.

Home Delivery Logistics Challenges Home delivery poses series of logistics challenges like the following: l Goods need to be delivered to individual houses i.e. small shipment size and huge number of drop points. l Goods are delivered during day time and mostly within city limits. The retailer needs to arrange for small trucks and these trucks need to travel during hours when traffic congestion is expected. l Goods need to be delivered within particular time period l Accounting for hundreds of small shipments l Goods need to be delivered in perfect condition l The retailer needs to have in depth knowledge of the locality i.e. every street name, road etc. l In some cases the retailer needs to check availability of people at home before delivery or need to deliver only at times when people are available at home as specified by the customer. In most cases retailers outsource this operation to a local logistics service provider who has good knowledge about the locality. At the end of the day the service provider submits to the retailer the signed copy received from customer to ensure that goods are delivered in perfect condition.

Home Delivery Domino—Free home delivery: Domino’s philosophy rested on two principles— limited menu and delivering hot and fresh pizzas within half an hour. Domino’s was also credited for many innovations in the pizza industry and setting standards for other pizza companies. It had developed dough trays, corrugated pizza boxes, insulated bags for delivering pizzas, and conveyor ovens. Domino’s entered India in 1996 through a franchise agreement with Vam Bhatia Corp in Delhi. With the overwhelming success of the first outlet, the company opened another outlet in Delhi. By 2000, Domino’s had outlets in all major cities in India. When Domino’s entered India, the concept of home delivery was still in its nascent stages. It existed only in some major cities and was restricted to delivery by the friendly neighbourhood fast food outlets. Eating out at ‘branded’ restaurants was more common. To penetrate the Indian market, Domino’s introduced an integrated home delivery system from a network of company outlets within 30 minutes of the order. What really worked with the Indian mind set was the promised 30-minute delivery. Domino’s also offered compensation of Rs 30 off the price tag if there was delay in delivery.

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IT FOR RETAIL DISTRIBUTION AND REPLENISHMENT Retail distribution and replenishment process needs support from information technology for efficient operation. Some common areas of IT application here is shown in the table. Table 6.1 IT for retail distribution and replenishment Information technology application Computer based system for calculating order/replenishment quantity EDI (Electronic Data Interchange)

Point of sales (POS) system Bar code and scanning ASN (Advanced Shipping Notification) ERS (Evaluated receipt settlement)

How it helps This application either based on minimum maximum level or based on last period’s sales figure can calculate replenishment quantity keeping logistically efficient quantity in mind. Retailers adopting continuous replenishment process/vendor managed inventory or CPFR need to have EDI technology in place. This is must for effective VMI because sales data from POS system is sent to supplier as an EDI message. This helps in good receipt and inventory updation at store. This keeps warehouse receipt section ready for inbound shipments. This is a common technology for settling supplier payments electronically.

MEASURES FOR RETAIL DISTRIBUTION AND REPLENISHMENT There can be variety of metrics to measures the efficiency of retailer’s distribution and replenishment process. Some of the common ones are as follows: l Inventory turn at distribution centre l Inventory turn at retail l Average inventory carrying cost l Stock out levels at store l Fill rates from the supplier l Customer service levels l Reduction in lead time and product freshness l Planning and ordering cost l Customer ordering errors l Percentage of sales people time dealing with replenishments l Percentage reduction in paper work l Number of shipments l Truck utilisation

Walmart—An Example of Fast Replenishment Cycle Figure 6.8 shows an example of one of the best replenishment cycles in the world that of Walmart. As soon as the customer make a purchase at Walmart store, point of sale system captures the sales transaction and the data is transmitted to warehouse management

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system to update the inventory. Based on min max limits set in the system and based on last day’s sales, order is generated on the corresponding supplier. Merchandise is shipped by the supplier to warehouse from where it is cross docked to store. The store provides the merchandise back on the shelves.

Fig. 6.8 An Example of 48 Hours Replenishment Cycle Source: Presentation made by Casey Keller, Rick Buonauro and Aicha Aissaoui of Walmart (www.cusn.edu, accessed on 1st February 2008)

Conclusion Replenishment is one of the critical processes for the retailer which ensures that shelves of his store are never out of stock. For this he needs to synchronise two operations: ordering the right product of the right quantity at right intervals and ensuring that the product is distributed efficiently. For efficient distribution the retailer can follow various distribution models like directly to store, through RDC, through supplier’s warehouse and through supplier’s warehouse and retailer’s RDC to store. l There are several replenishment models like computer based ordering and continuous replenishment programmes. In the first one the retailer calculates the order quantity based on a variety of factors while in the second one, the supplier takes all the responsibilities for replenishment. In vendor managed inventory system of the supplier takes responsibility of managing the retailer’s inventory by having the retailer’s sales and stock information on regular basis. Information technology plays a leading role in VMI. VMI process and its advantages are discussed in this chapter. l CPFR is an advanced level of collaboration relationship between retailer and its supplier through joint development of business plan, joint forecasting and replenishment planning. The nine steps of CPFR process is detailed in this chapter and the advantage of using this technique. l Direct store delivery is a replenishment model started with the beverage industry where the manufacturer directly delivers the stock at retail outlets. Different types of DSD models, the process of route accounting and advantages of DSD are detailed in this chapter. l Home delivery is becoming part of retailer’s value proposition for certain category of merchandises. This incorporates certain complexities in retailer’s outbound logistics operations; however this can be an important customer service differentiator. The retailer needs to have a clear home delivery policy and needs to manage his service provider effectively for a satisfying effective home delivery system.

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Review Questions 1. 2. 3. 4. 5. 6.

Explain the VMI process What are the advantages and disadvantages of VMI/CPR? Explain the nine steps of CPFR process? What are the advantages of CPFR over VMI? Explain the direct store delivery process? What are its advantages? How information technology helps in VMI and CPFR process? What are the different retail collaboration tools? How they differ in terms of technology and process maturity requirement? 7. Explain the difference between computer assisted ordering and CRP? 8. Explain the difference between different retail distribution models 9. How home delivery policy impacts retailer supply chain planning?

Objective Type Questions 1. 2. 3. 4. 5.

Explain the difference between VMI, CMI and SMI? What are the types of EDI messages required for VMI? What are the nine steps of CPFR process? What are the kinds of EDI messages relevant for CRP? What is Bullwhip effect?

Assignments 1. Study three retailers from different sectors (Grocery, Apparel, Consumer durable etc.) and compare how goods are distributed from the supplier to the retail store? 2. Compare the home delivery policy adopted by three organised retail chains in your locality? What kind of supply chain infrastructure have they built for this? 3. Study ordering policy of two retailers. How order quantities are calculated? What factors are considered for ordering? How effectiveness of order management is measured?

[CHAPTER]

7 LEARNING OBJECTIVES

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In this chapter we will explain the following concepts: l

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Retail transport n Transport planning n Transportation execution processes n Using IT for transport management n Concept of transportation management maturity model n Measures of transport management n Green transport Retail warehousing n Basic functions of a retail warehouse n Value added service of a retail warehouse n Retail warehousing best practice—Cross docking n Concept of warehouse management maturity model n Use of IT for warehouse management n Measures of warehouse management Inventory management n Reasons for having inventory and cost of inventory

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Concept of inventory management framework and inventory management pyramid Inventory control tools Concept of inventory models Inventory management best practices Inventory management case study Use of IT for inventory management Measures of inventory

Evolution of retail as an economic sector in the last decade has seen series of actions at the front end i.e. fight for establishing a retail brand, creating awareness, establishing stores at premium locations, putting strategies in place for having greater footfall in the stores etc. However as the market is consolidating and retailers also realised what works in this country and what does not—one thing is becoming clear to them that in the near future, success will depend largely in how effective they are in managing the back end as well i.e. the ‘Close-Knit’ supply chain. Unfortunately at the back end things have not changed much—Indian retailers have a long way to go to match the supply chain performance and capability as that of Wal-Mart (U.S.) and other such benchmark retail-SCM organisations. The country’s infrastructure and policies also has a role to play here. The size of the logistics industry in our country has reached US $ 90 billion and is expected to reach US $ 110 billion by 2010. Transport and warehousing are the two most important elements of this industry. Before the concept of supply chain management became popular, most of the logistics professionals used to believe that these are the only two elements of logistics. Nevertheless transportation and warehousing together still contribute more than 50 per cent of logistics cost for a retailer. In this chapter we will start with retail transport first, then discuss about retail warehousing and finally end with logistics outsourcing as for most retailers transport and warehousing is outsourced to a logistics service provider.

RETAIL TRANSPORT Transport Planning Transport managers in retail industry today are facing many challenges like which transport vehicle to select, how to reduce cost, how to make deliveries fast etc. Figure 7.1 explains some of these challenges. Transport expenses are important element of cost that every consumer pays whenever we buy something from retail stores. This component may vary depending on the type of product. For example, for certain food products like rice, salt, biscuit, fresh fruits and vegetables, percentage wise transport cost can be a good percentage of product cost, whereas for some other categories like fashion apparels, perfumes this percentage may be marginal. Retail transport planner also needs to find innovative solutions to different retail industry specific unique transport requirements like: l Managing cold chain l JIT Deliveries i.e. frequent deliveries in small lots l Managing global logistics as most retailers source from low cost countries l Multiple mode and multi zone transportation l Pressure on reducing lead times

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Fig. 7.1 Challenges of Retail Transport Planner

Increasing compliance requirements Increasing importance of shipment tracking l Cross docking l Milk Runs l Large no of SKUs add to complexity in load building l Vendor Managed inventory, cntinuous replenishment challenges l Special packaging and building requirements l Seasonal demand Figure 7.2 shows some of the global trends that are affecting transportation industry in general today. The left and right blocks in the figure some of these trends. These trends are forcing retailers to design innovative models of transport and distribution (Some of this is mentioned in the lower block) l l

Legs in Transportation There can be different legs in transportation for manufacturers and retailers like: l Primary distribution: Goods move from factory to manufacturer’s warehouse or distribution centres l Secondary distribution: Goods are transported from manufacturer’s DC to retailer’s RDC l Tertiary distribution: Goods are transported from retailer’s RDC to store However these linkages may vary depending on volume. If there is a full truck load volume from a particular store on a manufacturer, goods may move directly from factory to retail store surpassing manufacturer’s DC and retailer’s RDC. In the same way goods may move directly from manufacturer’s warehouse to store surpassing RDC.

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Fig. 7.2 Trends Affecting Transportation

Benefits of having a Good Transport Management System A better transport management is a win win situation for all stakeholders: l For shippers, optimised transport improves logistics cost structure l For carrier, better use of capacity enhances competitiveness l For receiver of shipments i.e. retailer, it is the lower prices of purchased goods which helps him to develop more efficient inbound supply chain. l Consumer benefits from a better choice of fresh goods at lower prices l The community as a whole benefits from fewer miles travelled, lesser gaseous emissions, less noise and less traffic congestion. Better transport management help in cost reduction in following ways: l Reduce expedited order costs due to better planning and system directed exception handling. l Increased load consolidation from LTL (Less then truckload) to FTL (Full truckload) l Better carrier and mode selection l Lower administration cost with automation of tendering, shipment creation and consolidation l Utilise assets (drivers and equipments) more effectively l Lesser transit inventory Better transport management helps in improving service level in following ways: l Lesser out of stock l Lesser lead time l Product remains fresher

Transportation Planning—Drivers and Tools Better planning for transport means a variety of steps for the retailer such as: l He needs to ensure that the vehicles are running full i.e. the space within the carrier is fully utilised and it is not running half empty.

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He needs to ensure that vehicles are travelling the shortest possible distance to reduce transport lead time and cost l The optimum transport mode and carrier are selected so that it gives optimum service at best possible cost and causes least possible damage to the environment These different objectives are defined as drivers for better transportation planning. The planner can use a variety of tools to meet these objectives. Figure 7.3 shows a list of such drivers and tools. l

Fig. 7.3 Retail Transport Planning—Drivers and Tools

Improving Vehicle Fill Since carrier has restrictions on weight and volume it can carry, filling the vehicle with optimum load is always a challenge for the retailer. Light bulky products will fill available cube before utilising available weight. Conversely heavy dense products will use available weight before utilising available cube. Optimisation on both measures may be achieved by combining these two different types of loads. Poor vehicle fill can occur for different reasons like: l Not following unit load principles (recommended pallet dimensions, load heights etc.) l Carrying capacity lost to transport items like pallets l Many small orders of small quantity with different SKUs, sizes etc. l Not enough product volume to fill the vehicle l Service requirements (vehicle needs to leave immediately) l Lack of synchronisation between demand and supply side activities l Distribution network design i.e. location of warehouses, production sites etc. Transportation planning needs to improve vehicle fill by measures like better load design, truck load building etc.

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Tools Vehicle space optimisation This means placing the loads in trucks in the most effective way and it involves: l Put loads inside truck according to factors such as material length, width, height, maximum truck weight and other parameters. l Put load inside truck considering unloading sequence. l Sophisticated optimisation algorithms are used these days which considers customer specific and material specific pallets as well as customer specific limit on pallet height and stacking preferences, and calculates the most optimised locations for each pallet. Example: An FMCG company needs to send several FMCG products together from its wholesaler to a retailer. Products include bulky food products (high in weight, less in volume) like packed atta, salt etc and comparatively lighter items but which take space (like ready to eat food). These need to be loaded, preferably in the sequence in which they are to be dropped to retailers i.e. materials to be dropped to first retailer needs to be in the outermost portion of the carrier. The company has taken help of a software algorithm to solve this complex optimisation problem i.e. which items need to be placed at which portion of the carrier to prevent overloading, to obey the volume restrictions and drop sequence.

Reducing Empty Running This focuses on minimising the number of vehicle trips travelled empty. A variety of tools can be used to achieve this objective like l Consolidation of deliveries l Network optimisation l Use of routing and scheduling software to build transport circuits. Empty running can occur for different reasons like: l Lack of coordination between suppliers and carriers within a region l Lack of planning and scheduling l Insufficient visibility of opportunities for building efficient circuits l Incompatibility between vehicle characteristics and product requirements This can be reduced by greater cooperation to pool flows and consolidate operations among many parties. Generally there is conflict of interest between manufacturers and retailers. Manufacturers will like to ship full truck loads while retailers want both smaller and more frequent deliveries to reduce inventory holding and have fresh consignments. This conflict can be addressed through joint negotiation of delivery frequencies and schedules, increased flexibility in the definition of time windows, collaborative operation of traffic capacity planning and routing and scheduling processes.

Tools (for Reducing LTL—Less than Truck Load) Consolidation This means bundling of many small deliveries into fewer, larger loads. In many cases the retailer’s suppliers may not have enough business volume to fill a single truck with each delivery they make on regular basis. In those cases goods from different origins can be bundled into one shipment for same destination while meeting the delivery requirements. Consolidation can be a win win situation for both supplier and retailer. There can be different options for consolidation like consolidation of trucks, pallets, shipments or SKUs. Consolidations can be of different types like:

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Supply Chain Management for Retailing Orders for same destination are consolidated: By consolidating deliveries for one destination, the total delivery sizes i.e. drop size for this destination is increased i.e. the delivered quantity per stop is increased. Cost of unloading and handling is reduced. Orders for destinations which are close are consolidated: This is consolidation of several delivery destinations in the same geographic area that may be served by the same delivery tour. This is also called increasing stop density i.e. distance between the stops are reduced. This results in reduction of unit transportation cost. In Figure 7.4, previously three trucks were used for dropping shipments at three different destinations which are close by. Later on these three loads are consolidated in one large trailer which drops shipments at all three points in one go—thus reducing total transport miles and associated cost. Multiple date order consolidation: This is consolidating orders with different delivery dates. Example of this can be where the supplier convinced the retailer to take the shipments of next two days together (which could ideally be two different shipments) so that he can combine these two to a full truck load and agreed to pass on the benefit of reduced transport cost to the retailer.

Fig. 7.4

Transportation Consolidation by Delivery Points

Generally LTLs used hub and spoke networks to facilitate consolidation. From different places LTLs come to one hub. These terminal networks are used to move freight from one location to another and these terminals have large break bulk centres which sorts freight by destination region in full truck loads/bigger carrier. In Figure 7.5 from this hub to the retailer’s main RDC (Regional distribution centre), the main leg of the transportation is through ship which is very cost effective. From RDC, materials again get transported by truck to different stores. This is also a good example of multi mode transport.

Example of Consolidation A cosmetic manufacturer replenished the five RDCs of a retailer from his own warehouse at least once a week with an average volume per shipment and per destination of between one to six pallets. This was reduced to one weekly delivery in either full trucks or railway containers to one centrally located RDC.

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Fig. 7.5 Transport Consolidation by Network Design

Milk runs. This is used when the retailer expects several small loads from suppliers and consolidates these to a full truck load by collecting shipments from different supplier’s premises and brings it to the retail store or RDC warehouse in a full truck load.

Example of Milk Run Several dairy companies collect raw milk from individual farmer’s house, consolidate it at one central point and then send it to milk processing unit for further processing in full truck load.

Increased Productive use of Transport Assets Transport assets (trucks, trailers, refrigerated vehicles etc.) need to generate high ROI and hence productive use of these assets is essential. Lower utilisation of transport assets occur due to: l Poor planning of routes and delivery schedules l Access restriction in certain areas like city centres and towns (like trucks reaching after 6 A.M. need to wait outside the city full day and are allowed only after 9 P.M.)—This needs to be taken into account in planning l Limitations of operating hours (retailer’s distribution centres may accept delivery only between 9 A.M. and 6 P.M.)—Need to be planned l Limitations of available delivery hours l Delays in loading and unloading l Traffic congestion l Time required for vehicle maintenance/vehicle breakdown etc.

Tools This calls for doing outbound planning with matched return load in mind. This calls for building effective vehicle ‘circuits’ to reduce empty running. This calls for higher level of co-operation

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between shippers and receivers of goods and logistics and transport services providers to synchronising delivery and collection schedules.

Example Tesco improved logistics efficiency by using suppliers’ vehicles to make store deliveries on their return trips (rather than travel empty) i.e. the supplier’s vehicle should bring items from supplier to Tesco’s RDC and while returning take some items (which may be different from what he bought) from RDC and deliver at Tesco stores on its way.

Reduce Distance Travelled Reducing distance travelled is a major objective for all retailers as lesser distance means lesser time, cost and in some cases better freshness of the product. For some products like fresh fruit and vegetable, dairy products, livestock items etc. this is absolutely necessary due to very nature of the product itself.

Tools Route planning/dynamic route determination This is planning of the route that the particular vehicle should take while delivering everyday for example from RDC to different stores. Route planning needs to consider factors like the maximum time allowed between the collection and delivery of goods, the distances between stores, cost of transport etc. These days optimisation algorithms are used to calculate optimum route where the objective function is to minimise transport cost and time under several constraints like the feasible route, maximum time allowed between collection and delivery (specially for perishable items) etc. In some cases the route is dynamically determined based on the current position of the carrier. Route planning also means despatching deliveries by matching vehicle and drivers to customers, thereby bringing improvements in the use of drivers and vehicles and reducing cost. Customers typically have fixed days and times when deliveries are received; a customer receiving multiple deliveries during the same week can be assigned to different routes for example, on Mondays and Thursdays. Each of the day’s routes can include a different set of customers. Continuous move A continuous move is the systematic linking of two loads where the destination of the first is at or near the origin of the second and the delivery time and pick up time are within a set, achievable time frame. A continuous move can apply to as few as two stretches or as many that meet the necessary criteria. They can be applied to one or multiple shippers’ freight who would all share proportionately the benefits. This plan multiple freight movements in succession by the same carrier and with the same piece of equipment. Continuous move routes can be created manually or by sophisticated optimization algorithms automatically.

Example The leading Indian consumer goods company ITC uses transportation planning and vehicle scheduling tool from SAP to plan the individual route of trucks on everyday basis for secondary distribution. The optimiser tool runs on daily basis and recommends the optimum root which is considered while generating delivery orders for different customers.

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Reduce Cost by Better Transport Mode Reducing cost by more cost efficient transport mode is another option most retailers are exploring these days. Beyond cost, mode of transport plays an important role in carbon footprint as different transport options—train, plane, ship and truck have different carbon tradeoffs between cost, service level and carbon impact. Train and ship can be more preferred options from logistics cost and green logistics prespective. However this may call for carrying higher transit inventory and long lead time for transport, so decision needs to be made with proper trade off.

Tools Multimode transport planning This means building shipments for orders on multiple modes (example can be: breaking a particular shipment into three modes, rail from plant to port, vessel from port to port, truck from port to customer). Multi mode transports are getting popular these days for issues related to road transport like high direct and indirect costs of road transport as a result of pollution, road damage, accidents etc; effects on road congestion on supply chain efficiency and cycle times, roads are not environment friendly mode of transport; and competitive costs of rail/sea on long distance. Figure 7.6 shows different transport mode available for transport.

Fig. 7.6 Different Transport Modes

Carrier/Mode optimisation. Determines the best carriers and models of transportation based on price, due dates, contract requirements and other constraints. This optimises carrier assignment for selected orders.

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Example Tesco introduced a daily rail service to Scotland, which takes 26 truck loads a day off the roads and invested in more double-deck trailers which give higher load fill Walmart reduced road miles by five percent by switching to rail. l

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Improve Cost and Service by Better Transport Planning Better transportation planning and scheduling solutions help in reducing costs and improves customer service.

Tools Vehicle Scheduling Once orders are taken, deliveries must be scheduled. Efficiency of shipments can be increased by grouping customer deliveries on the basis of vehicle, driver and customer sequence with consideration of vehicle, driver and tour restrictions. So vehicle scheduling involves decisions like the type of vehicle to be sent based on delivery type, sequencing of deliveries and finding optimised delivery schedule. Finally based on vehicle scheduling the retailer will develop a daily list of route for each vehicle, the start time and the time when they should be back (Example of vehicle schedule: on 15th January vehicle A should start for route X by morning 10 A.M. and should return back by 6 P.M. to RDC after delivering at 6 different stores). Optimisation algorithms can be used for better vehicle scheduling. Collaborative transportation planning with suppliers, customer, 3PL/TSP The real benefit in cost can be achieved in transportation if there is collaboration between different players in transport ecosystem like shippers, logistics service providers and 3PL. There can be different levels of collaboration like: 1. Collaborative capacity planning with carriers: Here retailer exchanges expected daily number of shipments with carriers; give carriers access to mid-term plan via the Web and carrier uses this information for carrier optimisation. 2. Collaboration with trading partners for load and capacity planning: This enables collaboration between different shippers to plan shipments and share carrier capacities.

Transport Constraints However a better transport planning also needs to work with several transport constraints. Figure 7.7 shows some of these constraints. Explanation of some of these constraints: l Vehicle capacity (weight and volume limitation) l Vehicle type (each type of vehicle has its own service level and associated cost. For example aircraft is a fast mode but it is very costly. Ship is a cheaper option but requires very long lead time) l Opening hours of location (retailer’s distribution centre may accept shipments only during particular hours of the day say from morning 9 A.M. to 6 P.M. in the evening) l Access restriction at city centre during particular hours of the day: a growing number of large cities are introducing regulations to restrict large good vehicles from accessing the city centre and other urban areas and even if large vehicles are allowed, it is only during particular hours of the day. Manufacturers need to use smaller delivery vehicles for city centre deliveries. This

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Fig. 7.7

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increases transport cost as them more number of vehicles/more trips are required and more congestion at city centres. Moreover if time windows for loading and unloading are restricted, this means more vehicles are trying to access the city centre at the same time leading to increased pollution, more cycle time etc. Stacking constraint—heavy materials can not be loaded on top of light materials Drop sequence—materials should ideally be loaded in the truck in the same sequence as they should unloaded in different stores Handling resources—material transportation also needs to consider handling capacities at source and destination locations—whether there are required crain, forklift etc., to unload the materials etc.

Transportation Execution Process Transportation execution processes are the transaction oriented processes that the retailer needs to carry out for effective management of transportation processes. These processes can be grouped into five set of processes as shown in Figure 7.8.

Fig. 7.8 Transport Execution Process

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A. Carrier selection In this process the retailer decides which transporter will carry his loads. If the retailer uses his own fleet then this process is simple. However these days most of the retailer’s transportation is outsourced and in that case the process can range from very simple to most sophisticated ones. Different process involved here can be as follows: l Tendering/Request for quotation: the retailer asks for quotation from different transporter including different routes the transporter needs to cover, service levels expected with an approximate estimate of yearly transport load. l Receiving replies and evaluation of offers. l Finalisation of transporter for each route with SLAs (service level agreements) and rates for each transporter. l Using bidding/auction platform for carrier selection: the retailer uses an e procurement or auction platform to get the best price for a particular route from several transporters and thereafter finalises the carrier based on the best bid. l Contract management: the retailer enters into yearly contracts with transporters and regularly monitors contract compliance and carrier performance. B. Transport documentation Typically transportation process involves managing a series of documents created by retailer, supplier, transport service provider, insurance company and import— export authority. Retailers need to manage these documents for effective transportation process. A list of such documents can be: l Pick list l Transport challan and invoice l Delivery documents l Test certificates (if required) l Insurance copy l Proof of delivery l Import and Export documentation (in case goods are moving out of country) l Transport contracts and orders l Parcel manifesting: ensure compliance with the requirements of major parcel carriers such as UPS and FedEx. C. Shipment and despatch process This may mean series of steps like: l Create shipment: in this step the orders are grouped with common service requirements and freight terms l Create Load: in this step the lowest cost mode is assigned to shipments which meets desired service level l Assign carrier to load l Schedule pickup D. Managing transport visibility and exception Materials need to be tracked while these are in transit—this can happen when the materials have left supplier’s factory but have not reached the retailer or have left retailer’s RDC but have not reached the store. Visibility to inbound and outbound shipments down to SKU level is important for retailer. Once there is an exception i.e. delayed shipments or accident of the carrier, the same needs to be notified to interested parties and necessary action to be taken. E. Financial settlement These processes are related to paying the transporter for carrying load. Typical steps will be: l Receiving transporter’s invoices, reconciliation and audit

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Sorting out issues with transporter or debiting in case there is a damage or transport delay Payment and financial settlement through manual or electronic transfer of funds Automated bill payment Shipment costing

F. Transport performance reporting, analytics This involves tracking performance of carrier (against SLAs), benchmarking carrier performance and tracking performance of transportation process as whole. This may call for generating variety of reports like: l Carrier delivery performance l Percentage of transport damage l Demurrage cost performance as trucks could not be unloaded on time l Loading, unloading cost, route wise transport cost l Transport cost as percentage of overall supply chain cost

Transportation Cycle for a Retailer Transportation cycle is the sequence of activities that a retailer carries out for shipping a set of articles. Let us start with a simple transportation cycle as shown in Figure 7.9. A full truck load delivery from a retailer’s RDC directly to a store is one such example. The process shown has the following steps: l Receive order RDC receives order from store. For a continuous replenishment process, there may not be any order and the replenishment decision may be based on stock information at store. l Create shipment In this step the orders are grouped with common service requirements and freight terms. For example on a particular day the RDC had received requirements from store of different food items like grocery, vegetables, fruits and dairy products. Among these items vegetables, dairy and fruits have similar service requirements i.e. they all need to be delivered

Fig. 7.9 Transportation Cycle for a Retailer

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Supply Chain Management for Retailing on the same day but dairy products have a different freight term (need to be transported in refrigerated vehicles) from fruits and vegetables (normal vehicle required). RDC will group orders of vegetable and fruits in one shipment, dairy in the second and the grocery products in a third shipment. In this step extremely large orders or orders requiring multiple shipments or periodic delivery schedule can be split. Create load In this step the lowest cost mode is assigned to shipments which meet desired service level i.e. looking at the delivery date at store, it is decided whether the shipment will go by air, sea or truck, trailer etc. It is expected that RDC is within few hundred kilometers of the retail store and most of the load will move by road and possibly by truck. The next decision point is which type of truck to be used i.e. whether to use a 9 MT truck or 12 MT truck or something else. If there are partial loads, then consolidation possibilities need to be thought of. For example, if the store had asked for 38 MT of material, RDC may send three full 12 MT truck and another 2 MT can be sent via a different mode (say courier) or is consolidated with other shipments of nearby stores. In case of this kind of LTL (less than truck load), there are different options which retailer needs to evaluate like consolidation, pooling, zone skipping, multi stop truck load etc.—these are detailed later. At the end of this step the RDC finalises which type of carrier to be used for the shipment and how many loads to be used. Assign carrier to load Some retailers have their own carriers and most of them outsource their transport operations. In this step, retailer decides the particular loads that would be given to each carrier. Carriers are assigned to load based on cost, service, performance, availability etc. At times, retailers have fixed carriers for each zone and in that case the problem is simple. Sometime particular load may require special material handling equipments for loading, unloading which the retailer needs to communicate to the carrier. Schedule pickup In this step, the shipment is released to warehouse for picking and work scheduling. Create delivery documents Here relevant delivery documents are created (like pick sheet). In transit tracking and resolve exceptions Retailer tracks the consignee from the point it leaves RDC till it reaches the store. Retailer can use some manual tracking system like taking information through phone or can use sophisticated tracking system which gives the detailed status of each shipment as soon as shipment number is typed in. In case there are some exceptions like delay, the retailer needs to take corrective action immediately otherwise the store may face a out of stock situation. Delivery confirmation Once the shipment reaches the store, the proof of delivery (POD) is collected from the store. This can be a physical document or sent electronically through EDI. Sometimes it is the basis for transporter payment. Freight payment and claim management Once the shipment is delivered, transporter submits his claim which is processed by retailer. In case of transit damage or delay beyond a limit, retailer can deduct some percentage of transporter’s payment. Carrier performance measurement Generally most of the retailers have a system of measuring transporter’s performance based on criteria like schedule performance, damage record, service flexibility (arranging a transport at short notice) etc.

Using Information Technology for Transport Management Information technology is increasingly getting used in better management of transport. There are different facets to technology usage i.e. using more high tech carriers that speed up the process of material handling, using better network systems for tracking carriers and using information technology for better transport planning. Here are some examples:

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Table 7.1

Information technology for transport management

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Tracking vehicles on Global Positioning Help in tracking vehicles in transit the move Systems Wireless technology Wireless asset tracking companies like GobeRanger, Qualcomm and Savi technology help in tracking and tracing Building optimum Truck load building These applications help in building optimum load for the load so that vehicles technology truck, keeping truck’s space and load carrying capacity in never runs empty mind. Load can be built keeping the drop sequence in mind and properties of materials. Specialised application vendors like ‘loadbuilder’ helps in three dimensional truck load building. Building optimum Route optimisation These applications help in building optimum route keeping route so that vehicle application multiple drop points in mind and ensure that the truck travel minimum travels minimum route while dropping at all the points. distance Special constraints can be built like the total transit time should not cross more than eight hours for perishable items like milk, which needs to reach processing centre within specified number of hours of collection. SAP’s APO TPVS (Transport planning vehicle scheduling), i2 route planner, GLOG are leading applications. Better planning of Transport planning These applications help in better planning of vehicles i.e. vehicles so that applications when and what size vehicle needs to be ordered looking at minimum number of the daily shipment plan, service level required and vehicle vehicles are used capacity. SAP Transport Management (TM), i2, Oracle’s GLOG, Manugistics, Manhattan etc., are leading players in TMS application space. Transport Network optimisation These applications help in recommending points of transport consolidation points vendors consolidation in supply chain network. Logic tools is a planning leading vendor in this space Supporting transport Transport management These applications support freight costing, settlement of transactions applications transport vendors, transport documentation preparation etc. SAP TM, Oracle’s GLOG are leading vendors here. Visibility in ocean Ocean specific portals Consolidate data from various ocean carriers for shippers to provide end-to-end visibility. Better fleet On board computing Enables better matching of available vehicles to potential management loads, support better fleet management and help extend effective engine life through monitoring vehicle use.

Transportation Maturity Model Figure 7.10 explains the concept of transportation maturity model. The base of this pyramid talks about the transportation execution processes which any retailer needs to perform to be in the business. The next layer talks about the basic level transportation planning processes that help retailers to improve vehicle feel, to better consolidate load and greater optimisation of transport

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Fig. 7.10

Transportation Maturity Model

routes. These capabilities help retailer to improve cost performance and transport service. The highest level of the pyramid talks about advanced transport optimisation practices that help a retailer to use transport as a tool of competitive advantage.

Measures of Transport Management Different retailers adopt variety of measures to measure efficiency of transport management. The table below shows some of these measures. Table 7.2 Measures of Transport Management Measure Transportation cost as a percentage of supply chain cost/as a percentage of turnover Transport lead time adherence percentage

Definition Transportation costs including all company paid freight and duties from point of manufacture to store as a percentage of supply chain cost/turnover How many times the transporter had reached the destination within expected lead time i.e. in how many occurrences there are delays as percentage of total number of occurrences (Contd.)

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(Contd.) Transit inventory percentage Percentage of empty running

Transport settlement error percentage

Percentage of transit inventory as part of total inventory In how many occasions in a particular time period (say month) there are cases of empty running divided by total number of occasions. This is an indicator of planning efficiency Percentage of invoices having errors divided by total number of invoices

Green Transport Efficient transport management is one of the major opportunities to reduce carbon footprint. This can be achieved by variety of ways: Relooking at mode of transport Mode of transport plays an important role in carbon footprint as different transport options—train, plane, ship and truck have different carbon tradeoffs between cost, service level and carbon impact. Train and ship can be more preferred options from green logistics perspective. However this may call for carrying higher transit inventory and long lead time for transport—so decision needs to be made with proper trade off. l Tesco introduced a daily rail service to Scotland, which takes 26 truck loads a day off the roads and invested in more double-deck trailers which give higher load fill l Walmart reduced road miles by five percent by switching to rail. Using alternate fuel Retailers are exploring a variety of options like using natural gas, biodiesel, biofuels, electricity etc., as alternatives to conventional petrol and diesel. Here are some examples: l Tesco piloted Mercedes dual-fuel diesel and natural gas trucks and used biodiesel for part of its distribution fleet. l Walmart is currently testing biofuels for the distribution fleet. l Ikea is planning to use hybrid vehicles for greener operation. l Sainsbury’s has started to use zero emission vans for its home delivery service and planning to use electric vans for its urban deliveries. Consolidating shipments Shipment consolidation is one of the major opportunities to reduce the carbon footprint. Shipment consolidation can happen in variety of ways like sending lesser shipments to stores i.e. sending large shipments or planning the return load early enough etc. However consolidating shipments have a bearing on inventory replenishment policy i.e. replenishments may not happen exactly as per the requirement in small lots more frequently following just-in-time principles. Fewer but larger shipments may cause higher inventory levels, higher storage cost and can affect service levels. So a decision needs to be taken on a holistic basis. Tesco reduced the number of deliveries to convenience stores and is also trying to improve logistics efficiency by using suppliers’ vehicles to make store deliveries on their return trips (rather than travel empty). Reducing food miles Today many supermarkets are trying to reduce the food miles their products travel. Again the decision needs to be taken on a holistic basis. For example, growing a crop at a slightly far away place in natural conditions and then transporting it may be more environmental friendly than growing them under glass in a nearby place heated by gas or oil.

RETAIL WAREHOUSING Retail Warehousing Overview Retailers need warehouses for different purposes like warehouse at store which is generally the

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backyard of the store for storing merchandise once they come from suppliers/RDC and before they are put into shelves; warehouse at RDC for temporary storage of merchandises from different suppliers and before they are shipped to different stores. There can be bonded warehouses as well where materials are kept once they are imported and before import clearance. These days the idea is to keep the materials in the warehouse for lowest possible duration. This was the driver for innovations in retail distribution like cross docking (which reduced the time the merchandise needs to spend in RDC) or floor ready merchandise (which reduced the time the merchandise needs to spend in store warehouse for shelf preparation like packing, labeling, tagging etc.). Traditionally inventory control, goods movement, storage and shipping (known as pick, pack and ship) are the most important functions of a retail warehouse. However now a days a retail warehouse performs many other functions like managing reverse logistics, value added services and a host of reporting.

Basic Functions of a Retail Warehouse A retail warehouse does multiple of functions. Figure 7.11 shows functions of a modern day’s retail warehouse.

Fig. 7.11

Functions of a Retail Warehouse

A. Goods Receipt Receiving goods is one of the fundamental processes in every warehouse. Warehouses can be part

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of the store or regional distribution centre. Goods are received from manufacturer/supplier, quality check is done, and goods are returned which are not as per quality specifications. Sometime goods receipt can be also against returns from retail store. Sometime warehouses receive an advanced shipping notification (ASN) before the actual shipment. Use of software is common in this process as volume of daily transactions can be huge. Any retail RDC warehouse depending on size can receive a few thousand articles on regular basis. There can be several sub processes under this like: l Receiving goods against a purchase order l Receiving goods against a delivery schedule l Damage identification on receipt l Unloading and unpacking l Capture lot information on receipt l Reconcile purchase order/delivery schedule line item with receipt l Doing quality sampling check (in some cases) l Vendor returns in case the goods are not as per quality specifications l Receiving advanced shipping notification (ASN) receipt from manufacturer before receiving a consignment l Receiving returns (e.g. store had returned a consignment to RDC) l Posting goods receipt (with total quantity, accepted quantity, date etc.—this becomes the basis for rating the supplier) Typically every goods receipt system has some reporting capabilities like receiving exceptions, vendor report card, open Purchase orders (PO) etc. These days with Bar codes and Radio Frequency (RF) scanner goods receipt process has become simpler.

B. Put-away Once the goods are received in warehouse, the next important step is to move materials from receiving area to point of use or storage location. This process of moving material from the dock and transporting it to a warehouse’s storage, replenishment, or pick area is known as Put-away. Some guidelines on this process are as follows: l Same day put away Ideally goods should be put-away the same day it is received. Sometimes delay here can result in product damage as the merchandise is moved again and again, to make way for higher priority receipts. l Put-away zone Sometimes products are first stored in a Put-away zone from receiving area before taking it to final storage location based on the purchase order or the part number. Sometimes products are delivered directly from receipt to the storage location. l Resource and Space requirement for put-away process This is calculated based on expected receipts and current backlogs. l Direct delivery (from receipt to the storage location) This is the most efficient practice and is the method used in best practice companies as it uses the least space for storing with least handling of product and ready for use it faster. For direct put-away programmes retailers use sophisticated WMS (warehouse management system) that can assign locations from an advance ship notice (ASN) or upon receipt at the dock. Assigning locations and using direct put-away can be further optimised by use of sophisticated material handling systems like automated conveyor systems that can sort and divert materials by zone and location. l Best put-away route Leading retail companies use WMS systems to manage travel time from receiving to storage areas, pick locations, and replenishment areas so that the best put-

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Supply Chain Management for Retailing away route can be selected. The result is put-away travel paths are sequenced based on the shortest route for the product to reduce travel time. Managing expedited materials Taking these materials quickly to actual point of usage once they are received is another challenge. In a manual process the product might be flagged as ‘hot’ and placed in a special ‘expedite’ storing area, so that the put-away team can move it to the required location as quickly as possible. Obviously this is not a very effective process. Smart retailers instead use a smaller version of cross-docking process. Cross-docking is the process of moving specific products to support an open order or replenishment request with minimal handling and delay. The WMS system flags the product for cross-docking by matching it to an open order or replenishment requirement, at the time of receipt or when the ASN is received. Instructions to move the material to the point of use is sent to lift truck or hand held RF device. Put-away strategies There can be a variety of Put-away strategies which a retailer can use to optimise the storage of goods in the warehouse. Leading WMS vendors support a list of Putaway strategies and based on this the system automatically locates the best location for the goods which are freshly received. Below is the list of Put-away strategies supported by SAP, the leading ERP—WMS vendor where the system searches for a storage bin 1. According to user entry 2. For a fixed storage bin 3. In the open storage location 4. For a storage bin that already contains stock 5. For the next empty storage bin in the storage location 6. Near the picking bin 7. According to storage unit type (Pallet) 8. Randomly based on a dynamic number 9. User defined strategy

C. Slotting/Replenishment Product Slotting is the technique of intelligently locating a product in the warehouse or distribution centre for optimising material handling efficiency i.e. it identifies the most efficient placement for each item in a distribution centre or warehouse. Slotting improves picking productivity. Travel time can often account for up to 60 percent of a picker’s daily activity. A good product slotting strategy can reduce travel time thereby reducing picking labour. This is achieved by putting fast moving goods toward the front, by grouping together those products that are regularly sold together, to put bulk stock close together for replenishment, by putting heavy products at hip or shoulder level. All these improve productivity and provide the best ergonomic solution.

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Work Balancing By balancing activity across multiple pick zones congestion in the zones is reduced, material flow improves and total response time for a given order or batch of orders is reduced. Load Building To minimise product damage, heavy product is located at the beginning of the pick path ahead of crushable product. Product may also be located based on case size to facilitate pallet building. Accuracy Similar products are separated to minimise the opportunity for picking errors.

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Ergonomic considerations High velocity products are placed in such a way that it reduces bending and reaching activity. Heavy or oversized items are placed at lower levels in the pick zone or placed in a separate zone where material handling equipment can be utilised. l Pre-consolidation By storing and picking product according to classification family group, downstream sorting and consolidation activity is reduced. This is particularly important in a retail environment to facilitate efficient restocking at the stores. l Material flow This needs to be considered when evaluating replenishment operation. Locate overflow items near the primary storage location, preferably above or adjacent to the primary. l Security considerations Warehouses containing volatile substances, certain products must not be placed close to each other, because of possible chemical reactions. Heavy products should be loaded at the bottom of a pallet and not on top of breakable products. l Importance of on-going product slotting maintenance It is not enough to do a good slotting once, as over time customer demand changes, products come and go and it is important to continually re-slot the warehouse to keep it operating at maximum efficiency. Some retailers re-slot their highest movers (typically also their most profitable products) on a daily basis. As activity changes, SKUs should be moved to different locations or pick zones. For example, SKUs that slow down in high volume locations should be replaced with faster moving SKUs. The slotting process can be handled at weekly or monthly interval cycle counts. Data/Parameters required for defining an effective slotting strategy It is important to evaluate the size, the storage media, the mix, and the velocity of product to determine the best slotting strategy. These four parameters are detailed below: l Sizing Weight and cubic data of each item needs to be recorded. l Storage Knowing the characteristics of each type of storage medium and the physical dimension of the storage media i.e. width and depth of the shelf, number of various heights, quantities of each storage position etc., needs to be known. l Velocity By looking at the inventory over three to six months, an inventory movement analysis can be developed. When the analysis is completed, the quantity of inventory that is to be dedicated to each type of storage media within the facility needs to be determined. l Product mix It may require keeping similar groups together, allowing for ease of picking for those items that are often sold together. Some items may need to be grouped in a particular storage area because of a kitting operation. These different product mix and storage rules need to be understood. l Productivity, ergonomics, and security all need to be taken into account. l

Slotting Tools ABC Slotting This is one of the popular slotting methods. As 50 percent of pickers’ time at work is spent in transit, one way to decrease that transit time while increasing the number of picks per worker is ABC slotting. Simply put, ABC slotting means storing the most popular merchandise closest to the picking line and the least popular items farthest. To implement ABC slotting, products need to be graded to A, B, or C based on each item’s sales volume. Place A items (may be shipping 150–200 SKUs daily) near the picking line—typically at the front of the warehouse, B products, (shipped may be 60–70 SKUs daily) should be stored just beyond the A designation. Place your C products near the back of the warehouse (shipping fewer than 10 SKUs daily). Generally A, B, C distinction is based on daily and monthly sales reports. There are software packages (such as

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FlowTrak from Streamsoft and Slot-It from Manhattan Associates) that can recommend where different items in the warehouse should be stored based on sales history to ensure proper flow. Slotting optimisation solutions These will take into account demand patterns at pallet, package, and item level and can suggest improvements to stock location based on factors such as the matching of pallet dimensions to a particular location. These applications require sufficient data including the measurements, location, and number of products in a box; the number of boxes in a pallet; and the storage conditions of each article. Information about the pick locations is also needed; this includes measurements, carrying capacity, walking distance, and the types of products that may be put on them. Finally, the system requires data about the movement of goods, such as the number of picks per product and its demand forecast. Optimiser has goals like reducing walking distance between picking points or better allocation of jobs under constraints like weight restrictions, storage conditions for harmful substances etc. The result will be a series of suggested re-slotting moves for layout alterations. Slotting optimisers are part of few advanced WMS applications. Leading ERP vendors like SAP provide tools for Replenishing / Slotting Fixed Bins in the Warehouse In this method the replenishment quantities that are necessary to maintain appropriate stock levels, based on the current stock situation for each storage bin, are calculated based on the minimum stock requirement data maintained in material master record. Replenishment is used to fill up the stock in fixed storage bins. Leading ERP vendor SAP provides different replenishment options in its solution like: The function ‘replenishment for fixed storage bins’ calculates the replenishment quantities necessary to maintain stock levels, based on the current stock situation and the entries in the material master. Here the system automatically calculates the replenishment quantity required to keep the stock in the fixed bins at levels that meet the requirements of the current stock situation. The function ‘planning of replenishments for fixed storage bins’ forecasts the necessary stock for fixed storage bins by considering planned stock removals resulting from existing deliveries with picking from fixed storage bins, along side the current stock situation.

D. Picking Picking is the process by which the goods are picked from different warehouse locations for delivery against order. There are different picking methods like: l Single order picking This entails picking to a single order and the order is placed into the shipping container, eliminating downstream handling. Generally orders are prioritised by customer-requested shipping date. l Multi order batch picking This technique works best when there are a large number of SKUs that may be ordered and the SKUs are spread over a large area. Batching enables a picker to pull the products for a number of orders as he passes by each item’s stocking location. l Order consolidation This method groups orders by destination or by customer. It has the benefit of pulling product for multiple orders in a single pass through the pick area. l Wave picking A wave is an automated grouping of orders by a specific set of criteria. Orders may be grouped by priority, by carrier, by shipment type, or by destination. These combined orders are then released to pick area as a group. l Zone picking These orders may be grouped by predefined warehouse zone such as case pick area, bulk pick area or pallet pick areas. With zone picking an order may be split and subsequently consolidated in the shipping area.

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Advanced Picking Technologies Picking product is one of the most labour intensive operations in the warehouse and paper pick tickets are the most common form of pick documentation used for this. However they are prone to human error and are usually less efficient in case of high volumes, so these days it is common to use advanced technology options for this. Some of the upcoming technology options in this area are: Light picking technology: This is a paperless picking technology. A system of lights throughout the picking areas is linked to the order management and inventory system. The worker picks product by following the lighted locations and then confirms each pick in the system. The system is then able to carry out inventory transactions, complete order records, and drive replenishment requirements. Voice picking technology: Voice messages deliver tasks to pickers and help them to direct to the correct pick location. These systems are flexible and allow order priorities to be quickly changed. Workload assignments for the order selectors are downloaded to the voice devices from the warehouse management system. The system prioritises the order picking process by grouping orders for efficient picking. The warehouse system can download this information to the order selector in real time, or it can place the information in a batch mode. This technology is very simple for users as they simply receive a verbal command, which everyone can easily follow, and then they respond to the system by declaring their status or actions. Users have no responsibility to make a judgement on the requested action and they just follow the instructions by listening and responding with spoken word. If they did not understand the instruction, they can request for its repetition. This is a hands free and eyes free technology that offers productivity gains over a scan-intensive application. Spoken picking instructions come from the earpiece of a headset worn by each picker. A microphone mouthpiece then enables the picker to speak back to the wireless computer worn on his belt. The wireless computer, in turn, relays data to the warehouse management system (WMS). A picker puts on his headset, logs into a terminal that recognises his name, and receives his first assignment. For instance, the headset might issue the command, ‘Go to aisle 001, location 3.’ When the picker arrives at aisle 001, location 3, he will see a label with a number printed on it. The picker repeats the number into the headset to let the system know that he is in the right place. The system tells the picker how many items to pick. After the picker has done this activity, he will say something like ‘ready’ to let the computer know it is time to hear the next task. The system then tells the picker how to proceed. As the picker pulls items to fill orders, the inventory software or WMS is alerted to the action through a computer the picker wears on his belt. Voice-directed picking enables workers to keep their hands and eyes free, as pickers do not have to look at computer screens or paper lists to determine how to fill orders. They simply listen to instructions that come through their headsets.

Retailers are adopting these best practices in picking: l Think about product placement: Place more frequently picked product in the easiest-to-reach locations. This facilitates safe handling and reduces employee fatigue. l Layout of pick area should be such which eliminates excess travel. l Continually monitor and optimise picker efficiency and travel times. l Strike a balance between manual and automated systems. Conveyors and automated material handling equipment make sense only if volumes are high. l Take time to understand the way their customers order product: Understand order profiles based on the mix of products, size of orders, and number of lines per order. This information helps to establish efficient picking strategies and methods.

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Supply Chain Management for Retailing Review order and pick frequency: How many times a product SKU is picked, as well as how much of the product is picked. Most companies will find that their orders follow the 80/20 rule, in which 80 percent of the orders are made up of 20 percent of the product SKUs. By identifying the top 20% of products you can define the correct picking strategy to optimise the majority of your picking volume. Investigate alternative techniques: Should you pick to order or cluster pick to multiple orders? Review the flow for every product, documenting every movement and activity and the reasons for the process from receipt to shipment.

E. Packing Packing is the process of packing the articles in cartons before despatching to stores. Retail packing has some unique requirements like floor ready merchandise. Retail packing is specifically covered in 'Retail Product' chapter under section 'Packaging'.

F. Loading and Goods Issue Goods issue from retail warehouse typically happens against a planned delivery. These issues can be recorded in inventory management system so that the inventories are updated. Before attending to goods issue, goods can be packed and loaded in carrier as per the delivery specification, provided goods are issued from a retail distribution centre for despatching to store. If goods are issued from the same warehouse which is at the backyard of store, in that case those extra packing and loading activities may not be required. However in every case inventory updates are must. The process can also involve activities like notification of goods (ASN) to be supplied from a warehouse to a customer and obtaining proof of delivery from the receiving business partner. The activities under this can be listed as follows: l Delivery creation l Packing l Goods issue from warehouse l Loading l Posting goods issue to inventory management l Creating ASN for store / business partner before making the despatch l Receiving proof of delivery (POD) from store / business partner.

G. Managing Material Handling Equipments Managing material handling equipments is an essential task for every warehouse. These equipments can be as basic as fork lifts to as advanced as fully automated systems made up of conveyor, automated guided vehicle systems (AGVS), and automated storage and retrieval systems (AS/RS) depending on sophistication of the warehouse. Automated conveyor systems with sorters and diverters can route product to the appropriate put-away zones, reducing travel time and handling. Automated storage/retrieval systems (AS/RS) technology is especially effective in distribution centres with narrow aisles and extremely high racks. AGVS and AS/RS solutions are capital intensive. Managing these materials handing equipments is the responsibility of every warehouse.

H. Handling Customer Return/Reverse Logistics Handling returns from customers is another important aspect of warehousing. Returns first come to store and then to the warehouse at the backyard of the store—later on they may come to the central

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warehouse connected to regional distribution centres from where they may be sent back to supplier for replacement or destroyed. From warehousing perspective, reverse logistics has following implications: l In warehouse, provide adequate work and storage areas for returns. l There can be two instances for return: either the customer is paid back the money in which case retailer needs to process the credit refunds or the customer is given back a replacement; the second one is known as warranty claim. In case of warranty claim i.e. the product needs to be replaced, these returns are taken back to central warehouse where it is consolidated and the retailer make a warranty claim to suppliers of these articles. Once the suppliers process these claims, replacements are received at warehouse from where they can be sent to individual store. l Sometimes the faulty products which come back from different retail shops need to be disposed by warehouse in an environment friendly way. This may call for setting up reprocessing centre or engaging a third party agent to do this.

I. Work and Resource Management The time a typical warehouse manager spends in this activity is highest among all other tasks. Resource management includes managing both labour and material handling equipments. Work management. This is mainly concerned with despatching work (picks, moves, put-away, cycle counts) based on task priority, location of last/next task, constraints (e.g. type of equipment), and process objectives (e.g. minimise travel time, maximise service etc). Task management focuses on the ‘what’ of the work assignment i.e. what tasks need to be performed. Resource/Labour management. Resource management addresses the ‘how best’ to perform work. By using engineered standards and best practices methods, operators can be directed to perform tasks in the most productive way. A warehouse resource management must consider a three dimensional view of the warehouse (height, length, width), work standards, and constraints (e.g. speed and type of equipment) when allocating work. Best practices for work and resource management: l Optimise the material flow via task execution and resource deployment. Break down material movements to a task and resource level and optimise the sequence in which they are executed, ensuring the right task is completed by the best resource within the most optimal time. l Have process visibility in the warehouse and track every activity performed in the warehouse floor. l Use a systematic model of the warehouse’s physical layout to deploy resources according to the actual workload, the resource’s qualification and the current geographical position of the resource. The efficient deployment of resources contributes to a considerable reduction in costs in material flow processing. l Have the warehouse site map in mind. This is a detailed 3D model of the entire warehouse including storage bins, pick-up and drop off points, work centres, working areas, zones and all other geographical points that constitute it. This allows you to assign a task to a resource, given a resource’s present position and the distance of the task. l Assign task based on task’s priority: This selects tasks for assignment to the optimum resource at optimum time. Optimisation can be achieved through the use of priority rules that consider factors such as the rush order priority, the type of task (e.g. picking the outbound delivery has high priority over replenishment), the load to be moved, route priority (this increases the priority of a particular task based on the resource’s physical location in the warehouse and its proximity to completed tasks). Several factors can be considered for prioritisation like: physical

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structure of warehouse, load, availability of resource, weight and priority, location/length of travel etc. l Task bundling should be considered. Task bundling means when a group of tasks must be executed by one resource at a given time. l Tasks in close proximity to one another need to be assigned, providing a continuous workflow to the resources and less movement within warehouse. Upon task completion, the resource’s current position need to be studied to provide it with tasks whose starting point is close to that current position making deployment of resources efficient. l For each task performed, the cost of available resource needs to be compared to the task priority. Overqualified resources are only assigned in case of very high priority given to task completion and when a suitable resource is not available. l Work needs to be assigned with task completion time projections. l Performance needs to be monitored against goals. Through analytics, companies can monitor resource performance by numerous characteristics (e.g. task, equipment, operator, and customer) and make adjustments when needed. Leading retail warehouses these days use sophisticated software for these kinds of requirements.

Value Added Services of a Retail Warehouse A warehouse can provide many value added services. In case the warehouse is operated by a logistics service provider or 3PL, these value added services are the major differentiator between two LSPs. Figure 7.12 shows the different kind of value addition services that can be provided by a warehouse operator.

Fig. 7.12 Retail Warehouse—Value Added Services

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Light assembly Typically this makes sense for consumer durables, office equipment or home furnishing retailers, where components come from different suppliers and at RDC they are assembled. Of course RDC can only have very simple manual assembly kind of operation. Managing private labels Typically private-labels for the retailer from contract manufacturers are directly received at RDC warehouse, where incoming inspection—packing—price tagging—labelling can happen. Repair/Refurbishing If there are minor defects in incoming shipments, the goods can be repaired at RDC level. Quality control/Inspection Inspection at goods receipt stage is quiet common at warehouse level. In transit merge Typical example of this can be a personnel computer retailer where the PC and the printer come from two different manufacturers, in which case shipments are consolidated at RDC level and delivered as a complete set to store. Kitting Kitting is an operation where parts come from different suppliers and sold as a complete kit. A typical example can be for an auto accessory retailer where spanner, screw driver and other items come from different suppliers, assembled as a ‘Car repairing kit’ at retailer’s RDC warehouse level and the complete kit is delivered in store as ready to sell item. The warehouse needs to be aware about the bill of material (BOM) for the kit for this kind of assembly operation. Cutting Items may come in long lengths from manufacturer which is cut in warehouse in sizes in which it is sold at store. Labelling/Tagging This is the most common warehouse value added operation where the items are opened from big pack/container, repacked in smaller packs suitable for store, new labels, bar codes and price tags are attached. Specialty packaging This can be for special seasons like ‘Christmas packaging’, ‘Valentine day packaging’ etc. where several products are bundled together. This can also be for special promotion scheme—for example, two soaps and one shampoo is bundled in a special pack at discounted price. Providing information As the warehouse is the common link between manufacturer/supplier and retail store, it can provide a variety of information to both the parties—sales pattern, receipt pattern, change in trends etc.

Cross Docking Cross docking is a retail distribution technique where an item is taken from the manufacturing plant and delivered directly to the store with minimum handling in the process. In this process materials are unloaded from an incoming truck or rail car at retail distribution centre and loaded on outbound trucks or rail cars with little or no storage in between i.e. goods are received through one door and shipped out through the other door almost immediately without putting them in storage. This requires close synchronisation of all inbound and outbound shipments. Sometimes merchandise from an arriving truck is broken down into case or pallet loads upon arrival at a cross dock facility. Cases or pallets are quickly moved across the warehouse to the shipping dock, where they are placed onto truck loads for individual stores. The speedy transfer of goods eliminates the need for warehouse storage.

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History of Cross Docking Historically, transport companies used to bring small loads by small tracks/vans at hubs, repack them and used to reload them in large carriers like trailers/trucks etc., and used to move them over long distances to optimise truck movements. In 1980s mass merchandiser such as Wal-Mart had used this concept and started cross docking in large scale. Presently some 90 percent of soft goods and 35 percent of hard goods are cross docked through Wal-Mart’s distribution centre. The grocery industry had first started cross docking, which soon became popular in automative industry. Components from several suppliers are consolidated at logistics hubs and cross docked from there to factory. Cross docking is now used in several other industries.

Pallet and Case Cross Docking In pallet cross docking, full pallets are received from the vendor and moved directly to outbound docks for combination with similar pallets from other suppliers on store vehicles. These pallets consists of pre-picked store orders for a number of supplier’s products for a particular store. In case cross docking, each pallet is broken down into components for delivery to stores. These components are then moved ‘across the dock’ for consolidation with other components from different vendors of other merchandise into single store deliveries. This is required when the pallet size is big and a single pallet cam not be consumed by individual store. Three cross docking types can be: l Cross docking of full pallets: One SKU per pallet, pallets moving from truck to truck. l Cross docking of cases: Break down of pallets at the TSP with no leftover. l Cross docking of pre-commissioned pallets: Mixed pallets moving from truck to truck. Typical applications of cross docking: l ‘Hub and spoke’ arrangements Here materials are brought to one central location from different places and then sorted for delivery to a variety of destinations. This is very common in retail RDCs where materials come from different suppliers, sorted and cross docked to different stores. l Consolidation arrangements Here a variety of smaller shipments are combined into one larger shipment for economy of transport. Large retailers consolidate shipments from lot of small suppliers at cross docking point.This model is used often by transport companies. l Deconsolidation arrangements Here large shipments e.g. railcar lots are broken down into smaller lots for ease of delivery. Large retailer may order a big trailer from manufacturer, bring it to cross docking point, do a bulk breaking and repack as per individual store’s requirements. It can be reloaded to small trucks directly delivering at individual store.

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Reduction of inventory levels Cross docking reduces inventory in the chain as warehouse inventory is virtually eliminated. Fewer inventories means less space and equipment required for handling and storing the products. This also means reduced product damages and product obsolescence. l Better account receivables If the supplier bills at the time of shipment, cross docking will help get product through the distribution centre and ultimately to the customer, starting the accounts receivable clock sooner. l Improvement in RDC space usage The area needed for the depot is reduced since the RDC serves only as a stop over point for the distribution of the goods. Thus in the RDC, turnover per square meter can thus be increased. Manufacturers will also need less space for storage. The end result may be shutting down of large number of warehouses. l Cross docking shift the focus from ‘supply chain’ to ‘demand chain’ For example stock coming into cross docking centre has already been pre-allocated against a replenishment order generated by a retailer. l If cross docking is done strategically, it improves customer service For example, a retailer such as Sears, Roebuck and Co. positions inventory in four regional warehouses so it can cross dock and provide next day service to customers. In this case, geographic postponement coupled with cross docking eliminates the need to have product inventory at all locations. Figure 7.13 depicts how cross docking can reduce transport cost by reducing less than truck loads (LTLs) l

Fig. 7.13

Cross Docking Reduces LTLs and Save Transport Cost Source: www.iglo.com (accessed on 3rd July 2009)

Cross docking can be applied to a number of circumstances. For manufacturing, cross docking can be used to consolidate inbound supplies, which can be prepared to support just-in-time assembly. For distribution, cross docking can be used to consolidate inbound products from different suppliers which can be delivered when the last inbound shipment is received. For transportation, cross docking involves the consolidation of shipments from several suppliers (often in LTL batches) in order to achieve economies of scale. For retail, cross docking concerns receiving products from multiple suppliers and sorting them to outbound shipments to different stores. The world’s biggest retailer, Wal-Mart delivers about 85 percent of its merchandises using a cross docking system.

How Cross Docking Works A typical cross docking centre can be divided in three areas as follows:

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Receiving area Here goods are received in truckloads from different suppliers. Goods can come in small truckloads for consolidation at cross docking point or in large trailers for deconsolidation. On receiving bays workers put pallets in lanes corresponding to the receiving doors. Storing/Sorting area This is the area where materials are sorted, consolidated and repacked. In some cases cross docking operations require large storing area depending on volume of operations where materials can remain from few hours to a day. The purpose of storing operations is to make the outbound shipment ready for store shelves. Lesser the time spent in storage area, better is the efficiency of cross docking operation. Shipping area Here the shipments are loaded into outbound trailers/trucks. Figure 7.14 illustrates this layout.

Fig. 7.14

Cross Docking Layout Source: www.iglo.com (accessed on 3rd July 2009)

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Supplier notifies shipping time, date, carrier, SKUs, quantity to cross docking system. Carrier notifies the arrival date, time for each shipment at cross docking system. Cross docking system receives order detail from the customer. Cross docking system notifies outbound carrier of pick up time, load description, destination, delivery date and time. Cross docking system notifies customer shipment detail, carrier, arrival date, time. Finalise a dock location for trucks involved in receiving and shipping. Schedule labour and handling equipment.

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Record and reconcile receipts and notification of receiving variances. Labelling, bulk breaking, repacking, consolidation operations in storage area. Reload in loading area. Route and track cases and pallets from receiving to despatch. Performance measures to be collected for carriers and warehouse operations.

Necessary Ingredients of Cross Docking Though cross docking does not need substantial investment it does require more of a change in the process the way retailer and its supplier works—however a retailer needs to have certain things in place to start cross docking—EDI, Bar codes/RF, scanners, computerised warehouse management system, change in warehouse layout are few of these things. For retail suppliers packaging needs to change and it has to be optimised for distribution to the store (i.e. floor ready) as opposed to optimised for shipping, since there is very less time from the point it leaves factory and put in store shelves. EDI between supplier and retailer This is crucial because all inbound and outbound deliveries of trucks need to be synchronised and tightly controlled for effective cross docking. Suppliers generally send an electronic message known as an advance shipping notice (ASN) to the receiver, prior to the arrival of goods detailing when the shipment is coming, quantity, shipment content etc. The retail RDC in the same way can send message to individual store informing them about the shipment so that stores can keep their receiving section ready. Messages can also flow between cross docking centre and the transport company asking number and type of trucks. Thus EDI is the heart of cross docking. Bar Codes/RF Bar codes placed on cartons/pallets allow the receiving warehouse to route them quickly to the appropriate shipping dock designed for specific store delivery. This also means that the warehouse needs to invest in few barcode scanners. Computerised warehouse management system This is another critical element in a cross docking system. This determines the sequence for unloading inbound trucks and loading outbound trucks. As workers remove cartons on pallets from the inbound trucks, they scan the bar codes. The computer system automatically matches the scanned information about delivered goods with the information received in the advance shipping notice. The computer checks receipt of goods and updates inventory as it directs the workers where to place the goods on the appropriate conveyor for transfer to the correct area of shipping dock. Changes in distribution centre layout The distribution centre layout may change to have separate receiving, storage and loading areas as described earlier. Labelling, break packing etc happens in storage area. Floor ready merchandising Manufacturers participating in this programme must pack and label products in a way that it is ‘floor ready’ because once a cross docked merchandise leaves a distribution centre, it goes direct to store. Introducing Roll over stock system In cross docking, infrequent, large deliveries by the supplier are typically replaced with smaller and more frequent deliveries, driven by the replenishment of actual issues to store. For this the supplier’s side transport cost can increae due to more order picking and inefficient filling of vehicles arising from smaller delivery quantities. These effects can be mitigated by a small procedural change. If the quantity ordered is not sufficient to fill a truck, the supplier

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Fig. 7.15 Traditional Distribution

Fig. 7.16

Crossdocking

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adds as much as it is needed to fill the truck. This particularly suits fast moving goods, and the surplus quantity is then subtracted from the order for the next day, but requires storage at the RDC. This is called roll over stock.

How Cross Docking Saves Time Figure 7.15 and Figure 7.16 explains how cross docking saves time by doing small operations at the warehouse compared to traditional distribution.

Case Study Wal Mart Wal Mart is one of the largest corporations in the world and owes much of its success to its cross docking network. l Wal Mart runs 85 percent of its goods through its cross docking system. l Cross docking is one way Wal Mart reduces its cost of sales by two to three percent. l This is a contributing factor to allow Wal Mart to offer lower prices. Wal-Mart had modified its processes and systems to support cross docking. Warehouse System: Goods are continuously delivered to Wal Mart’s warehouses where they are stored, repacked, and distributed to stores without ever remaining in the inventory. Example: Paper Towels. Loading Docks: Instead of goods spending valuable time in the warehouse, they are crossed from one loading dock to another in 48 hours or less. This enables them to be in the store and ready to be sold. Communication Network: Cross Docking relies on continuous communication between Wal Mart’s suppliers, distribution centres, and every point of sale system in each store. This enables orders to flow in, get packaged and then shipped. Certain features of communication network are as follows: l Wal Mart operates their own satellite network. l Wal Mart’s satellite network sends the point of sale (POS) data directly to 4,000 vendors. l Each register is directly connected to a satellite system and sales information is instantly relayed to Wal Mart’s headquarters and distribution centres. l Each store manager communicates via the satellite network with other managers to discuss sales and market trends and strategies. Trucking Network: Wal Mart has over 80 distribution centres throughout the country. They are serviced by 2,000 company owned trucks. The truck fleet allows Wal Mart to ship goods from its warehouses to stores in less than 48 hours. Store shelves are then restocked twice a week on an average while the industry average is once every two weeks. Benefits of Wal Mart’s Cross Docking Network l The cost savings attributed to Wal Mart’s reduced costs of sales allow them to provide lower prices than their competitors. l This means that Wal Mart can reduce the expense on promotions.

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These stable prices make sales more predictable and therefore forecasting for their cross docking system more accurate. l These lower prices attract more customers into the stores which lead to higher sales per retail square foot. Source: http://wapedia.mobi/en/cross-docking for Walmart communication network (accessed on 3rd July 2009) l

Warehouse Process Maturity Model Figure 7.17 explains the concept of warehouse process maturity model. The base of this pyramid talks about the basic warehousing processes which any retailer needs to perform to be in the business. The next layer talks about mature warehousing processes that help retailers to improve efficiency in warehouse, in most cases with help of technology. These capabilities help retailer to improve productivity and reduce warehousing cost. The highest level of the pyramid talks about advanced retail warehouse practices that very few retailers adopt to gain competitive advantage.

Using Information Technology for Warehouse Management Information technology is used in various degrees in modern warehouses depending on the sophistication of the warehouse, kind of activities performed and level of maturity of warehouse operations. Some examples will follow in the table given on next page.

Fig. 7.17 Retail Warehouse Process Maturity Model

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Technology used

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What it does

Efficiency warehouse Warehouse Management Support high volume warehouse transactions like goods transactions System receipt, goods issue, delivery document creation, picking, packing etc. Cross docking Advance shipping ASNs make the warehouse people ready for receipt and notifications (ASNs) better planning of cross docking inbound shipments with outbound deliveries. Track and Trace RFID Helps in track in trace of inbound load and outbound shipments. Quick inventory Scanner and Bar code Instead of manual entry into system, scanning helps in update quick updating of inventory at point of receipt and issue. Material handling Slotting and loading These applications help in optimally locating a product in efficiency optimisation applications warehouse for material handling efficiency based on variety of parameters. Optimum usage of Task and resource These applications help in optimum distribution of load warehouse labour management between different warehouse operators. applications

Measures for Warehouse Management Measures for warehouse management are internal measures of logistics efficiency and accuracy for a retailer. There can be variety of measures here as shown in Table 7.3. Table 7.3

Warehouse Management Measures

Measure Receiving Accuracy Receiving and product storage costs as a percentage of product acquisition costs Transfer and Product storage costs as a percentage of product acquisition costs Picking accuracy Picking efficiency Packing, Loading accuracy Packing, Loading efficiency Warehousing cost as a percentage of total supply chain cost/sales Measures for value added service done by warehouse

Definition A measure of receipt conformity of recorded values to the actual values. All costs associated with taking possession of and storing product. Includes warehouse space and management, product receiving and stocking, processing work orders, pricing, and internal product movement. This does not include incoming inspection. All costs associated with the storage and/or movement of the product to the next appropriate stocking location (transfer point) in the supply chain expressed as a percentage of product acquisition costs. Number of picks correctly done by total number of picks in a day. This is done operator wise. Number of picks everyday. This can be done operator wise to measure labour efficiency. Number of packing, loading correctly done by total number in a day. This is done operator wise. Number of shipments packed, loaded in a day. It can also be measured weight wise. This can be done operator wise to measure labour efficiency. Total cost of warehousing operations as a percentage of total logistics costs or total supply chain cost or as a part of total turnover. There can be variety of measures here depending on type of service like making merchandise floor ready, kitting etc.

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Managing Retail Inventory It was the fall of 1999, and Jeffrey Preston Bezos, the founder of Amazon.com had a tough challenge at hand—he wanted to offer his customers a wide selection of books, but did not want to spend time and money on opening warehouses and in dealing with the inventory. In early 2001, Bezos had taken one of the toughest decisions in the history of Amazon by partly outsourcing its inventory management. He knew that it was a huge risk as it means playing with its hard earned reputation of providing superior customer service. Amazon decided not to stock every item offered on its site, it stocked only those items that were popular and frequently purchased. If a book that was not too popular was ordered, Amazon requested that item from its distributor who then shipped it to the company; in the company the items were unpacked and then shipped to the respective customers. Thus Amazon acted as a trans-shipment centre and ensured that the entire process of shipping from the distributor to the customer was done efficiently. However the strategy worked out to be one of the biggest success story in the world of book retailing and by 2003, Amazon became the biggest book, music and video retailer on the Internet and offered more than 4.7 million books, videos, music CDs, DVDs, computer games and other products.

This story talks about how the inventory management strategy can be used as strategy of competitive advantage for a retailer. There are several examples which may be quoted—how Wal-Mart had used cross docking to move inventory quickly from supplier to point of consumption that helped them to achieve Every Day Low Price (EDLP) for consumer; how Dell had reduced inventory by manufacturing only against confirmed order and thus became the largest seller of PC; how Toyota had successfully adopted Just in time to become one of the three top car makers of the world. It is important to understand that a retailer’s supply chain performance is largely measured based on how effectively he is using his inventory—too little of it is risky as there can be stock depletion and possible loss of retailer’s sales and too much of it is costly as there is a cost of carrying this inventory and the retailer may have to opt for heavy end of the period markdowns to liquidate this stock. Every retailer tries to achieve those golden rules of inventory management i.e. ‘Have the inventory of right merchandise at right time of right quantity at right location’.

Why Inventory The ideal situation could have been the retailer orders everyday exactly the same quantity which he sells on daily basis. This principle is called Just in Time principle. However in practice, it is difficult to follow this for following reasons: l Supplier’s lead time Supplier will take time to execute the orders placed on him. Retailer needs to keep stock for this time. For a supplier in an other country, this lead time can be few months. Transport lead time (i.e. time taken for the material to be transported from supplier’s place to retailer) is a part of supplier’s lead time. l Economies of scale Economies of scale is present everywhere in supply chain. Suppliers prefer to supply in large quantities (so that they can get some economically viable production runs and can transport in truck loads) and provide good discount if ordered in large quantity. Transporters want to supply in full truck load as that reduces unit cost of transport . Sometimes suppliers even do not accept order below a particular quantity. These lot size constraints force retailers to order in bulk and carry inventory. l Demand uncertainty Retailer is not sure how much he is going to sell during the next period. Retailer needs to maintain some safety stock for this and safety stock requirement will vary based on service level i.e. higher safety stock for higher service level.

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l

l

l

l

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Supply uncertainty This may be due to factors like transport lead time uncertainty or uncertainty regarding quality of input material. Generally the truck takes two days to reach from the godown to store while bringing materials—however in some cases it takes three days. Retailer needs to keep buffer for this one day variation. The other reason can be the consignment from supplier got rejected for quality reasons—the retailer needs to take care of this sort of eventualities and build some buffer. Buffer kept for supply uncertainty is also a part of safety stock. Particular days of shipment from DC This is a common practice in this industry to send material from godown to store on particular day of the week say every Monday. As the next shipment is going to come only on next Monday—the retailer needs to have stock for these seven days. This type of stock is called cycle stock. Building ahead A retailer can build ahead inventory expecting future demand. Example of this can be retailer is accumulating the stock of umbrellas before rainy season or stock of consumer electronics items before festive seasons. This type of inventory is called Build ahead inventory. Strategic reasons A retailer can also hold inventory for strategic reasons like a very special volume discount where the discount obtained in price is much more than inventory carrying cost or the retailer is expecting some supply disruption in near future, and to does not want to take any risk and therefore builds up stock. Risk hedging Retailers may maintain inventory to hedge against future risks like price increase, disruption in supply, transport strike etc.

Cost of Inventory It is obvious that retailers need to hold some inventory. Holding this inventory costs the retailer. Table 7.4 shows the kind of costs incurred by the retailer to hold inventory: Table 7.4 Inventory carrying cost Cost type Item Cost Holding Costs Capital Costs Shortage Costs Risk costs Storage costs

Description Price paid for the item + Duty and Taxes + Transport cost + any other direct cost associated with purchase Include the variable expenses incurred by the plant related to the volume of inventory held The higher of the cost of capital or the opportunity cost for the company Loss of customer goodwill, back order handling, and lost sales Obsolescence, damage, deterioration, theft, insurance and taxes Include the variable expenses for space, workers, and equipment related to the volume of inventory held

Retailer’s Inventory Management Framework Figure 7.18 explains the inventory management framework for the retailer. Retailer has two main business drivers in inventory management l Never have a stock out as this causes customer dissatisfaction and lost sales l Never carry excess inventory as this increases cost of operation; moreover there is chance of obsolence and heavy markdown

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Fig. 7.18

Inventory Management Framework

These two challenges call for these key decisions on retailer’s side l Having inventory of right merchandise—it does not make sense to have enough inventory of item A, when item B is in demand l Having inventory at right location/right store l Having inventory of right quantity Retailer can adopt a variety of tools to address these key decisions which are described in detail later in this chapter.

Tools for Inventory Management—Concept of Inventory Management Pyramid A retailer can adopt a variety of tools to solve his inventory problems. Tools can be ranging from something very rudimentary to the most advanced ones. These are represented in Figure 7.19 through inventory management pyramid. Inventory control The base of the pyramid talks about inventory control. This layer focuses on activities like recording all inventory transactions like goods issue—receipt, cycle counting for inventory accuracy, process of valuation of inventory etc. These are the most basic processes to achieve timely and accurate information on inventory status. Generally, retailers have some goods receipt and issue them integrated with point of sales system for effective inventory control. This is must for every retailer and for most of them inventory management starts and ends at this level.

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Fig. 7.19

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Tools for Inventory Management. Concept of Inventory Pyramid

Inventory management The second level of the pyramid is about inventory management. In this level a retailer will adopt some scientific approach to determine how much quantity to order and when to order. Some retailers here follow scientific approach of calculating demand variability, supply variability and customer service percentage to arrive at safety stock numbers. Retailers can adopt statistical tools for forecasting and to determine expected consumption during supplier’s lead time, so that they do not go out of stock during this period. Strategic inventory management Retailers are these levels are innovators. They can adopt varieties of tools to remain ahead of others. It can include things like: l Adopting inventory management best practices like VMI, CPFR, Cross docking, Just in time etc. l Integrating with suppliers to reduce inventory in the channel. l Do simulation to decide where it makes sense to hold inventory—in distribution centre or at store or at some other central location etc. l Initiatives to reduce supplier’s lead time and hence the need for inventory. l Initiatives to reduce demand and supply uncertainty so that safety stock needs come lesser

The Concept of Inventory Models Inventory models help a retailer to take two fundamental inventory decisions l How much to order l When to place the orders There are few popular inventory models like: 1. Q model or EOQ model (in this model when the order quantity is depleted to ROP – Re-order point, order replenishment of quantity equal to EOQ occurs. So in this model how much to order is equal to EOQ and when to place the order i.e. frequency of replenishment is ROP) 2. P model or Periodic review method (here inventory levels for multiple stock items are reviewed at the same time and can be reordered together) 3. Min Max model 4. Two bin system

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Q Model—EOQ Model EOQ model balances between carrying cost and ordering cost. If orders are placed too frequently, ordering cost increases but it reduces the inventory carrying cost. On the other hand, if orders are placed after long intervals, this increases the carrying cost and reduces ordering cost. These costs are opposing costs, i.e., as one increases the other decreases. The sum of the two costs is the total stocking cost (TSC). When plotted against order quantity, the TSC decreases to a minimum cost and then increases. This order quantity where TSC is minimum is known as the economic order quantity (EOQ). The amount ordered each time an order is placed is fixed or constant.

Mathematical Interpretation of Q Model Demand is constant at D items per year Order quantity is fixed at Q items per order, so number of orders in a year = D/Q Ordering cost is S per order. So total ordering cost in a year = D ´ S/Q Inventory holding cost = H/per item. Pick inventory = Q, Inventory depletes to 0, So average inventory = (Q + 0)/2 = Q/2 Inventory holding cost = H ´ Q/2 Total stocking cost = D ´ S/Q + H ´ Q/2 The order quantity where the TSC is at a minimum (EOQ) can be found using calculus (take the first derivative, set it equal to zero and solve for Q) EOQ =

2DS /H

Figure 7.20 explains the EOQ model

Fig. 7.20 EOQ Inventory Model

Assumptions of EOQ Model Economic Order Quantity is a very popular model among inventory management academicians; however it is not common in practice, the reason being the model works under a list of assumptions which are not feasible in real life (like demand is known, no safety stock, no quantity discount etc).

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Typical assumptions of this model are: l Only one product is involved l Demand is known throughout the year l Lead time is known and constant l Each order is received through a single delivery l There are no quantity discounts i.e. acquisition cost is fixed l No safety stock is required l Ordering costs are constant l All demand is satisfied (no shortages) l Carrying cost (C) and ordering cost (S) can be estimated l No inventory when an order arrives One problem of this model is that each stock item is reordered at different times, so administration becomes difficult with no economies of ordering and transportation.

Reorder Point As per the EOQ model, the ordering should be done at reorder point i.e. when the quantity on hand of an item drops to this amount, the item is reordered. ROP is determined based on the rate of demand and the lead time. ROP = D ´ LT D = Demand rate per period LT = lead time in periods

ROP Limitations Assumes demand is known and linear Relies on instantaneous replenishment when inventory reaches zero l Assumes lead time is known and constant l Has no relationship to future usage l Treats each item independently Figure 7.21 explains the inventory cycle in EOQ model, where usage rate is uniform and when the re order point is reached, an order equal to optimum order quantity is placed. By the time the l l

Fig. 7.21 Inventory Cycle in EOQ Model

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order is received, stock depletes to zero. After receipt of order, quantity in hand becomes again Q, from where uniform consumption starts. This model does not require any safety or buffer stock. However in real life, the usage rate is never uniform and varies every day. Usage rate between re order point and actual arrival of material, may be higher then average—this results in stock out—to prevent this situation retailer needs to maintain some safety or buffer stock. This is explained in Figure 7.22.

Fig. 7.22 The Concept of Safety Stock

P Model—Periodic Review Method The philosophy of P model is opposite of that of Q model. Here the inventory is reviewed at regular interval i.e. review frequency is set (T). Quantity to place on order is the difference between maximum quantity (M) and amount on hand at the time of review (OH). So here the inventory review frequency is fixed and quantity varies with each order. Management needs to set optimal values of T and M to balance stock availability and cost. Figure 7.23 explains P model.

Mathematical Interpretation of P Model Targeted inventory level:

TI d RP L SS

= = = = =

d(RP + L) + SS average period demand review period (days, weeks) lead time (days, weeks) zsRP+L

The amount of safety stock needed is based on the degree of uncertainty in the DDLT and the customer service level desired. Replenishment Quantity (Q) = TI – OH

Advantages of P Model l l

This model is more practical as it require little administration i.e. only periodic checks This model is more acceptable to suppliers as supplier may effect savings in Ordering, Packing and Shipping costs

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Periodic Review System (P Model)

Disadvantages of P Model Requires a larger safety stock Increases carrying cost l Costs of periodic reviews Min—Max Models In this model a pre determined minimum and maximum inventory level is defined for each item. As soon as the stock reaches close to minimum point, the ordering is done. Two—Bin System One of the simplest inventory models to administer—there are two containers of inventory—reorder when the first is empty. l l

Inventory Control Tools Inventory Accounting Systems—Periodic and Perpetual Periodic Inventory System The simplest method the retailer can adopt is the daily counting of all products on the shelves. It is not recommended as it is costly and too labour intensive. The next option is to physically count items not regularly but at fixed periodic intervals, say every week. This is called periodic inventory system. An annual physical counting and stock taking in most cases is mandated by external auditors.

Perpetual Inventory System The second method is based on the incoming and outgoing product flow of the store. The incoming flow is recorded from goods receipt system and the outgoing flow from point of sale scanners at billing counter. At the end of the day, the store clerk adds the goods receipt records to previous day’s

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inventory and subtracts the sold quantities (data obtained from POS) for each SKU. Thus a perpetual inventory system is fully integrated with the POS scanning system and the electronic store receiving system, and maintains the store shelf inventory on the basis of its two inputs-over the counter sales data and data regarding receipt of goods. The perpetual inventory system is updated on real time. This system keeps track of removals from inventory continuously, thus monitoring current levels of each item.

Having Best of Both Worlds One of the problem in perpetual inventory system is the difference between system and physical stock due to data accuracy problem in POS scanning and electronic store receiving system and because shrinkage can not be reduced electronically. To resolve this issue most of the retailers follow a process of periodic cycle counts to support a perpetual inventory system. System stock needs to be corrected after regular interval based on periodic cycle count results. This helps in timely detection and correction of inaccurate records.

Inventory Classification A retailer needs to manage thousands of items in inventory—it is virtually impossible to control all of them with the same level of accuracy. ABC classification helps in prioritising level of control and frequency of review of inventory items. Class A items are all high revenue products, which typically accounts for about 80 percent of annual sales and represent about 20 percent of inventory SKUs. Class B items include products that typically account for about 15 percent of annual sales and represent about 30 percent of inventory SKUs. Class C items include products that typically account for about five percent of annual sales and represent about 50 percent of inventory SKUs. To identify A, B and C class a Pareto analysis is done depending on annual dollar volume. As Class A items account for the major part of the business, a high frequency periodic review policy (e.g. a weekly review) is appropriate in this case. Similarly a periodic review policy is applied to control B class products, although the frequency of review is not as high as that for class A products. Finally depending on product value, the firm either keeps no inventory of expensive class C products or keeps high inventory of inexpensive Class C products. Figure 7.24 explains the concept of Inventory Classification.

Factors to be Considered by Retailer for Deciding on Inventory Retailer needs to consider a variety of factors while deciding the type and quantity of inventory he needs to hold: A. Type of item Items having very short life need to have a different inventory strategy than the stables ones. Items like dairy products, bakery products, fish, meat, fresh vegetables, fruits etc., fall into this category. For these items any safety stock may not be maintained. For seasonal products, inventory needs to be maintained only during the season and during other seasons either a minimum quantity can be maintained or the retailer may take a choice of not to maintain any thing at all. For regularly selling products a retailer will like to maintain a safety stock at all time. B. Service level The amount of inventory retailer needs to hold will depend on the customer service level retailer wants to maintain per category, for example for a destination category, the retailer may not like any stock out and a very high customer service whereas for a convenience category this service level may be less. Service level also may differ as per the location i.e. the retailer

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Fig. 7.24 Example of ABC Classification of Materials

may follow a very high customer service level in major cities where the competition is intense but a lower service level in small cities where there are no other major players. Good example of this can be in retail banking where some of the large government banks (like State Bank of India) provide services like call centre, ATM etc., in large cities where competitors (like HDFC, City or HSBC) are strong, and offer much different levels in smaller cities where private players are not operating. C. Inventory Network Whether the existing network of warehouses and retail stores can meet the customer service level at reasonable cost or whether this needs to be redesigned i.e. there needs to be new warehouse or warehouse could to be relocated. D. Where to hold inventory Whether it makes sense to hold inventory at warehouses or at store? The end objective is to meet a service level commitment within a total inventory budget and constraints like storage capacities. Holding inventory at store provides higher service level. Holding inventory at warehouse provides flexibility as the same can be sent to any store based on requirement. This kind of inventory decision problem is called Multi – Echelon inventory problem. E. Customer demand The type of customer demand pattern also affects inventory decisions. If historical data of customer demand is available, forecasting tools are used to estimate the average customer demand and the variability of demand. Average demand and demand variability are inputs to calculate inventory requirements. G. Replenishment lead time The lead time required to replenish the inventory also influences inventory decision. Retailer needs to hold inventory at least for this period. If this lead time is very

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long, the retailer also needs to hold inventory for variability of this period. For example, if the lead time of supplier is for two days, retailer will hold inventory for at least two days of average consumption and may be one days of buffer stock. If for an imported item, this lead time is few months, retailer needs to hold inventory for this period plus buffer stock. H. Inventory costs Inventory holding also depends on the cost of the item. Retailer will be very careful in planning inventory for a high cost item as the amount of money blocked for him is high, whereas for a low cost item, there is some flexibility available to the retailer. I. How much to hold The amount of inventory a retailer should hold to maintain a particular customer service level and to take care of demand supply uncertainties and replenishment lead time is the most critical questions of inventory management. There are different inventory models available to calculate this quantity. Different inventory models discussed earlier helps in this decision.

Best Practices in Retail Inventory Management ‘Keeping high level of customer service with minimum investment in inventory’—the drive to meet these objectives challenged retailers to come up with breakthrough ideas for managing retail inventory. Some of these are as follows: l Cross docking l Vendor managed inventory l Collaborative planning forecasting and replenishment l Build to order model l Postponement l Identifying a fixed set of options that cover most customer requirements In this chapter we discuss these best practices from inventory management perspective. Cross docking Cross docking reduces the inventory at retail distribution centre warehouses by effective coordination of inbound (shipments from retailer’s suppliers to retail distribution centre) and outbound (shipments from retailer’s distribution centre to store) shipments. Items are not taken inside the retail warehouse at all but sent directly to store. This reduces inventory in the total supply chain and also reduces the lead time of supply from supplier to store. Walmart uses cross docking effectively. Vendor managed inventory Here, instead of retailer managing the stock of items in retail shelves, the supplier takes the responsibility of managing the stock based on stock and sales information from retailer on daily basis. VMI between WalMart and P&G is a much talked about case. As stock is replenished more frequently and managed by supplier who has better information about the sales trend of the product, the inventory in the chain comes down. Collaborative Planning Forecasting and Replenishment (CPFR) Here, retailer and suppliers jointly make the business plan, future forecasting and replenishment plan for the product. Regular sharing of information helps in better inventory replenishment decisions, lesser stock and improved customer service. Build to order model Very successful model adopted by online retailer like Dell, where they manufacture a PC only after receiving a firm order. This model can make finished good inventory as non existent and very useful in an industry with high obsolence. However this model is not applicable in all industry (i.e. industries having long manufacturing lead time) and all types of item (for FMCG. products customers may not wait for the product to be manufactured).

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Postponement Here the final product is made as close to a customer order as possible. Few apparel retailers had successfully adopted this by buying raw fabric and doing the final value addition like colouring, stitching etc., as close to the season as possible, when they have much better information about the newest trends. Reebok first makes unprinted sports shirts and later print it with the logo of particular sports team once the result of the winner is known. Identifying a fixed set of options that cover most customer requirements Some retailers follow this option of storing few SKUs, thus reducing inventory and passing on the benefits to customer. One good example of this strategy is McDonalds who keeps few standard menus in its store and thus very cost effective.

Case Study This case shows how a leading retailer had followed a scientific approach in deciding the stock requirements at its outlets.

Safety Stock Planning at Store Safety stock planning at store is critical, as it should minimise the out of stock situation as well as optimising the average inventory carrying at store. To determine the Safety Stock at store, the following two factors are considered: (a) Forecast accuracy: The difference between store’s sales estimate and actual sales. (b) Supply variability: If supply from regional distribution centre does not reach store on predefined days, there is a chance of out of stock situation. So, in order to safeguard the store from losing sale due to supply variability, a certain amount of safety stock needs to be considered during replenishment.

Methods Recommended Different Methods are suggested for: 1. Regular SKUs which have sufficient sales history 2. New introduction For SKUs that have sufficient sales history, safety stock will be calculated dynamically based on the service level suggested. This would operate within a suggested min-max range that would help to maintain an optimum level of inventory at store. For relatively new SKUs the static method is suggested in which safety stock in terms of quantity or days would be maintained. When these products get stabilised, and sufficient past history is available, Safety Stock calculation will be done. Prerequisites for safety stock calculation is availability of past history of actual sales and estimates.

Formula for Safety Stock Calculation l l l

Safety Stock = SF ´ SQRTCRPT ´ s Standard deviation measure for forecast error and supply uncertainty. Safety factor (SF) changes based on defined service level. Replenishment time (RPT) is calculated from the transport duration, GR/GI processing times, and planned delivery time.

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Inputs of Data Historical data that is required for calculating the forecast error and supply variability are as follows:

Forecast Error Forecast error would be calculated based on (a) Historical weekly sales of the past 24 weeks (six months) (b) Historical weekly estimates of the past 24 weeks (six months) This demand variability of past data will be used to calculate the relative forecast error of future estimates.

Supply Variability Supply Variability would be calculated based on (a) Planned lead-time of the past six months. (b) Actual lead-time of the past six months. Due to nonavailability of actual Transit Lead time (TLT) data in the system, a certain judgemental number would be used depending on the TLT between each store and it’s supply source. The following safety stock (in no. of days) will be used to account for TLT variability. TLT

TLT Variability (no. of days)

1–5 days 6–10 days > 10 days

1 2 3

Service Level There were two approaches which were evaluated for defining the service level for store. l Shortfall-event-oriented (alpha service level): The service level in percentage means that no shortfall is expected in x percent of the buckets within the planning period. l Shortfall-quantity-oriented (beta service level): The service level in percentage means that x percent of the expected total customer demand can be fulfilled within the planning period. Example for calculating the service level Bucket Expected demand Shortfall quantity Shortfall event

1 100 0 —

2 100 0 —

3 100 0 —

4 100 0 —

5 100 0 —

6 100 10 x

7 100 0 —

8 100 0 —

9 100 0 —

10 100 10 x

Total of shortfall quantities: 20 ® beta service level: 1 – (20 / 1000) = 98% Total of shortfall events: 2 ® alpha service level: 1 – (2 / 10) = 80% Alpha service level is much more stringent and the retailer had chosen beta service level to start with initially. Retailer had defined the service level for different categories based on its profit as mentioned in the table. To safe guard itself against the system generated number (which is based on history and the quality of safety stock forecast depends on cleanliness of historical data), the retailer also defined

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a minimum and maximum level of stock for each category. This min-max range would limit the safety stocks within that range whenever system calculates any value out of that limit. For example, if the system calculated safety stock level for Fashion at a store for only one week, then it will automatically get corrected to two weeks. Categories Fashion Items Grocery – High Value Grocery – Low value

Range (Beta Service Level)

Min Week

Max Week

99.9 95 95

2 2 3

6 4 8

Cycle Stock Planning at Store The cycle at store is determined based on the frequency of receipts from RDCs (Regional distribution centre) i.e. if at one of the store, the stocks are reaching on every third day i.e. the stocks are connecting 10 times in a month, so in that case the cycle stock at store is kept as three days. The cycle stock is kept based on the judgement for each category looking at the frequency of receipt. The following table shows how cycle stock at store is calculated for certain category of items. Category Fresh Vegetables, Milk, Live stock Other dairy Items High value grocery Low value grocery

Frequency of receipts / M

Cycle Stock

>=30 15–29 11–15 6–10

1 2 3 5

Use of Information Technology for Inventory Management Retail inventory management is one area where almost every retailer uses information technology— the volume of transactions in this area forces retailer to use IT application. There can be different level of applications: l The most basic level of inventory applications supports goods issue, receipt and such basic transactions. It can do inventory valuation based on defined principle like FIFO, LIFO, average, weighted average etc. It supports simple inventory reports. l Retailers use application which helps a retailer for goods issue, goods receipt, inventory postings and valuations, stock reports. Many large retailers use ERP application for this. l The next level of inventory applications can recommend how much inventory to hold based on simple rules like min – max, day’s coverage etc., and can support relatively complex probabilistic models based on service level. These support complex inventory analytics and exception reports. l The most sophisticated inventory applications can do multi echelon inventory models i.e. recommend where to keep how much in an inventory network. It needs to be known whether it makes sense to keep more in store and less in RDC or vice versa. These applications help in inventory simulation. They can do collaborative inventory modelling with suppliers. The new generation of inventory management applications support inventory optimisation i.e. help retailers with ‘what if’ scenario simulation of where to keep more inventory (at RDC or at store), calculation of scientific safety stock levels, and suggesting the best inventory network.

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Measures of Inventory Inventory is something very closely measured in most of the retail organiations as success or failure of retail organisation depends on how effectively inventory is managed. As mentioned earlier, a retailer can not afford to be out of stock and hence needs to ensure that enough inventory is available for sales. At the same time he can not hold too much of it as lot of unsold inventory brings the profit margin down for high cost of carrying and can result in year end markdown. There can be several inventory measures as shown in Table 7.5. Table 7.5 Inventory Measures Measure

Definition

Stock outs

Number of incidents when customer looking for an item and the item is missing during a particular time period. As it is difficult to assess what item the customer is looking for—so generally stock out is measured as number of zero stock items on regular basis Annual Sales/Average inventory level Sum of all costs associated with finished goods inventory (like opportunity cost, shrinkage, insurance and taxes, total obsolescence, channel obsolescence etc.,) as a percentage of sales turnover The number of times a SKU cycle turns over in year; divide the average inventory level with the annual cost of sales. The percentage of total gross inventory (based on value) covered by expected demand within specific time buckets The absolute value of the sum of the variance between physical inventory and perpetual inventory Or the number of accurate part cycle counts divided by the total number of cycle counts performed expressed as a percentage. The annual obsolete and scrap reserves taken for inventory obsolescence expressed as a percentage of annual average gross inventory value

Inventory turn Inventory Carrying Costs

SKU Turnover Inventory Aging Inventory Cycle Counting Accuracy Inventory Obsolescence as a percentage of Total Inventory Shrinkage Storage Space Utilisation

The costs associated with breakage, pilferage, and deterioration of inventories Volume of all materials stored divided by the total volume of the storage facility expressed as a percentage

Conclusion In this chapter we have discussed three important concepts of retail logistics–Transportation, Warehousing and Inventory management. Retail transport and warehousing are two important logistics functions contributing close to 50 percent of logistics cost. Modern retailers adopt many innovative tools and best practices for better transport planning and warehouse management. l Tools used for effective transportation planning like load building, vehicle space optimisation, consolidation, milk run, route planning, continuous move, multimodal transport planning, collaborative transport planning etc., are discussed.

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Transportation planning is always subjected to a set of constraints, any optimisation needs to factor these while arriving at a feasible solution. l Effective transport management also calls for managing a set of transport execution processes efficiently. l Retail warehouses have a set of inbound (goods receiving, unloading, put-away etc.,) outbound (picking, packing, goods issue) and in house (slotting, inventory management, managing material handling equipments, reverse logistics, work and resource management etc.,) processes. l Modern day retail warehouses also perform a set of value added services. Warehousing and transportation in India has many special challenges in terms of poor infrastructure, nonavailability of sufficient warehousing capacity and cold chain network. However the recent retail boom in India has encouraged many global and local logistics players to invest in India and become part of the Indian retail growth story. The chapter ends with explaining the concept of retail inventory—why inventory is needed and a set of tools for inventory management and control are discussed. These tools help retailer to take decisions like which inventory to hold, how much and where. Some retailers are going beyond traditional inventory management and control and moving into the arena of using inventory as a tool for strategic advantage. Leading retailers like WalMart or Amazon have shown how out of box concepts like cross docking or virtual inventory can be used as a tool of strategic differentiator. l

Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

How better transport management benefits all retail stakeholders? What are the unique requirements in transport planning in retail industry? What are the drivers and tools for better transport planning? Explain the different forms of consolidation What is dynamic route determination and continuous move? What are the different modes of transport? What are the different constraints in transport planning? What are the steps in transport execution? Explain. How technologies can help in transport management? What are the main functions of a retail warehouse? Explain each of them briefly? What are the best practices in Put-away? What is the concept of slotting? What are the different tools for slotting? Define some of the best practices in slotting? What is the concept of picking? Explain different conventional picking methods? Explain the concept of voice and light picking? Explain the concept of resource and labour management? Explain the best practices in this area. What are the different value added services that can be performed in retail warehouse? What are the costs of inventory? Explain the concept of EOQ model? What are the limitations of this model? What is the purpose of ABC item classification? How is it done? Explain the concept of inventory management pyramid. What factors a typical retailer will consider while deciding inventory?

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Objective Type Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

What is the difference between drop size and stop density? By consolidating deliveries drop size . Increasing stop density means distance between the points . In hub and spoke model, hubs are generally associated with . What is the difference between route planning and load planning? What is meant by access restriction? What are the documentations necessary for transport? What is the difference between these two tools—ABC slotting and slotting optimisation? What is the difference between work management and labour management? What is Kitting? What is the EOQ formula? How re order point is calculated? What is the difference between Q and P model of inventory? What is the difference between cycle stock and safety stock? What are the three important decisions of inventory management?

Assignments A. Study the difference in transport and warehousing requirement for a specialised food retailer and apparel retailer? B. Study the supply chain of a retailer. What is the transport and warehousing cost as percentage of total supply chain cost? Can you suggest him some better methods of transport planning so that the cost can be reduced keeping the service level same? Study the suitability of different transport planning concepts explained in this book in this context? C. Study two retailers and compare their inventory management policy? How their policy changes depending on type of items? What tools they use for inventory management? How effectiveness of their inventory policy are measured? D. Study ordering policy of two retailers. How order quantities are calculated? What factors are considered for ordering? How effectiveness of order management is measured?

[CHAPTER]

8

LEARNING OBJECTIVES

Retail Logistics— Contemporary Issues

In this chapter we will explain the following concepts: l

l

l

l

Managing Retail Shrinkage n Elements and Causes of shrinkage n Approach for shrinkage reduction Managing Logistics Service Provider n Services outsourced to 3PL/LSP n Major drivers of logistics outsourcing n Logistics service provider selection: Case study for a particular retailer n Evolution of 4PL n Retail Logistics Service Provider—An Indian perspective Managing logistics visibility and exception n Retail logistics exception handling process n Role of information technology in managing logistics exceptions Green Retailing n Green Logistics n Green Infrastructure and Green IT

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MANAGING RETAIL SHRINKAGE India tops in retail supply chain loss: It is not just the booming retail industry in India that is making news internationally, but the alarming shrinkage rates (the percentage of loss of products between manufacture and point of sale) as well. As per Global Retail Theft Barometer a study conducted by Centre for Retail Research, England, across 32 countries in North America, Europe and the Asia-Pacific, India has the highest shrinkage rate of 2.9 percent. This is the largest survey of retail crime and loss in the world, which was conducted between June 2006 and June 2007. The total global shrinkage cost retailers in the 32 countries US $98,630 million or 1.36 percent of turnover. Around 820 retailers, operating 1,38,603 stores provided the data used in this study. The survey—funded by Checkpoint Systems—found that customer theft is responsible for 42 percent of shrinkage (US $41,504 million). Disloyal employees cost 35.2 percent (US $34,671 million), internal error and administrative failure (like pricing or accounting mistakes) was 16.5 percent (US $16,248 million) and supplier theft and fraud was 6.3 percent (US $6,207 million). Using the right systems at all stages—right from inventory through the supply chain up to cash tills and surveillance—can greatly help reduce shrinkage. Retailers are increasingly ramping up systems by in-house programmers to internationally reputed software of IT companies specialising in retail. Source: The Times of India, 8 February, 2008 (Online edition); www.indiaprwire.com (accessed on 16th December 2008)

Some of you perhaps have seen this article in one of the prominent daily newspaper sometime back. At times retail shrinkage is misunderstood as things like retail theft/shop lifting. However as described in the article, shrinkage is a much larger issue for retailers having variety of reasons. According to retail best practices principles there are four elements of retail shrinkage.

Elements and Causes of Shrinkage Elements Shrinkage consists of four elements: l External theft /Customer theft or shop lifting Most of the people refer to this as retail loss. This can also be via merchandise concealment, price-tag swap or alteration, or transfer of goods from one container to another. The most stolen items included branded and expensive products like cosmetics and skincare, alcohol, women’s apparel, perfumes, razor blades, DVDs/ CDs, video games and video consoles, small electric items and fashion accessories. In India, cosmetics, batteries and small food items are the most commonly flicked l Internal theft It is theft by employees or contracted staff. Retailers in the US, Canada, Australia and Iceland reported that employee theft was higher than customer theft. Internal theft does not receive as much monitoring as customer theft. One of the reasons of high internal theft in retail industry is because this industry attracts many unskilled people who work for minimum wages. Staff fraud includes discount, refund and credit card abuses etc. Positive programmes of employee relations built around fair compensation, proper surroundings and employer sponsored activities can reduce employee theft. l Process failures Shrinkage can occur if there is a failure in the physical flow of goods in the supply chain, in information systems or finance systems. The effect of this failure in any one of these systems may mean that stock will be lost and/or payments of goods are incorrect. This can occur for reasons like pricing or accounting mistakes, internal errors, administrative and paperwork errors etc.

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195

Vendor fraud This leads to shrinkage when trading partners deliver wrong quantities or charge for goods to their advantage. Supplier theft and fraud is common when external vendors are given the task of stocking up the store. Figure 8.1 explains these four reasons of retail shrinkage.

Fig. 8.1

Retail Shrinkage Elements

Causes of Shrinkage Understanding how stock is lost is important for any effective stock loss reduction strategy. This helps in identifying priorities and enables responses to be tailored to specific needs. There can be several reasons for retail shrinkage: 1. Lack of cooperation among departments /companies Lack of cooperation within and between companies involved in the supply chain is a cause for shrinkage. Generally stock loss is viewed as a responsibility of the security, audit and store department. Sometime the real cause of stock loss may lie with other departments like Logistics, Procurement, Marketing, HR etc. As shown in Figure 8.2 stock loss can be a cross functional problem. It is therefore necessary for all functional heads to be aware of their responsibility to reduce shrinkages. Having the mindset that security department (which is generally outsourced to an external agency) will solve the problem is a wrong assumption. 2. Making shop lifting synonymous with shrinkage The common practice in retail industry is to try finding reasons for shrinkage at the end of the supply chain i.e. at store—so shoplifting becomes the most obvious choice for all shrinkage—though the reality is that one third of the loss takes place before the goods have reached the retail outlet i.e. during goods in transit and storing in distribution centres. Most of the current shrinkage tools, applications and technology solutions the shrinkage managers has (EAS tools, CCTV etc.) are capable of handling shrinkage issues in store. An integrated shrinkage reduction approach across the retail supply chain will call for redesigning the process for traceability and adopting technology solutions like RFID. 3. Having the same policy for all products There are hot products like cosmetics, perfumes, DVDs/CDs, video games, impulse items like small powder tins or lipstick which are more susceptible to shrinkage. The challenge is to find these hot products and the nature of the merchandise where shrinkage is high. An apparel and footwear retailer reported pilferage as

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Fig. 8.2 Retail Shrinkage is a Cross Functional Problem

nil for its shoe section whereas its clothing section has more pilferage. Privacy laws dictate that a clothing store’s changing rooms are out of bounds to closed circuit TV (CCTV), so it is easier for thieves who pretend to try on the apparel to ‘walk out’ wearing the merchandise, leaving behind their own ‘used clothes on the pegs’. The retailer adopted different security policies for these two sections—use sensormatic electronic anti theft devices on the more expensive garments to prevent their pilferage. 4. Having the same policy for all stores/locations Losses are not uniform across the chain and vary across separate site, distribution centres and stores. It is important to identify which stores in a retail chain are responsible for a disproportionate amount of loss. One retailer reported that the bigger stores, with larger floor space and relatively smaller staff-to-merchandise ratio, tend to have about 1.5 percent shrinkage, whereas smaller stores may have one percent shrinkage. For these hot stores, processes and procedures need to be brought under control. 5. Shrinkage is known only at the end of the year For many retailers stock loss is only known at the end of the year during annual stock taking process done by accounting department. It is not possible to specify the point of time during the year when loss occurred. Reducing the time period for this calculation increases the likelihood of understanding that who was responsible, how and where the stock loss had taken place.

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Table 8.1 How shrinkage affects supply chain/Cost of shrinkage Type of effect

Supply chain area

Details

Direct

Increased cost

Cost of the item is a direct loss to the retailer as he now needs to buy the item again. Negatively impact customer satisfaction by causing out of stock at retail outlets. Lost stock is not reported in the inventory system, the replenishment system will not reorder this and store shelves will remain empty until the inventory is corrected manually and manual order is generated. There are expenditures incurred responding to stock loss, i.e. cost of counting the actual stock, cost of ordering the lost stock etc. Sometime retailers may relocate the products from aisle and lock them if they think the chance of theft is very high; this really limits the assortment on offer for retailer.

Reduced customer satisfaction Replenishment system gives wrong results

Indirect

Increased supply chain administration cost Limits assortment

Approach for Shrinkage Reduction As explained earlier, shrinkage is a much larger issue than simple theft and requires attention of senior management team to set policy, setting KPIs, allocating defined responsibility to individuals and monitoring performance on regular basis. Shrinkage policies need to be developed in consultation with supply chain partners. Studies have shown that companies employing dedicated security/ loss prevention and audit departments suffer much lower losses due to shrinkage. If all shrinkage related problems are recorded in a system and analysed, then these issues can be tracked effectively. There are few guiding principles and best practices adopted by some leading retailers to reduce shrinkage. These different solutions can be grouped into four different types: people, processes, design and layout, equipment and technology. These are as follows:

Process l

l

l l l l

l l

l

Focus effort on hot products, hot stores and hot spots in supply chain Apply the 80/20 rule i.e. focus on right products and right stores so that maximum benefits can be obtained quickly. Fast tracking to secure area The delivery area leaves products vulnerable—move them to a secure storage area as soon as they arrive. Check deliveries Checking deliveries is important—mistakes show up as stock loss. Secure delivery Separate high risk products and deliver them in sealed pallets from DC to outlets. Check each product movement. Appropriate replenishment Stock shelves to match the rate of sale—too many products tempts thieves, too little frustrates shoppers. Frequent replenishment between secure storage and shop floor. Regular counting Count high risk products to track losses and allow accurate reordering. Shelf counting reduces the time between loss happening and store staff becoming aware of it. Ongoing control through regular stock counting.

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People l

l

Have in store champion Identify a member of staff to take responsibility for checking product movements. Define ownership measures like stock loss results to be owned by in store champion. Staff awareness Encourage all staff to be highly vigilant.

Design and Layout l l l

Visible locations Keep products on open shelf but in highly visible locations. Anti theft fixtures Use fixtures that slow down the rate at which products can be removed. Retailers lacking in organised counter systems may suffer shrinkage as high as 30 percent of sales

Equipment and Technology l

l

l

l

Using the in store CCTV system in conjunction with the data on losses gathered through the counting helps identify persistent offenders. In jewellery and other sections, where goods are more costly, the mall implements CCTV monitoring. While the thief is not immediately caught using this method, the recording allows the security personnel to determine the manner of theft and get familiarised with physical features of the trespasser, who is likely to return to the store. Source tagging A loss prevention system that is gaining popularity is source tagging, which places the anti theft label or tag inside the merchandise at the manufacturing or packaging stage. This solution uses acousto-magnetic (AM) technology. When the device emits a beep at the exit gates, the customer is called in to have his items checked. Electronic Article Surveillance (EAS) systems EAS system vendors use proprietary technology tags (unlike RFID vendors who all use tag following EPC standards) for retail loss prevention. Advanced shrinkage applications these days are web based; integrate the capability of BI and analytics to deliver preventive alerts. Leading application vendors in this space are: Aspect loss prevention, Datavantage, Epicor software, March Networks etc.

Example A retailer designed an end to end loss prevention solution using technology platform from IBM and few other vendors to reduce shrink. The solution could: l Monitor all store locations from central operations and access them from virtually any location. l Collect integrated intelligence for real time decisions on sources of shrink, traffic patterns. l Understand what is happening at the POS through exception analysis and reporting. l Know instantaneously when the wrong UPC code is used. l Take action before customer theft occurs through facial recognition and actions analysis. l Examine bottom of cart for forgotten items, which are immediately recognized and added to the customers receipt. l Provide visual theft deterrence against internal inventory shrinkage.

MANAGING LOGISTICS SERVICE PROVIDER 3PL and Logistics service providers (LSPs) are playing leading role in today’s retail supply chain as most of the retailers have outsourced some or all of their logistics operations to 3PLs/LSPs. History of logistics outsourcing for retailers started with outsourcing their transport needs to transport companies.

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Next, as retailers expanded their scope of operations in different cities—there was a need for warehousing space in different places—instead of outright procurement which require much more long term commitment, retailers preferred to take it on rent or outsource their entire warehousing need (space, infrastructure requirement, labour, administration of warehouse etc.) to third parties. Over time some of the large transportation companies started owning their own warehouses and started offering this service. This was the beginning of 3 PLs/LSPs and most of them had their origin in either transportation or warehousing business. Pricing structure employed by the vendors: fixed and variable, cost plus, gain sharing model. Beyond retail there are several other industries which is driving 3PL like high tech, FMCG and Auto sectors. There is another kind of service which retailers always preferred to outsource—these are services like clearing and forwarding, customs clearance, managing insurance etc. 3 PL/LSPs expanded their services in these categories as well. Over time they started offering retailers value added services at warehouses like light assembly, kitting, labelling, packaging etc. Today’s 3 PLs/LSPs are much more technology savvy and provide capabilities like system for track and trace (to know where your consignment is lying), system for higher visibility (if there is a delay in shipment, you get an alert to plan for your next course of action) and advanced analytics (to know performance of your transportation and warehousing operations). 3 PL’s have evolved from a variety of background like Transportation service providers, Vendors renting warehouse space, Freight forwarder and information technology solution providers. Figure 8.3 shows how different type of organisations ventured into this business.

Fig. 8.3 3PL—Industry Evolution

Services Outsourced to LSP/3PL Most of the logistics service providers started with basic services like transportation, warehousing, freight forwarding, customs clearance etc. Retailers wanted to outsource these as some of them are typically capital intensive operations or activities involving many procedural hassles. Most of the logistics service providers also wanted to start with these areas owning to their historical strength and background. Over the years LSPs started providing more value added services like reverse logistics, tracking, packaging, order fulfillment etc. Typically, retailers were selective and slow in outsourcing these activities as in most cases these are core areas of retailer’s business process (like order fulfillment for an internet retailer) and involve higher level of risk.

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There are few logistics service providers who have reached the final stage of maturity in logistics outsourcing. These LSPs helped retailers to bring radical logistics innovations by supporting processes like cross docking, network management, route and load optimisation, supply chain collaboration etc. Some of these LSPs had also taken up full scale IT consulting or supply chain business consulting responsibilities. Figure 8.4 explains this path of gradual transition of LSPs, the way they matured over the years. Though the initial driver of logistics outsourcing was cost and retailers found it costly to maintain their own fleet for transportation, over time it was the concept of core competence which had given a boom to 3 PL/LSP industry. Retailers found that 3PLs can manage their logistics operations much more efficiently than their own staff because they have economy of scale and they do it for so many other customers that they can share the best practices. They can also leverage the relationship with other government bodies (like excise, customs authority, port authority, transport authority etc.,) for a retailer’s benefit. These days the trend is towards more and more outsourcing—however the major challenge will always be to identify the right partner for outsourcing and to monitor him on regular basis.

Fig. 8.4 3PL—Services Outsourced

Major Drivers of Logistics Outsourcing Historical Drivers Historically the major driver for using 3PL was cost savings. Cost with agreed SLAs (Service level agreements) was the core driver for logistics managers to opt for 3PLs in 80s. 3PLs were evaluated based on cost and service capabilities. Major historical drivers were: l Reduced labour costs

Retail Logistics—Contemporary Issues l

l l l l l l l

201

Reduced warehousing cost as retailers did not have their own premises at desired locations and it was expensive to own these Reduced inventory carrying costs Reduced transportation costs Reduced cycle time Improved customer service Access to information systems Need for higher IRR on investment Increasing operational efficiency

New Drivers Today, customers expect their 3PL providers to be more than just delivery mechanisms now. Logistics outsourcing decisions and evaluation of service providers need to be based on long term, strategic factors. Logistics management is also questioning the 3PL providers’ ability to be flexible, innovative, and to make use of newer, more efficient technology. 3PLs are increasingly becoming supply chain partners. The new criteria include the following: l Need to focus on core competence l Global logistics network l Increased IT complexity l Capability to provide supply chain visibility, and ability to quickly scale up l Support for collaboration initiatives Disadvantages of logistics outsourcing: l Loss of control—A retailer who had gone for logistics outsourcing is depending more on external agencies for customer service. l Impact on in house workforce—Outsourced services may cause redundant workforce. Figure 8.5 compares the drivers for logistics outsourcing for yesterday and today. Benefits of using LSP is detailed in Figure 8.6.

Fig. 8.5 Drivers of Logistics Outsourcing are Changing

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Fig. 8.6 Benefits of Using 3PL/LSP

Logistics Service Partner Selection: Case Study for a Particular Retailer Now we discuss a case study—the approach taken by a particular retailer in selecting their logistics service provider. The retailer had followed a three step approach as follows.

A. Initial Short Listing of Logistics Partner Initially all LSPs were asked to provide information on following. Based on these information, LSPs were evaluated: l Fleet (Fleet strength, whether own or outsourced, if outsourced by what percentage, drivers trained) l Warehouse space available l Manpower at the warehouse (contract labour, permanent employee, continuous training) l Warehouse value added services l Spread and market penetration (total number of warehouses in every region, number of customers in every region, sales revenue for every region) l IT Infrastructure (basic warehouse management system availability, E Mail facility, EDI connectivity, Network—Intranet, goods track and trace system, GPS, adequate hardware, availability of transportation management/transportation optimisation system). l Qualitative aspects (ability to offer customised services, responsiveness, innovative ideas, design suggested, customer acceptance) l Cost competitiveness (direct freight, local freight, warehouse costs, ability to recycle packing materials) l Value added services that can be provided l Reverse logistics capability l Capability of export/import—relationship with regulatory authorities l Multi modal transportation capability l Knowledge of country’s infrastructure (years of presence) l References of performance. Logistics provider’s track record—Customer’s base and growth rate. Evaluate metrics like fulfillment accuracy and shipment time l Financial stability l Capability and accuracy of small orders (parcel delivery) with flexible pricing l IT capability and interfacing capability with customer’s existing business systems. Shippers want

Retail Logistics—Contemporary Issues

l l l

to track their goods via internet and receive automatic notification when a shipment is deviating from the schedule Scalability (handling pick buying—during holidays, month end) Some consulting capability—Shippers no longer look at their LSPs as someone who can move boxes but who can improve their supply chain processes Successful providers should offer value added services like cross docking, delayed allocation, in transit merge, postponed assembly etc.

In the next stage, the LSPs were evaluated based on a set of qualitative and quantitative filters, their role, activities and SLAs are defined.

B. Selecting a Logistics Service Provider The procedure followed here: l Use a qualitative filter to reduce the logistics providers from large numbers l Use a quantitative filter to reduce the number to one or two

Qualitative Filter l l

l l l

Vision statement: Aspirations of the company, capabilities, direct/indirect investment in fleet, warehouse, IT support etc, value addition. Local knowledge: Investment in specific geographical region, strengths in terms of fleet—hubs— warehouses, routes in the specific geographical region, local tie ups with carriers—warehousing agents etc. Flexibility: Capability of LSP to handle fluctuations in demand Customer base: The customers LSP is providing service and the range of services offered Containerisation capability

Quantitative Filter It can be broken down into four stages: l Role definition l Job scope l Service deliverables l RFQ Role definition At this stage a broad level role definition of the activities that will be desired of the LSP is determined. This could be in the areas of: l Warehousing (near distribution centre, vendor consolidation centre) l Transportation (from supplier to store, from supplier to RDC, from RDC to store, home delivery) l Value addition (kitting, packing) l Inventory management l IT support (hardware, software, bar coding, tracking, integration with retailer) Job scope At this stage the role definition gets more detailed and intricacies are unveiled l Warehousing: Required capacity area, activities to be undertaken, material handling equipments required, manpower resources required, average load factor expected l Transportation: Type of service required (Small/FTL/LTL etc), mode (road/rail/air), geographical coverage, type of vehicle required (LCVs/HCVs), type of load (volume/weight), channel coverage l Activities to be undertaken: loading, unloading, handling, order processing, inventory management, light assembly/packing operations etc. Service level deliverables These are the process metrics that have to be defined once the job type is clearly articulated.

203

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l l l l l l l l l l

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Order to shipment cycle time Space utilisation Stock mismatches Housekeeping/safety process parameters Vehicle supply rate Transit time reliability Transit damage percentage Containerisation Collection cycle time Quality levels at kitting/packing

Request for quotation At this stage the LSPs are asked to give quotation. The essentials of RFQ are: l Cost plus margin format l PIC—Productivity improvement clause. Example can be two percent reduction in cost every year from third year onwards l Variable costs per unit with assured numbers

C. Evaluation of Quotation and Final Selection Finally different quotations of LSPs were evaluated based on cost, services offered, experience in the region and industry and overall track record.

Evolution of 4PL A ‘4PL’ or fourth-party logistics provider is a supplier of outsourced supply chain coordination and management services that generally does not own or operate the underlying logistical assets and resources. 4th Party Logistics is a term created by global consulting firm Accenture. Central to the 4PLs success is the ‘best of breed’ approach to providing services to a client. The development of 4PL solutions leverages the capabilities of 3PLs, technology service providers, and business process managers to provide the client organisation with greater cross functional integration and broader operational autonomy. 4PLs are also known as Lead logistics providers (LLPs). Two key distinctions make the concept of 4PL unique and sets it apart from other supply chain outsourcing options available in the market today. First, a 4PL delivers a comprehensive supply chain solution, and secondly, a 4PL delivers value through the ability to impact the entire supply chain. The investment required in technology will be minimised in a 4PL relationship. As the 4PL implements and runs supply chain solutions for multiple clients, the investment in technology is spread across the clients. Typically, consulting firms focused on the strategic end of supply chain solutions leveraging technology whereas 3PLs have focused on operational issues. A 4PL solution leverages the combined capabilities of both management consulting and third party logistics providers. 4PL does not own assets. Figure 8.7 explains how 4PLs have evolved over time and leverage best of breed capabilities of 3PLs, technology firms and consulting firms. Though the management fees of 4PL looks like an additional cost, the client receives more tangible and intangible benefits in the form of reduced transport rates. Further advantages are a single point reference for all logistics needs, possess knowledge of logistics, have manpower resources of higher quality to supervise vendors and ensure continuous process improvements and, above, all an IT base to network customer systems.

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Fig. 8.7 Evolution of 3PL and 4PL Source: Gattorna, J. L. (1998), Strategic Supply Chain Alignment, 5th ed., Aldershot

Retail Logistic Service Provider—An Indian Perspective Poor infrastructure is the major bottleneck Indian organised retail industry has a competitive disadvantage here due to poor infrastructure status in the country. Poor road condition, lack of sufficient warehousing facility at competitive price, absence of cold chain i.e. refrigerated vehicles and warehouses all contribute to this adverse situation. Quoting from a study undertaken by Transport Corporation of India, a typical truck driver would need to stop 49 times during his 2,400 km journey from Kolkata to Delhi because of bad roads, innumerable toll gates which operate on different billing systems causing delays and an unproductive journey. The logistics management cost component in India is as high as 7 percent–10 percent against the global average of 4percent— 5percent of the total retail price, despite the fact that the salary of an Indian logistics professional is far lower than that of his counterpart in US or Europe. The poor condition of roads translates directly to higher vehicle turnover, which in turn pushes up the operating costs and reduces efficiency. The reduced efficiency is passed on to the logistics service providers, with transportation costs accounting for nearly 40 per cent of the total logistics cost. The National Highways are being upgraded but these highways account for a meagre two per cent of the total road network in the country. The Government of course is trying to execute a large number of road and other infrastructure projects through PPP (public private partnership) initiatives to ease the pressure on the government funds. There are other problems such as complex tax laws and insufficient technological aids. The fragmented market increases costs due to huge paperwork and the individual truck owners, dominating the market, are unable to contract directly with customers, with the result freight consolidators and brokers take a commission to generate business for the truck owners. Only about a few thousand vehicles out of a total of several millions have tracking system. The use of IT, thus, is limited. Two per cent of roads constitute national highways but carry 40 percent of all cargo. Only 48 percent of villages are covered by road network. Indian cargo travels 250 to 300 km per day vis-a-vis 600–800 km as per international norms. This severely limits the access of rural products to the consumer markets. Consumer prices for fruits and vegetables in India are as high as 3.5 times the farm gate prices.

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Logistics has huge opportunity in India The good news is in India the demand for end to end retail logistics solutions is far outstripping supply due to huge growth in organised retail during the last few years. The logistics market for organised retail is estimated at US $50 million and is growing at 16 percent. It is expected to reach US $120–$130 million by 2010. Many global supply chain and logistics firms like UK based logistics firm Wincanton (recently was in news regarding JV with Reliance retail), Hong Kong based Heng Tai Consumables, ABS Procurement Co, ACM China (the greenhouse specialist) are eying opportunities in retail logistics space in India. Logistics players in India are ramping up their capital expenditure programme. Edelweiss estimates that the six major players in this sector—Concor, Gateway Distriparks Ltd (GDL), Allcargo, SICAL, Transport Corporation of India and Gati are all in an expansion mood. Traditionally, Concor and SICAL’s strength are in cold chain logistics, GDL and SICAL’s in container train operations, while TCI and Gati’s is warehousing. A characteristic feature of the local express and logistics service providing companies in India is that many players offer homogeneous services, with the result there is near commoditisation of services where the demand is price sensitive. The top end of the market is controlled by a handful of multinationals and large domestic players.

LSPs/3PLs in India LSPs in India can be classified based on their origin like: l Upgraded truckers e.g. TCI, Gati etc. l Upgraded couriers e.g. Elbee, Safe Express, AFL etc. l Upgraded import/export agencies or C and F agents l MNC’s e.g. Sembawarg Few LSPs currently operating in India are: l Gati l TCI (Logitra) l Elbee l Safe Express l AFL Logistics l Lemur l Sembawarg Shriram integrated logistics l UPS world wide logistics l TNT logistics l Airlink India There are several trends that are emerging in Indian retail logistics sector. Few interesting trends are: A. Big retailers are opening logistics companies to meet internal need and to serve external customers.

Case in Point: Future Logistics Future Logistics has big plan for retail transport and warehousing: Kishore Biyani’s US $2 billion Future Group has big plans for entering into logistics business, investing more than Rs 400 crore by 2010. The group plans to increase its two million sq ft of warehousing space to five million sq ft by 2010 and has plans to acquire a fleet of 1,400 specially designed trucks for the transportation of goods of which 800 trucks for intra city movement. To start

Retail Logistics—Contemporary Issues with, the company will operate intra city fleets in eight cities and the larger inter-city trucks will be used to cart goods procured from suppliers from Tiruppur and the likes to these eight cities. The fleet will be specially designed for carrying garments in hangers and transporting furniture and other articles requiring careful handling. The logistics business would be conducted under the name of Future Logistics Solutions Ltd (FLSL) and the company is targeting a top line of Rs 800 crore by 2010. FLSL plans to operate about seven new mega-merchandising hubs ranging from 70,000– 100,000 sq ft. Going further, in line with Future Retail’s growth, FLSL plans to operate additional seven hubs and 30 warehouses in cities nation-wide over next few years. These hubs will receive products from vendors and then feed the other smaller warehouses across the country. It would offer its services to non-group companies as well. FLSL is in talks with companies, especially in the apparel sector, for its services. Currently, the company is identifying and evaluating sites and requirements for its hubs. FLSL’s strategy is to focus on the consumer logistics segment dealing in products related to foods, fashion, general merchandise and home solutions. The company expects 50 percent of its revenues to come from outside the group by 2010–11. Future Logistics will focus on verticals like courier service, road transportation, freight forwarding, cold chain infrastructure through a string of joint ventures and focus on sectors like textiles, consumer durables and pharmaceuticals. The company will also build over a million sq ft of cold storages. Source: www.futurelogistics-india.com (accessed on 3rd July 2009); The Economic Times (Online edition)—25th November 2007; The Financial Express (online edition)—9th June 2008.

B. Logistics players are learning best practices working with global retailers.

Case in Point: Radhakrishna and McDonald Radhakrishna Hospitality Services Pvt. Ltd. Radhakrishna Hospitality Services Pvt. Ltd. (RKHS), the logistics service provider to McDonald specialises in handling transportation of temperature sensitive perishable products especially of small volumes items across the country. Traditionally, there was no reliable service provider to cater to this need; companies have to move goods either by air, which is expensive, or through bulk carriers with very little control on the delivery schedule. RKHS launched a new service called Fresh Rush which is a temperature controlled transportation service addressing the needs of small volume cargo. Some salient features of this service are: l Multi-temperature products, such as Frozen (below –18°C) and Chilled (1°C to 4°C) can be transported l Flexibility of load movement—A minimum of 500 kg to maximum of 5,000 kg can be transported l In transit temperature tracking l Adherence to strict hygiene standards l Consignment can be tracked through GPS system l Perishable tonnage handled per month—7,000 tons l First in the country to use multi temperature vehicles l Use of innovative methods to ensure temperature integrity during transit Source: www.rkfoodland.com (accessed 3rd July 2009)

C. Logistics players are launching specialised services for retailers.

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Case in Point: Safexpress Launches ‘Stock2Shelf’ Safexpress Pvt Ltd has rolled out its new service Stock2Shelf, to provide value added supply chain services to the malls across the country. The service will enable retail stores inside malls to function seamlessly, especially during all national holidays, Sundays and during sale periods as well, when malls experience heavy footprint. The Stock2Shelf service ensures time definite delivery through professionally trained crew that manages stocks along with the necessary paperwork required to enter the malls due to the increased security checks. Stock2Shelf service provides comprehensive mall supply chain services, inclusive of movement of retail and lifestyle goods, inspection and estimation, professional packaging, security clearance, storage and destination delivery, unpacking and reassembling/setting of retail goods, and finally reverse logistics. For this pioneer service Stock2Shelf, Safexpress will operate under a new logo. Dedicated trucks, in green colour will be servicing the retail stores inside malls. These trucks will be plying 24x7, 365 days a year and gradually Safexpress plans to build an extensive fleet of trucks devoted to the Stock2Shelf service. The vibrant logo of this service depicts the lifestyle elements associated with malls which highlights the intrinsic value of this service. This service has now been launched on a pilot basis for all the malls in Gurgaon including Ambience mall, DLF City Centre, Gurgaon Central, MGF Mega City, MGF Metropolitan, Mega Mall, Sahara Mall and DLF Grand Mall. Safexpress plans to gradually extend the footprint of this service across the country. This service will be a major focus area for Safexpress for the year 2009. Source: Moneycontrol.com (accessed on 05 January, 2009)

MANAGING LOGISTICS VISIBILITY AND EXCEPTIONS Retailer X is a leading retailer and getting ready for Christmas sales. Retailer X has big plans for this Christmas, having already worked out with the marketing team a great promotion plan. Expecting at least thirty percent more footfall this time. Negotiations have started with some large warehouses in place to accommodate the extra merchandise this season. Christmas is just one week away and suddenly the retailer had a phone call from its main womenswear vendor—the vendor will be not able to ship its next consignment, as its imported raw material consignment got rejected. Retailer X is in a crisis situation now as he does not have a second source from where he can get the same merchandise at such a short notice. The retailer had to go back on his plan for this Christmas—opting to loose close to 30 percent of its bottom line. This incident shows managing logistics efficiently is no longer about efficiently managing your own operations—as a leading retailer perhaps you control less than half of your supply chain—you need to deal with several suppliers, transporters, outsourced manufacturers, shipping agencies, clearing and forwarding agents etc. Better performance of your supply chain means that you need to have information about what your partners are doing—can manage quickly if there are exceptions happening in their supply chain and thus control their behaviour so that you do not suffer at the end. Figure 8.8 explains how the need for visibility across the supply chain is ever increasing. Once the visibility is in place, the next thing retailers need is effective management of exceptions. Exceptions can occur for variety of reasons like delay in schedule of incoming shipment, rejection of consignment for quality reasons, sudden cancellation of orders by suppliers, sudden change in sales pattern and hence large variations between forecast and actual sales etc. These exceptions can result in stock out, lost sales and unhappy customers. Retailers need to manage these exceptions effectively to remain in business. This may call for adoption of different strategies by retailers like having alternate supplier, having additional safety stock, strategies for selling alternate merchandise, monitoring the activities at supplier’s end at regular intervals or building an effective early alert

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Fig. 8.8 Supply Chain of Future Require Greater Visibility

system in the network which proactively warns the retailer, in case, there is an exception in the logistics network. Use of technology like event management, alert messaging, workflow etc., is common these days for managing exceptions. However technologies can only help when you have an exception management strategy in place and you know exactly what will be your next course of action when you get an exception message. Figure 8.9 shows an international sea shipment scenario; there are eight series of activities planned sequentially. Delay at any step (say Step 2) can reschedule other steps planned later. The table below shows possible exceptions that can occur in a supply chain. Table 8.2

An example of possible supply chain exceptions

Process

Event

Exceptions

Goods receipt process

Quantity of receipt Quality of receipt Date of receipt

Different from P.O. quantity Quality discrepancies Different from P.O. delivery date

Order status Delivery term

Order cancelled Delivery term changed

Sales order process

Retail Logistics Exception Handling Process Managing logistics exceptions effectively is a process that can be divided as a series of steps. These are shown in Figure 8.10. Steps are as follows: l Deciding the elements that need to be monitored Decide the elements in the supply chain which you need to monitor on a regular basis so that exceptions do not occur. Example

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Port New York Port Rotterdam

Arrival Carrier

Arrival at Destination

Loading Begin Custom Documents received Customs Cleared

Loading End Departure

6

5

Arrival Vessel Discharge from Vessel

Intermediate Location

Unloading

ALERT ! Arrival got delayed

2 Arrival and Departure

7

Arrival and Departure

Intermediate Location

Intermediate Location

Legend

8

Customer

Fig. 8.9

Intermediate Location

Arrival at Destination

Preliminary Leg

Unloading Empty Container returned

Main Leg

Arrival Carrier Loading Begin

Supplier Subsequent Leg

Loading End Departure

Example for International Sea Shipment Monitor—Elements / Events

Notify Exceptions

actual events event 2 Supply chain event 1

event 3

object event 2

Alerts

event 4

expected events

Control

Exception Handling Process

Simulate Re Plan

Learn

Re Schedule

Revise Norms Measure Performance

Fig. 8.10

Exception Handling Process

Decide next set of action

1

3

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l

l

l

l

211

of this can be a retailer who had decided that inventory status of merchandise and the status of orders which he had placed on his retailer are two most important elements on which he needs to have control to manage his supply chain effectively. Deciding the events In this step retailer decides the events of selected element that need to be monitored. For example, for monitoring status of order the retailer may decide to monitor three events i.e. the time the shipment leaves the supplier’s factory, the time the shipment reaches retailer’s RDC or store and the time the consignment is inspected at quality check point. The retailer knows that if things go well at these three check points, then he need not worry about his orders. However if there is a delay in the first two steps or a high rejection in the third case, he needs to take immediate action. Deciding the mechanism of exception notification There can be variety of ways for notifying exceptions like making phone call, sending e mail, sending message on mobile devices etc. The mechanism of notification needs to be decided based on the person who will take action on this. The exception messages can be triggered based on severity of exception i.e. if the variation is just 10 percent between the planned receipt times and actual, the message can be only for information purpose. If the variation is 30 percent, this needs to be a serious alert message informing the relevant person and also to his higher ups. There are different alerting messaging technologies to reach participants like e mail, web, cell phone, fax, pager, and Digital assistant (PDA), EDI and XML documents. New additions include greater personalisation functionality, which allows end users to define their own messaging profile. Deciding the next set of action Getting notified about the exception is not enough, if the person concerned does not know the next set of action which he needs to take to handle this exception. Retailer needs to define a set of follow up actions for each type of exception i.e. if he gets an alert from supplier that there is a delay in shipment, then what alternate actions the person responsible should take i.e. to ask the supplier to send material by air instead of road or to expedite the shipment from alternate supplier etc. Retailer can define workflows i.e. if the person responsible does not take action within predefined time say four hours, the exception message is communicated to next set of people in the organisation hierarchy i.e. his boss for taking immediate action. Measure performance It is important to measure the performance at the end of managing the exceptions—how much it costs? Whether it calls for revising some of the existing standards? To manage a stock out, if he has to send the products by air—how much extra travel cost is incurred? Whether selling the products were still profitable? If every time there is a delay in shipment from a particular supplier—whether it calls for revising his lead time estimate or to remove the supplier from the approved supplier list.

Role of Information Technology in Managing Logistics Exceptions A set of information technology applications help in managing logistics applications. These applications are known as supply chain event management applications. The core process elements of SCEM for tracking inventory and orders in the supply chain are monitoring, notifying, simulation, control and measure. l Monitoring—Provides on going information about supply chain events, including the current status of inventory, orders, shipments, production and supply. l Notifying—Helps to support real time exception management through alert messaging, proactively warning a decision maker if an action must be a taken or if a trend is emerging.

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Simulation—Supports decision making by assessing what will happen if specific actions occur or recommends that an action be taken based on response to an event or trend analysis. l Control—Lets a decision change a previous decision or condition, such as diverting a shipment or expediting an order. l Measure—Provide measurements, KPIs and metrics for assessing how well the supply chain performs. Though some advanced retailers these days are implementing integrated supply chain event management solutions for better visibility in their supply chain, these applications are still in their initial days of large scale deployment. Most of the other retailers do not use these applications; however they use a set of tools like e mail, messaging, workflow, reporting etc., to handle exceptions. l

GREEN RETAILING Green retailing is the current buzzword in the retail world as every large retailer is taking steps to reduce carbon emission, to make themselves more energy efficient, recycling and designing products that are more sustainable. Green retailing today touches every aspect of retailer’s supply chain—how the product is designed, sourced, stored and distributed. In this section, we have divided different green retailing initiatives by retailers in the following major categories: l Green Design l Green Packaging (package design innovations and recycling) l Green Customer relationship management and Recycling l Green Sourcing l Green Logistics l Green Infrastructure l Green IT Figure 8.11 explains the pillars of Green Retailing. Green Retailing

Green Design

Green Packaging

Green Sourcing

Green Logistics

• Design for environment • Hazardous / Toxic substance reductions • Assessment of carbon emission during life cycle

• Green package design • Use Biodegradable packaging material • Packaging recycling • Reduce Packaging concepts &

• Supplier compliance • Materials selection • Organic Farming • Cleaner Fabric Production

• Transport Mode Optimisation • Use Alternate Fuel • Consolidating Shipment • Reducing Food Mile

Green Infra Structure

• Green store design • Reducing energy consumption from lighting, air conditioning • Avoid using selected materials in making store equipment (e.g. PVC) • Increase usage of solar panel, wind power turbines etc

Green CRM Recycling

• Take back waste / collection centre • Invest in recycle centre • Special focus for e-waste recycling

Green IT (Data centre that consumes less energy, Green Infrastructure, Green workplace technology)

Fig. 8.11

Green Retailing

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Some of these topics have been discussed earlier and hence is not being repeated in this chapter. For example, Green design and packaging is discussed in chapter 5 (Retail product life cycle management), Green customer relationship management and Recycling is discussed in chapter 10 (Retail customer relationship management) and Green sourcing is discussed in Chapter 9 (Retail supplier relationship management). In this chapter we will discuss Green logistics and Green infrastructure.

Green Logistics Efficient Transport Management Efficient transport management is one of the major opportunities to reduce carbon footprint. This can be achieved in a variety of ways: Relooking at mode of transport Mode of transport plays an important role in carbon footprint as different transport options—train, plane, ship and truck have different carbon tradeoffs between cost, service level and carbon impact. Train and ship can be more preferred options from green logistics prespective, however this may call for carrying higher transit inventory and long lead time for transport—so decision needs to be made with proper trade off. l Tesco introduced a daily rail service to Scotland, which takes 26 truck loads a day off the roads and invested in more double deck trailers which give higher load fill. l Walmart reduced road miles by five percent by switching to rail. Using alternate fuel Retailers are exploring a variety of options like using natural gas, biodiesel, biofuels, electric etc as an alternative to conventional petrol and diesel. Here are some examples: l Tesco piloted Mercedes dual-fuel diesel and natural gas trucks and used biodiesel for part of its distribution fleet. l Walmart is currently testing biofuels in the distribution fleet. l Ikea is planning to use to hybrid vehicles for greener operation. l Sainsbury’s has started to use zero emission vans for its home deliveries service and planning to use electric vans for its urban deliveries. Consolidating shipments Shipment consolidation is one of the major opportunities to reduce the carbon footprint. Shipment consolidation can happen in variety of ways like sending lesser shipments to stores i.e. sending large shipments or planning the return load early enough etc. However consolidating shipments have a bearing on inventory replenishment policy i.e. replenishments may not happen exactly as per the requirement in small lots more frequently following just-in-time principles. Fewer but larger shipments may cause higher inventory levels, higher storage cost and can affect service levels. So a decision needs to be taken on holistic basis. Tesco reduced the number of deliveries to convenience stores and is also trying to improve logistics efficiency by using suppliers’ vehicles to make store deliveries on their return trips (rather than travel empty). Reducing food miles Today, many supermarkets are trying to reduce the food miles their products travel. Again the decision needs to be taken on holistic basis. For example, growing a crop at slightly far away place in natural conditions and then transporting it may be more environmental friendly than growing them under glass in a nearby place heated by gas or oil.

Green Infrastructure and Green IT Green Infrastructure Retailers are increasingly working on making the stores and warehouses more energy efficient, using more environment friendly material for store design and décor. Retailers are working on recycling

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of hangers, décor materials, etc., and reducing energy consumption in stores from lighting, heating and air conditioning. Retailers avoid materials such as PVC, halogen based plastic materials, metals such as lead and chrome and chemicals in the manufacturing of store equipment or in the finished products. Let us check what some of the leading retailers are doing in this direction. l H and M avoids PVC in all interior design as far as possible and do not lay PVC floors in stores. l Sainsbury’s piloted wind turbines at a distribution center, had opened an environmental store and decreased carbon emissions at stores. l Tesco is taking many new initiatives like solar panels, rain water collection, and wind power turbines on top of stores. They have constructed a supermarket from recycled wood and plastic at Diss and targeting to cut its energy use per square foot by one-half by 2010 against a baseline of 2000. It will also encourage its customers to use biofuels and help them to save energy in their homes and will target to become the ‘best’ supermarket for energy use.

GREEN INFORMATION TECHNOLOGY Green IT is not one technology but a set of measures that reduces power consumption for retailer’s IT data centres, having servers and desktop in office that reduces carbon foorprint, recycling offers for older equipments, smart usage of air conditioners in different IT set ups etc. Green IT is a major focus area for today’s retailers and influences decisions in vendor selection, equipment buying and long term maintenance strategy of equipments.

Conclusion In this section some contemporary issues of retail logistics are discussed like retail shrinkage, logistics outsourcing, logistics exception management and green retailing. l Managing shrinkage is another challenge for retailers. Unlike popular belief, shrinkage is not all about retail theft and a good amount of shrinkage can happen before actually materials actually reach store. A good shrinkage management strategy will involve a cross functional involvement of different retail functions, focus on hot products and hot stores, understanding real cost of shrinkage and an effective deployment of policies, processes and technology. l 3PLs/LSPs will increasingly play a larger role in retail logistics as most of the retailers feel these are activities non core to their business and outsource it to some specialised agencies. However, success depends much on selecting the right LSP and monitoring it on a regular basis. As basic services like transportation and warehousing are getting commoditised the challenge for LSPs are to find out innovative ways of value addition. Retailer needs to work with LSPs to find better methods of consolidation, truck route building, planning for return load and full truck load building—these will only enable them to use logistics for competitive advantage and not just as another service. l Managing logistics exceptions is a challenge retailer needs to handle with a defined set of processes for logistics exception. Typically, most of the retailers do not have defined processes here and exceptions are handled on adhoc basis. A good percentage of time of retailer’s logistics department’s staff is spent everyday for running behind exceptions. It is important that retailer defines exception management as a process, and defines set of business rules and action set for each set of exception. It is also necessary to define workflows and person responsible

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l

215

so that every exception can be handled as a part of structured process. Information technology in the form of workflow, alert, messaging, e mails, and reports can play an important role in the form of bringing efficiency to this process. The latest addition in this list is supply chain event management applications which are discussed here. Green retailing is gaining much popularity these days with retailers looking at innovative packaging, better transportation planning, recycling and better infrastructure in their effort to becoming greener. However success will depend on having a clear vision, long term commitment and a supporting organisation structure to support this initiative.

Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

What are the elements of shrinkage? What are the causes of shrinkage? What approaches a retailer can take to reduce the shrinkage? What type of services are provided by 3PLs? What are the advantages of using 3PL? How 4PLs differ from 3PL? Name some 3PLs operating in India. What are the typical drivers of logistics outsourcing? What are the criteria for evaluating 3PLs? What are the logistics issues in India? What trends are emerging in new generation 3PL service? What is the importance of visibility and exception management for retail logistics? Explain the exception handling process. What are the focus areas for green retailing? Explain the concept of green logistics and green infrastructure.

Objective Type Questions 1. 2. 3. 4. 5. 6.

EAS stands for LSP stands for 3PL stands for 4PL comprises of 3PL, IT consulting and 4PLs are also known as Retail shrinkage consists of theft and

theft.

Assignments A. Study the kind of measures taken to prevent retail shrinkage for a leading retailer. B. Visit a company who have recently outsourced its service to a 3PL—study how they had done the selection of a 3PL? What criteria were used for evaluating different 3PLs? C. Study five retailers and identify what kind of logistics services they have outsourced and what logistics services are not outsoured by each of them? Find the reasons for such decision. D. List 3PLs operating in this country. What kind of services they offer? E. Study the measures taken by retailers in India to increase visibility in the process of their supply chain partners.

[CHAPTER]

9 LEARNING OBJECTIVES

Retail Supplier Relationship Management

In this chapter we will explain the following concepts: 1. 2. 3. 4. 5. 6.

Retail sourcing Merchandise procurement Global sourcing Green sourcing Sourcing measures Information technology in retail supplier relationship management 7. Retail sourcing trends

RETAIL SOURCING Many people define retail as the business of sourcing and selling i.e. sourcing the right merchandise at best possible price is a make or break situation for this business. No wonder that you keep on hearing that global retailers are setting up sourcing base in India—Indian retailers are entering into joint venture with consumer goods companies to promote their brands at retail stores and outlets. However the news mentioned below came to some of us as a pleasant

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surprise. Anyway, if global analysts believe that India is one of the fastest growing retail markets in the world—how can we be far behind from our global counterpart in sourcing practice?

Indian Retail Chains Step up Global Sourcing Global retailers like Wal-Mart and Tesco do it all the time. Now it is the turn of Indian retail chains, who are exploring ways to step up global sourcing of merchandise for shoring up margins and offering the best price to consumers. These days, the likes of Big Bazaar, Ebony, Shoppers’ Stop, Westside or even Subhiksha are looking to source merchandise at the lowest rates globally. Future Group’s Pantaloon Retail India has just set up global sourcing offices in Hong Kong and Mainland China—the first overseas sourcing operation by any domestic retail chain. For retail chains across the globe, the world is becoming a single market and Indian retailers are looking at markets across the world from where one can source merchandise at best price. Future group has opened global sourcing offices in Hong Kong and China. Popular merchandise being sourced from across global markets include home decor, fashion accessories, furniture and consumer electronics, much of which is sold as private labels. But local retailers are still going slow in importing categories like apparel due to high custom duty structure. Industry circles are of the opinion that as domestic retailers grow in size, more and more chains will look at the option of setting up overseas global sourcing hubs. In this way retailers will be able to achieve economies of scale by setting up overseas sourcing offices. Apart from better margins, global sourcing also allows retailers to differentiate their merchandise mix. This allows a big opportunity for retail chains to differentiate from competitors. While international sourcing currently accounts for five percent of our total pie, it is growing at more than 50 percent. Ebony Retail said the markets where Indian chains are focusing for bargains are China, Malaysia, Indonesia, Middle East and Europe. Source: http://www.supplychains.in/en (accessed on 9th Jan 2007)

Understanding the Difference—Purchasing, Procurement and Strategic Sourcing Many a time we use these words Purchasing, Procurement, Strategic sourcing etc., to mean the same set of activities. Though these terms are very close, these words have different in connotations. l Purchasing is a transaction function, the main objective of which is to buy products and services at the lowest possible price. l Procurement is a little broader activity that involves few materials management functions like goods receipt, quality inspection, inventory management etc., in addition to purchasing transactions. l Strategic sourcing includes pre transaction activities, focus of which is to reduce the total cost of owning items. This includes activities like developing the sourcing strategy, vendor identification, evaluation, negotiation and entering into contract. This also includes activities of vendor management like vendor rating, vendor quality improvement, involving vendors early in the product design process and spend analysis.

What is Supplier Relationship Management? Supplier relationship management is an umbrella term that includes all processes related to supply management like sourcing planning and execution, sourcing analytics, supplier settlement, supplier performance monitoring, supplier collaboration and all processes that enable a retailer to analyse, control, and optimise its sourcing.

Retail Supplier Relationship Management 221 The difference between Purchasing, Procurement, Strategic Sourcing and SRM is explained in Figure 9.1.

Fig. 9.1 Difference between Purchasing, Procurement, Strategic Sourcing, SRM

Supplier relationship management includes the following processes:

A. Pre-procurement Supply Planning and Source Finalisation Processes These are typically the processes of strategic sourcing l Sourcing strategies processes like order/spend analysis, sourcing strategy development, generate and analyse requirements etc. l Supplier qualification processes like Market Scan and Identify Sources of Supply, Validate Supplier capabilities (financial, quality and delivery performance) and supplier evaluation etc. l Supplier negotiation processes like RFP (request for proposal), RFQ (request for quotation), Auction processes, Negotiation and Supplier Selection etc. l Contract management processes like contract development, execution and monitoring.

B. Post-procurement Execution Processes Like Receiving and Financial Settlement l l

Receiving processes like goods receipt, delivery acknowledgement and quality assessment Financial settlement processes like invoice verification, payment, issue resolution etc.

C. Supplier Management Processes This is required for tracking supplier qualification and performance. Few retailers publish regular supplier scorecards for this.

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D. Collaborative Design Processes Designing private labels along with supplier is a common practice for retailers now a days. Retailers can develop bill of material, technical specification etc., jointly with their suppliers.

E. Supplier Optimisation Processes These processes help in identifying the optimum allocation of quota to different vendors.

F. Spend Management Processes This helps in understanding how much money is spent and where to identify opportunities to improve sourcing i.e. negotiations with suppliers for new contract and monitoring contracts. Spend management provide visibility across all spend categories. Monitoring spending against the budget may also call for appropriate alerting and escalation processes for dealing with spending that exceeds budget levels. As an example, the leading enterprise solution vendor SAP considers various supplier facing processes as part of its SRM suite. This is shown in Figure 9.2.

Fig. 9.2

SAP Supplier Relationship Management Solution Source: www.sap.com (accessed on 3rd July 2009)

MERCHANDISE PROCUREMENT Merchandise procurement process is followed by Merchandise budgeting exercise (where it is decided that how much money is available for merchandise procurement) and Assortment planning (where it is decided that what quantity of which merchandise will be procured). Merchandise budgeting process and Assortment planning have already been discussed in earlier chapters.

Retail Supplier Relationship Management 223

Procurement Decisions Retailer’s procurement of merchandise can involve variety of decisions. The challenges faced by retail sourcing manager are shown in Figure 9.3.

Fig. 9.3 Challenges of Retail Sourcing Manager

These are as mentioned below. Make or Buy Here the retailer decides whether to make the items by themselves or order it to a vendor. For example, once the procurement quantities of men’s wear and women’s wear for next season were known, an Indian apparel retailer decided to buy all men’s branded formal wear directly from Raymond and Madura garments. While for women’s wear, the decision was to produce themselves. However producing may not mean doing the entire process related to manufacturing the garment by the retailer himself. While he can keep a few processes (like design, sampling, quality inspection etc.) under his control, the other part i.e. actual making of garments can be outsourced. Producing its own typically involves private label introduction by the retailer. Determining the right source of supply This is a key decision for the retailer. Today the world has become a global village and retailers are ready to approach any part of the world for right quality and better price. Global sourcing is the order of the day and for large retailer in U.S. and Europe— third world countries like China, Bangladesh and India have become the sourcing base. Supplier’s quota (in case of multiple suppliers for the same item). If there are more than one vendor for the same item, the retail needs to decide how much to procure from each of them. Quality specification of merchandise A retailer needs to decide the quality specification of its merchandise based on its image and target customers. Single sourcing versus multiple sourcing Retailer also needs to decide whether he wants to have single source for every article or multiple sources. Single sourcing have many traditional

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advantages like more volume to single source meaning cost advantage, lesser inspection as everything comes from one source, lower freight costs etc. On the other hand multiple sourcing can protect the buyer during tough times when one source fails to meet commitments, maintains competition and keep prices competitive, provides a back up source and sometimes may be must as the first source can not meet customer’s volume requirements. To buy directly from manufacturer or from distributor Retailer also needs to decide whether to buy from manufacturer or from distributor. For some items where retailer’s volume requirement is huge and need items in truck loads, it makes sense to opt for manufacturer for economy of scale. In some cases the retailer may opt for distributor for special services and credit offering.

Procurement Process Merchandise procurement process shown in Figure 9.4 comprises the following set of activities: l Identifying the possible sources for an article l Evaluating these source of supply and supplier selection l Negotiating with the supplier l Giving a sample order l Finalising contract once the sample order is successfully completed l Vendor management l Early supplier involvement l Vendor analysis/évaluation l Spend analysis

Fig. 9.4 Procurement Process

Identifying the Possible Source of Supply Here first retailer decides his boundary—whether he will restrict his search only within the state— within the country or will look for global sources if required. Generally retailer’s size of operation

Retail Supplier Relationship Management 225 matters—a large retailer will typically look for best possible sources anywhere across the globe. It also depends on the type of merchandise and the country the retailer is operating from. A retailer in Europe dealing with apparel items, will perhaps look at China or India also as possible source, whereas if he is dealing with only food and grocery items—perhaps he can restrict his source search within the country. First, the boundary for search is decided—sources can be located by visiting markets, trade shows, expositions, from references of trade publications, web sites, supplier catalogues, trade registers and directories, phone directories, sales personnel etc. The end objective of this exercise is to come out with a list of possible sources for an article that the retailer wants to procure. Source identification is a continuous process as every month new articles get added in retailer’s portfolio.

Evaluating the Source of Supply and Supplier Selection Typically retailers follow a set of criteria for evaluating the sources of supply and these are: l The fit between the product and the image of the retail organisation l The quality and price of the merchandise l Terms and conditions of the vendor, delivery capability and services offered l Vendor’s reputations, reliability, financial strength, present customers l Whether the vendor is a manufacturer or trader These criteria may also vary depending on the type of item and the type of vendor he is dealing with. Assume a grocery retailer is evaluating few large organised CPG companies for direct delivery to its store—in this case the main criteria for evaluation can be price, delivery terms and kind of services offered. However the criteria can be very different when the retailer is evaluating a set of suppliers for supplying fresh vegetables to its store—the retailer may look at their credibility, dependability, size of operation, financial strength and a host of other factors beyond price and quality. Sometimes evaluating the source of supply can involve detailed supplier surveys and facility visit, analysis of supplier’s financial capability, quality capability, capacity capability, management capability, capability to provide service and information technology capability. Sometimes supplier selection also happens through bidding process. Bidding is common when money value of total procurement is large, there are several suppliers available who can supply the same article and retailer is clear about the specifications. Bidding can be at two stages, where in the first stage technical evaluation is done and in the second stage it is price bidding. However in most cases negotiation is the common approach for supplier selection.

Negotiating with the Supplier Negotiation is important in cases where it is impossible to estimate costs with a high degree of certainty. Price is not the only important factor as retailer needs to invest in supplier in terms of equipment, quality systems etc. Retailer may negotiate with supplier on variety of terms like: l Price l Delivery terms and shipping instructions l Packaging requirements l Possibilities of returns l Providing after sales service of the items (in case applicable) l Quality and testing requirements—in some cases the items need to carry country of origin certificates l Yearly volumes l Legal terms

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There are several types of discounts that a supplier can provide to retailer for better price and this includes: Volume/Quantity discount (can be cumulative or non cumulative; retailers also get discount for buying a large quantity in a single shot or for purchasing certain quantities over a period of time), Cash discount (for paying in cash and for paying the invoice amount prior to the discount period), seasonal discounts (for buying merchandise during off seasons etc.)

Giving a Sample Order Typically most of the retailers follow this pattern—where retailer first provides a small order to the supplier to check product quality etc., successful completion of which is followed by the actual order. This is more common in case of international purchases.

Finalising the Contract Once the vendor is selected, the negotiation completed and the vendor successfully completes the sample order it is time to award him the contract. There are different types of contract like: l Yearly contract: Here an approximate yearly volume is indicated and unit prices. Against this contract the retailer goes on releasing delivery schedules and actual deliveries by supplier happens as per this schedule l One time fixed volume contract l Buy back contract: This allows a retailer to return unsold inventory up to a specified amount at an agreed upon price. This is common in publishing industry for products with low variable cost, such as books, magazines, and newspapers. This is also common for some of the consumer goods companies where the company enters into large scale contract farming with farmers and ensures buyback of the crop at the end of the season. Buyback can result in surplus inventory that must be disposed of like unsold papers. l Revenue sharing contract: The retailer does not pay the full amount while buying from its supplier—pays a part amount for each unit purchased, but enters into an agreement that it will share a portion of the revenue for each unit sold with supplier. This reduces the risk for retailer as he need not invest upfront and pays only when it sells. It is sometimes good for the supplier, as well, specially for new products where retailers are encouraged to try to pick up new items for their store, which otherwise they would not have taken. The contract may have different terms and conditions like unit price, taxes, transport cost details, delivery terms, price variation clause and a list of legal requirements. Sometime the contract may have specific clause for performance improvement i.e. year on year savings of 10 percent on purchase unit cost is expected. Sometimes the retailer may share with the supplier a percentage of the savings that result from performance improvement. This provides incentive to the supplier for performance improvement.

Vendor Management Managing vendors on continuous basis is an ongoing challenge for any retailer. Leading retailers today believe in continuous collaboration with vendors and Wal Mart—P&G collaboration is a good example in this regard. Regular sharing of retailer’s stock and sales data with the vendor who supplies a particular article can help him in managing retailer’s stock and adjusting the next delivery schedule and quantity accordingly. This principle is called vendor managed inventory principle which is getting popular among retailers and suppliers globally (discussed later in this book). Principles like VMI calls for a very high level of maturity in vendor management principles. Leading retailers are also collaborating with their vendors for better product design. Better vendor management is a win-win situation for both retailer and vendor as retailers get the right product of right

Retail Supplier Relationship Management 227 quality at right time. For the vendor it is an increased pie of retailer’s business and better planning of its resources to meet retailer’s delivery schedule. Any good vendor management practice is based on following principles: l Mutual trust l Common goals l Open and regular communication

Early Supplier Involvement Early supplier involvement is a process of involving supplier in the collaborative design process. This early involvement is to get supplier inputs before the design is frozen. This can save time in design cycle and motivate the supplier as he feels that he is part of the team. A retailer can involve supplier for inputs on variety of things like what materials can be used, what sort of technology should be used, defining right specifications—tolerances—standards, inputs on manufacturing process, packaging design and finally how to reduce design cycle time. Early supplier involvement is common in private labels sourcing, where an apparel retailer can work with his supplier to design the new fashions for next season. They together define the specifications and work out on plans to bring the product line faster in the market.

Vendor Evaluation A supplier is typically evaluated on the following parameters: l Price rating: This rates different supplier on price for an article. It is better to take landed price as the basis for comparison. l Quality rating: How much quantity the supplier had supplied during a particular period and how much percentage of it got accepted. l Quantity rating: How much quantity the retailer had asked from the supplier during a particular period and how much percentage of it he actually supplied. l Delivery rating: In how many cases the supplier had not supplied the article on the particular date asked for. l Service rating: This can be based on variety of parameters like how flexible the supplier is in accommodating the last minute changes in delivery schedule, how fast he can ramp up or ramp down his capacity to meet retailer’s variation in demand, innovations he brought during the period etc. Period for vendor evaluation can be monthly, quarterly half yearly depending on the retailer. Based on this rating some suppliers may get more business in the future for their high rating and some of them may be discarded. Some retailers use other criteria as well for vendor rating like participation of the vendor in various schemes and promotions, advertisement expense of the article whether shared by the supplier as well etc.

Spend Analysis A retailer periodically analyses its procurement spending and uses this analysis as an input for future sourcing decisions i.e. renogiating contracts with suppliers, managing merchandise budgets etc.

GLOBAL SOURCING Managing global sourcing effectively is increasingly becoming a bigger challenge for retailers. This is because most of the large retailers these days source a significant portion of their merchandises from low cost countries. Large retailers like Walmart, Tesco etc., are sourcing a good percentage of

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their merchandises from countries like India, China and Bangladesh. Even Indian retailers these days sourcing items like toys, consumer electronics goods from China and wooden furniture from Malayasia etc. These countries are increasingly becoming favourite destinations. Though low cost is one of the main drivers for global sourcing, there can be several other reasons for imports like exclusivity of items (example: Armani men’s wear), globally famous brands (example: High end watches like Rado, Omega etc), high end items etc. Though global sourcing provide many opportunities in terms of cost and exclusivity, it also brings complexity in the supply chain in terms of complex customs regulations, long lead time, legal requirements in terms of abiding with trade agreements between different countries. Post 9/11, there are other complications in global trade in terms of managing risks owing to several regulations imposed by different countries in terms of not doing business with restricted parties etc. Every retailer these days wants to bring efficiency in global sourcing process—let us first understand the major drivers for efficient global sourcing.

Advantages and Disadvantages of Global Sourcing There are several pros and cons of global sourcing which a retailer needs to be aware of before venturing into this. These are shown in Figure 9.5. Some of these are:

Fig. 9.5 Pros and Cons for Global Sourcing

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Low labour cost in developing countries Labour cost in some countries like India, Bangladesh, China and some countries like Africa can be as low as 10 percent of their counterpart in U.S. in Europe. This sometimes becomes one of the main drivers for outsourcing work in these countries. This is one of the main reasons for industries like diamond processing, apparel manufacturing to move to third world countries. Abundant raw material availability Raw material availability brings down the cost of production further. China has become one of the largest destinations of the world for apparels for its abundant raw material availability. Less stringent environmental standards Strict environment norms in the western world are pushing manufacturing today to third work countries. This is especially true for some industries which are known for poor environment standards like bleaching, dyeing and washing of fabrics, tannery industry, manufacturing process that contain chemicals etc.

Retail Supplier Relationship Management 229 Lower cost of labour and raw materials really need to translate into lower total cost of ownership. Sometimes though unit cost of procurement is low if the lead time is very long, retailer needs to keep sufficient inventory for this situation. If the retailer looses much time and money in customs clearance, it really may not convert into low TCO. So it is important to look at TCO and not the per hour price of labour and per kg of raw material cost. Currently several retailers have outsourced the manufacturing of their private label brands to low cost countries.

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Long lead time leading to high transit inventory, higher safety stock and slower cash to cash cycle time. Poor visibility into the process as different entities (customs, shipping, insurance, bank etc.,) are involved. Generally poor service as supplier can not fulfill rush order or can accommodate last minute changes in schedule. Complexity of global trade—a typical cross border shipment may involve more than 25 parties, 35 documents to be generated or transferred, 600 laws and 500 trade agreements to be considered. A single error can result in costly delay. Disputes take longer time to resolve. Risk of global trade especially after 9/11.

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Mitigate financial risk of trading globally. Managing currency fluctuations effectively. Improve reputation with enforcing agencies. Start dealing with government agencies electronically. Government systems (excise and customs authority, different import—export authority etc.,) are getting modernised. They expect business to send electronic documents and communication and thus greater demand for automation. SOX compliance requires stringent record keeping and audit trial. Reducing risk of business disruptions through a strong mitigation strategy for non compliance. Securing global supply chain has become very important especially after 9/11. There can be several types of risks like customs risk, regulatory risks, natural disaster etc. Abide with trade compliance and documentation standards. This is becoming more important these days for reasons like incomplete documentation causes border delays and unanticipated costs, customs fines and license withdrawal. There is also corporate brand equity risk of unknowingly selling to a restricted party.

Major Processes in Global Sourcing Figure 9.6 shows major processes in global sourcing. These are discussed in detail below:

Custom’s Management l

Product classification—Export and import business transactions need official commodity codes to report to customs authorities and these needs to be assigned to product master. There can be different numbering systems like Export control classification number (ECCN), Harmonised tariff systems number (HTS), Import list number, Commodity code etc. U.S. import has a 10 digit HTS number and Europe has a 11 digit number. Data can be maintained manually or can be uploaded from a data provider. There is regular need for reclassification

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Fig. 9.6 Processes in Global Sourcing

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as well whenever there is change in government policies. The ultimate aim of product classification/harmonisation process for duties and taxes is to create a consistent classification of goods across the company and across forwarder and broker points. Custom duty calculation Upon importing into any country, import duty needs to be calculated and paid to customs authorities. Transactional value for customs duty calculation is calculated as: Net value of imported commodity + any value adds or rebates + Transportation cost (Freight) + Insurance. There are different types of duty rates that can be applicable like Preferential duty rate, Anti dumping duty rate, value added tax (VAT) calculation, Percentage— quantity or weight based. Preliminary customs value can be determined from purchase order, calculate resulting customs duty, values are updated when more precise information is available during delivery process i.e. this is known as supplementary customs calculation and declaration. Duty rate for new items needs to be uploaded, if there is any change that needs to be maintained. Management of different customs master data Customs management also includes maintaining different master data like custom code lists, commodity codes, guarantees, list of authorised consignee and consignors and different business partners like custom office etc.

Sanctioned Party List Screening—Screening of Suppliers Security is becoming a global issue for supply chain. As a responsible retailer he should not source any thing from a supplier who is under a denied list published by different government bodies from time to time. A supplier/manufacturer can be denied for variety of reasons like connection with terrorist organisations, using child labour or causing environment concerns. The retailer must check his business partners against multiple lists published by governments around the world. These days there are intelligent screening software which can screen suppliers having multiple addresses, can screen all sensitive documents, can do advanced linguistic and phonic search in multiple languages.

Retail Supplier Relationship Management 231 When the application detects a prohibited trading party, it blocks current transaction and sends alerts. This helps tracking sanctions on non cooperative countries, fines on non compliant countries.

Preference Processing These are measures granting preferential customer treatment for goods from certain countries and geographical areas. Preferential treatments can be reduced rate of customs duty i.e. preferential duty rates or in some cases exemption from customs duty. The legal bases for traffic preferences are several trade agreements. Preferential processing can have several steps like: l Request and remind about vendor declaration—a vendor declaration is the verification of the originating status of a product. A vendor uses a vendor declaration to confirm that the product meets all the conditions in a preference agreement regarding the acquisition of the originating status. l Maintain vendor declaration—vendor declarations received from vendor need to be stored properly as these are subject to regular audits by the authorities. l Aggregate vendor declaration—if there are several vendor declarations for the same material, then aggregation process is used to specify which declaration should be used for determining preferential origin. l Determine preferential origin—the threshold value for determining preferential origin is calculated here including all components of item’s bill of material. l Determine eligibility for preferential treatment. l Print vendor certificates—movement certificates are used as proof that a product is eligible for preferential treatment when it passes through customs. l Generate vendor declaration for customer’s purpose.

Embargo Check Some countries impose tight restrictions on trade with other countries or entities but global corporations do not operate just from a single country. This introduces significant variability in the import and export rules under which global corporations must operate. This requires verifying international documents of trade regulations. For example an embargo check may show that a company in Italy can ship certain products to Russia but the same check reveals that an U.S. company can not ship an identical product to Cuba.

Managing Import Licenses If products are imported or exported without proper license, there can be severe consequences. That is why the classification of licensable material needs to be tracked and proper license to apply given to transactions for both import and export needs to be determined. Both the value and quantity limits issues for each license needs to be tracked via alerts and reporting mechanisms.

Managing Import Documentation There can be variety of import documents and efficient import process requires these documents need to be managed effectively. Some examples of this can be: l Import declaration l Transit document l Required forms like entry summaries, certificates of origin, packing lists etc l Letter of credit l Documents for managing trade preference processing like managing vendor declarations, determine preferential origin, printing of preference documents etc.

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Import

Processing

There can variety of processing involved in import like: l Entry processing and anti dumping counter veiling checks: Are there any anti dumping measures that need to be taken into account which can challenge import transactions. l Quota checks: Are there any quota to be considered l Bonded warehouse processes/customs warehousing l Declaration before goods receipt: When importing, goods can be presented to customs right at the border and place them under a customs procedure with customs declaration

Electronic Communication with Customs Authorities/Trade Systems These days government authorities are becoming more demanding and they expect electronic communication. Example of this can be electronically filing all information requiring shipper’s export declaration via AES. This data must be submitted prior to departure of the goods.

Global Sourcing Challenges Global sourcing involves many challenges as shown in Figure 9.7. These are explained in details below.

Fig. 9.7

Global Sourcing Challenges

Managing the Physical and Financial Supply Chain Well Managing global logistics calls for managing both physical and financial supply chain effectively. The physical supply chain describes the activities involved in planning and executing the movement of goods, including making, storing and moving products and their documents (i.e. P.O., bills

Retail Supplier Relationship Management 233 of lading and customs documents). Leading companies are looking to create better coordination across strategic sourcing and procurement, manufacturing, logistics, sales and trade compliance groups so that the supply chain can flex in response to demand or supply events. The financial supply chain describes the activities involved in planning and executing payments between trading partners through various financial instruments, including INCO terms, exchange rates, credit and country risks. It involves cash flow, working capital and corporate risk management. Leading companies are looking at ways to leverage cash and credit across supply chains to create greater financial efficiency.

Physical Supply Chain Processes Cross border trade involves many parties, and physical logistics can be quite complex to coordinate. The process includes the following: l Export/Import/Customs compliance l Global Logistics Management—Logistics operations and network design l Supply Chain Visibility l Exception alerts and resolution l Multi echelon inventory management l Global risk and security management l Multi modal transport planning l Import documentation and compliance l Contingency planning, corporate risk management, business continuity planning

Financial Supply Chain Processes These are financial aspects of international trade and can include the following: l Duty calculation l Duty drawback l Letter of credit l Tariff management l Electronic paperwork l Invoice reconciliation and claims automation l Financial settlement l Corporate risk management l Contract management l Trade finance—cash, credit and working capital management l Purchase order management l Settlement management (e.g. LCs or open accounts) l Pre and post shipment financing l Dispute/chargeback management l Foreign exchange management l Insurance management

Managing Government Regulations Complying with regulatory requirements and streamlining collaboration with government authorities is another major challenge for global trade management. Following issues become important here: l Government compliance and document regulations—provide the electronic version of the regulations required by the customs and security agencies of various departments.

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Supply Chain Management for Retailing Automated denied party screening (sanctioned list screening) Contract management Product classification capability/Product harmonisation classification for duties Manage commercial document creation and distribution online Customs documentation/customs clearance regulations for import and export Security requirements/security clearance regulations Electronic filing requirements/Electronic communications

Managing Collaboration among Number of Players Managing of global trade requires effective collaboration among number of players like: l Retailer l Freight forwarders/customs brokers l Logistics technology providers l Financial institutions l 3PLs/LSPs l Government agencies like customs, export administration etc.

Best Practice in Global Sourcing One of the good examples of effective collaboration between all parties in Global sourcing is: Straight through processes with forwarders, brokers and 3 PLs. Here brokers or other logistics partners do not create documentation by keying in data in system. With straight through processing, all parties have appropriate electronic integration and access to view and amend data and documents as the transaction progresses.

GREEN SOURCING Increasingly green sourcing is becoming a compliance issue for the retailers as in several countries there are strict government legislations forcing retailers to take green sourcing on top priority. Leading retailers like Wal-Mart and Tesco are in the forefront of this revolution and have started a set of initiatives for green sourcing. There are different types of green sourcing initiatives by retailers and some of them are: Cleaner fabric production initiatives for apparel retailers Bleaching, dyeing and washing of fabrics use large quantities of water, energy and chemicals. This makes fabric production one of the textile processes with the greatest impact on the environment. Retailers increasingly interact with dye houses for designing these process keeping environmental considerations in mind. Organic farming of cotton and vegetables Organic farming is another area where retailers (especially apparel retailers) are showing interest these days. Retailers are interested in using cotton that has been grown organically i.e. without the use of chemical pesticides or synthetic fertilisers. Organic farmers can not grow cotton in the same field for an extended time because it depletes the soil of nutrients. This forced farmers to alternate the planting of cotton with vegetables, or other cover crops to rejuvenate the soil. Those alternate crops often cannot be sold as organic and are not as lucrative as organic cotton. To meet organic standards, a farm needs to remain free of non-organic pesticides or similar materials for a period of three years prior to the harvest of any organic crop. To solve this problem, leading retailers are coming up with innovative concepts like l Wal-Mart makes a commitment to buy a specified quantity of cotton and gives its suppliers an incentive to develop and produce that product. Wal-Mart makes a five year verbal commitment

Retail Supplier Relationship Management 235 to buy organic cotton from farmers which gives farmers confidence. Wal-Mart also agreed to purchase the organic cotton farmers’ alternate crops. Wal-Mart’s textiles network select standards for organic cotton farming and manufacturing processes and Wal-Mart employees interact directly with organic cotton farmers to understand their needs to improve farming practices. l H and M support the cotton growers during the crossover period from conventional to organic cotton. H and M has started to use so called transitional cotton in select garments. However till now, the biggest initiative for green retailing has come from none other than the world’s top retailer Wal Mart who had identified 14 focal areas, bundled into three broad categories of renewable energy; zero waste; and sustainable products. For each focal area, an executive sponsor and a network captain took charge of building a sustainable value network of Wal-Mart employees and representatives from government, academia, environmentalists and suppliers. The goal was to reduce environmental impacts and derive profit from that positive change.

SOURCING MEASURES Sourcing and procurement can have variety of measures to monitor the efficiency of process. Some of the common measures adopted by merchandise procurement can be: Measure Supplier Measures: Quantity performance Quality performance Delivery performance Cost performance Service performance Invoice accuracy performance YOY Cost savings performance

Description Quantity delivered/Quantity asked for Quantity rejected/Total quantity delivered Quantity delivered on time/Total quantity delivered Price charged by the vendor/Minimum price of that particular item among all vendors Number of time rush orders are fulfilled/Number of times changes in delivery schedule accomodated Number of wrong invoices sent during a month/Total number of invoices sent in a month How much unit cost of articles had come down over years

Procurement function Measures: Time to place a purchase order Cycle time from the time the requirement of the order is known to the time of actually sending the order to supplier. This can be measured in days Processing cost per P.O. Internal cost of processing per purchase order. This is calculated by total cost of ordering per month by number of orders placed. Settlement accuracy Number of mistakes made by accounts department in settling invoices in a month/total number of invoices YOY savings achieved How much savings procurement department had achieved year on year can be measured in absolute term or as a percentage of turnover How much improvement procurement department had achieved year YOY improvement in lead time on year in bringing supply lead time down performance How much improvement procurement department had achieved year YOY improvement in quality on year in bringing supplier's rejection percentage down. This shows (Rejection performance) how much effort procurement department is putting for getting quality systems in place at supplier's unit

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It is common to see that retailers have different means for measuring their supplier’s performance—however except cost savings very few of them have internal methods in place to measure the effectiveness of merchandise procurement cell. Only a balanced measurement system for both retailer’s procurement department and supplier can ensure success. New generation ordering systems like vendor managed inventory/continuous replenishment made the concept of ordering redundant. The traditional KPIs of measuring quantity or delivery performance does not work in a VMI situation as here the supplier himself fixes the quantity to be delivered and the time when it has to be delivered.

INFORMATION TECHNOLOGY FOR SOURCING Information technology can be used at every stage of sourcing to bring efficiency and effectiveness in sourcing process. Figure 9.8 shows how information technology can be used in different stages of retail sourcing process:

Fig. 9.8 Information Technology in Sourcing l

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Supplier identification Internet is today the most popular medium for any search and can be used for identifying initial list of suppliers. Many suppliers today post the electronic catalogue of their products over internet which can be used by a prospective retailer to choose the kind of merchandise he is looking for and the possible supplier source. Supplier selection Suppliers can be selected in different ways. Retailers can participate in supplier’s auction or can send a request for information (RFI) or request for proposal (RFP) to supplier for quoting price and delivery terms of desired merchandise. In most cases retailers may like to physically visit the premises before final selection. However technology can play an important role in making the first step simple. Contract management Contract management applications can help in creating and monitoring complex contracts for the retailer. Purchase order/Delivery schedule creation Typically, retailers always use technology here as volume of transactions make manual maintenance difficult. Enterprise resource planning softwares are common here. Mostly orders are sent through EDI and not as physical copy. Some retailers are using e procurement applications these days for electronic purchases.

Retail Supplier Relationship Management 237 l

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Goods receipt/Quality inspection For an area of high volume transactions, materials management applications/ERP applications are commonly used Invoive verification/Payment/Settlement Again for an area of high volume transactions, finance applications/ERP applications are commonly used Vendor rating/spend analytics Analytics applications are used for measuring vendor performance, spend performance etc. Analytics applications are part of solutions from data warehousing/ data mining vendors. Some of the ERP vendors also offer these as standard analytics functions Design collaboration/Delivery collaboration Retailers will like to collaborate on real time basis with their suppliers for new product design or modifying the delivery schedule. Collaboration application or portal can be used as a platform for this. Leading retailers have application like Supplier self service (SUS) for these kind of requirements. Design collaboration is also facilitated by some of the leading product lifecycle management (PLM) applications.

RETAIL SOURCING TRENDS Global Retailers are Setting up India as their Sourcing Base China and India are expected to continue as the top sourcing hubs in retail and consumer sector globally in the coming years, even as concerns over rising cost, quality and environmental issues may impact their advantage as per a latest PwC report. China is the number one destination for global sourcing , while India follows closely. While cost is still the key driver of global sourcing activities, mature companies are shifting focus to gain greater efficiency in competitive market, with focus on better quality products and collaborative supplier relationships. Source: The Financial Express, New Delhi, 16 June 2008.

Global Retailers are Stopping Import and Getting into Local Vendor Development Marks and Spencer Sets up New Sourcing Centre in Bangalore Building scale into its sourcing operations from India, Marks and Spencer Reliance India proposes to source up to 70 per cent of its apparel indigenously. The newly formed 51: 49 joint venture between the UK based Marks and Spencer and Reliance Retail, has recently set up a second sourcing outfit in Bangalore to specifically cater to the Indian market. This sourcing office in Bangalore will make apparel previously for sale in India and going forward, 70 per cent of the volumes sold in M and S stores will be made in India. Considering that apparel attracts steep import duties of nearly 38 per cent, the UK based retailer is planning to bring down its percentage of imported apparel and reduce price to make itself a ‘mid-market’ retail brand as in the UK market. Source: Business Line, Mumbai, 11th Aug 2008.

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Indian Retailers are Getting into Contract Farming and Working with Government for Sourcing their Private Labels Reliance Retail bets on Punjab, Haryana to boost private labels biz: To augment its private labels business, Reliance Retail Ltd has signed up with both the Punjab and Haryana Governments to set up food processing units and procure land for cultivation of fruits and vegetables. Reliance Retail has acquired 20 acres of land from the Haryana Government at Saha and Rai. The plan is to build two food processing units at these two places, with a total investment of Rs 100 crore. The plants would be engaged in processing, packaging and distribution of fruits, vegetables, and milk products for the retail chain’s private labels. Reliance Retail has also signed an MoU with the Punjab Government for acquiring three lakh acres of land for the cultivation of fruits, vegetables and food grains. Punjab will play a major role in the company’s supply chain and logistics strategy. Source: Hindu Business Line, New Delhi, 28th Jan 2007

More Sourcing Joint Ventures are on the Cards Pantaloon in JV with Axiom Pantaloon Retail India Ltd has entered into a 50:50 joint venture (JV) with Axiom Telecom LLC, UAE at a valuation of Rs 120 crore to do sourcing and wholesale distribution of mobile handsets and accessories, apart from setting up service centres and authorised after sales service centres for mobile handsets in India. Axiom Telecom LLC is the leading, authorised distributor, retailer and after sales support provider of mobile phones, phone accessories, wireless gadgets, memory and storage devices in the Middle East. The new company will focus on developing back end sourcing infrastructure for Pantaloon Retail’s existing telecom retailing business to enable it to expand and scale up exponentially. Further, it will also create a nationwide network of state-of-the-art after sales service centres for mobile handsets in the country. Source: www.financialexpress.com (accessed on 3rd July 2009)

Conclusion In this chapter we have discussed about the sourcing process of merchandise. The chapter started by explaining the difference between Purchasing, Procurement and Strategic sourcing process. Purchasing is a simple transaction process, Procurement includes transactions related to purchase and supplier settlement. Strategic sourcing includes all pre transaction processes of identifying the right source and entering into contract. Supplier relationship management is all inclusive i.e. it includes all processes of strategic sourcing and merchandise procurement. l Retailer needs to take variety of decisions regarding right source, local or national purchase, make or buy, to source from manufacturer or distributor. l Retailer’s sourcing process starts with source identification, followed by evaluation, selection, entering into contract, releasing regular delivery schedule, receiving material and quality inspection, settlement and payment and finally vendor evaluation and analysis of spend. l Global sourcing and low cost country sourcing are gaining in importance these days. Though global sourcing provides cost advantages, it is associated with high risk, long lead time, several compliance issues and typically low service and visibility due to distance. Global sourcing involves variety of processes like customs clearance, letter of credit, sanctioned party list screen-

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ing, import documentation, import license etc. Success in global sourcing depends on managing physical and financial supply chain effectively and managing government regulations effectively. Green sourcing is another area of concern where retailers are looking forward to organic farming and other measures. Information technology supports all phases of sourcing process. It is important to measure both the supplier’s performance and the performance of retail procurement department.

Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

What is the difference between Purchasing, Procurement and Strategic sourcing? What is supplier relationship management? What processes does it include? What are the procurement decisions? Explain the procurement process. What are the steps in this process? What are the drivers of global sourcing? What are the advantages and disadvantages of global sourcing? Explain the processes in global sourcing. What is sanctioned party listing? What is Embargo check? What are the differences between physical and financial supply chain? What are the components of these? What are the challenges of global sourcing? What is meant by green sourcing? Explain some examples of the kind of initiatives retailers are taking for green sourcing? How information technology helps in different sourcing processes? What are the different sourcing measures?

Objective Type Questions 1. In revenue sharing contract, retailer pays a percentage of each unit purchases and shares a portion of of each unit sold. 2. In buy back contract, the can return back a portion of inventory at pre defined price. 3. Three most important criteria of vendor rating are rating, rating and rating. 4. Import duty is paid to authorities. 5. Two common product classification numbering systems for customs purpose are and . 6. Preference processing means rate of customs duty. 7. Preference processing need determination of origin. 8. Embargo check arises because certain countries impose on trade. 9. Financial supply chain management needs managing of credit. 10. Price performance = Price charged by vendor/ of that item.

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Assignments A. Visit a retailer in your locality. Study its sourcing process. What kind of measures it uses? How it select its vendors and what kind of criteria it uses for vendor evaluation? For which processes it takes help of information technology and why? B. Study the sourcing pattern of top five global retailers. What kind of items they source from other countries and why? How these sourcing patterns have changed during last few years? What are the considerations they have while selecting a country or selecting a supplier?

[CHAPTER]

LEARNING OBJECTIVES

Retail Customer Relationship Management

10 In this chapter we will explain the following concepts: l Customer Service n Customer service mix and Customer service pyramid n Customer Service over retail sales life cycle n Ways to improve the customer service for a retailer l Order Management n Order management process n The concept of perfect order l Multi Channel Retailing n Multi channel retailing challenges n Leveraging strength of one channel for another n Multi channel logistics l Retail Return and Reverse Logistics n Return policy and Return process n Reverse logistics process and reverse supply chain network

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Supply Chain Management for Retailing Reverse logistics challenges and use of IT for Reverse logistics Retail Loyalty Programme n Loyalty program the best practices n Use of IT for loyalty Retail Kiosks Advanced Payment Technologies Green Retailing—What it means for CRM Measures of Retail CRM n

l

l l l l

Welcome to Metro’s Future Store. Here you will experience an all together different level of personalised shopping experience full of fun and making life easier for you with effective use of emerging technology. This store showcases the kind of buying experience supermarkets and malls of future will provide. To achieve this vision Metro had worked with several technology partners like SAP, Intel, Microsoft and IBM and adopted several leading technologies like touch screens, intelligent labels, wireless communications, personal shopping assistants, intelligent scale and self services checkout lanes to make buying a great experience for the customer. Any consumer entering the store is given a device called a ‘personal shopping assistant’ (PSA) at the entrance. The PSA is a handheld computer with a touch screen and integrated barcode scanner. PSA helps customers create and save their shopping list online. When they arrive at the store they grab a shopping cart with a portable Wincor Nixdorf tablet, scan their loyalty card, and, through in store Wi-Fi, retrieve their shopping list. Previous shopping lists are available so shoppers can easily modify their list on the PSA. Shoppers scan items using either Radio Frequency Identification (RFID) or bar codes with the PSA as they shop. The customer can use PSA also to put together his or her purchase list, to calculate the cost of the goods in his or her shopping cart and to receive additional information on the product. The personal purchasing consultant can also tell the consumer where he or she can find specific products and the quickest route to the corresponding shelf. During the purchase of vegetables and fruits, the buyer does not have to remember any numbers that are used to identify the product. An intelligent scale recognises the product put on the scale and calculates the correct price. IBM’s scale management system self identifies produce using a digital camera and scale. The scale then prints out a bar code label to attach to the produce bag, speeding the process of checkout. At the end of the purchase, the customer becomes the cashier. At the self checkout lanes, he or she can transfer the price data previously scanned on using the buying consultant to the register. The customer then pays immediately by cash or credit card, without taking the goods out of the shopping cart. Then, the consumer puts the goods in a shopping bag, which is automatically weighed. If the weight of the bag differs from that of the scanned-ingoods, an employee at the information desk receives an automatic message. RFID is used extensively to manage the logistics chain of the store from production to store. The goods receipt and issues are controlled with RFID labels and they report to the stock system when a product is missing or when an incorrect article is on the shelf. This information can be sent to the manufacturer, who can plan his replenishment accordingly. RFID is used throughout the exhibit including smart refrigerator, smart shelves, checkout, theft security, logistics, and warehouse management. RFID ensures that out-of-stocks are minimised and labour required to record receiving and put-away is reduced to almost nil. Source: www.future-store.org (accessed on 3rd July 2009)

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INTRODUCING RETAIL CUSTOMER RELATIONSHIP MANAGEMENT The story of Metro Future store reflects on how technologies can provide customers a good shopping experience and thus helps improve long term relationships with them. Unfortunately customer relationship management is sometime misunderstood just as a technology. Though technology plays an important role in providing better customer relationship—however it is the design of the process that first needs to be looked into. Customer relationship management has impacted several areas of retail like call centre for product info and customer support, internet selling, tele selling, campaign management, marketing automation, sales force automation, field service, web personalisation, return management, managing loyalty etc. These help in improving the shopping experience, personalisation and customised content for the shopper based on the retailer’s recall of past preferences and reduced costs for the retailer as customers use the Web instead of contacting a call centre representative. Purchase data may be mined. Replenishment suggestions, generated from an initial purchase order, can be targeted towards the customer. Another aspect of customer relationship management for retail industry is the evolution of InStore CRM capabilities i.e. capabilities that can be delivered via sales associates in the retail shop floor to help customers become self sufficient (for example self service kiosks or mobile phone). Traditionally, in store CRM capabilities were available in back office computers, handheld devices, POS systems, self service kiosks etc. However now a days, consumer devices (like mobile phones, PDAs etc) are becoming targets for delivering In store CRM outputs. These devices are increasingly getting used as shopping device with m commerce taking the centre stage. Customers are getting personalised discounts, promotion offers or product recommendations through SMS and mobile phone calls. Another important thing to remember is that the kind of customer relationship management a retailer will adopt will also depend on the kind of items he handles. For example, in the end of a low cost grocery retailer issues like personalised promotion or pricing capability may not matter. However this may be very useful for a high end fashion retailer. It is important to understand that CRM capabilities are only important if the customer values them. Successful customer relationship management can provide several returns on investments for the retailer like increased loyalty, increased cross sells and up sells, increased customer awareness of products, increased customer to customer referrals, decreased service costs and better inventory management. There are several customer relationship areas, but in this section we will focus on areas that impacts supply chain management the most. Some of these are shown in Table 10.1. Table 10.1 How CRM Affects Supply Chain Customer Relationship Area

How it affects supply chain

Customer service strategy

Several supply chain areas like inventory management, transportation planning etc Order management Multi channel logistics Reverse logistics Using loyalty data for customer segmentation and designing supply chain strategy based on this

On time delivery of order, Order status update Multi channel sales and service Hassle free return of items Loyalty (Personalised pricing, promotion and merchandise recommendation)

(Contd.)

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Supply Chain Management for Retailing (Contd.) Advanced payment technologies for hasslefree payment Kiosks for product information, comparison, gift registry and order out of stock items Reducing cost of acquiring the item, helping sustainable environment and better product lifecycle management for customer

Green retailing-Designing recycling systems

CUSTOMER SERVICE Retail Customer Service—An Introduction Customer satisfaction is the ultimate goal of any service industry and retail is not an exception. Just think about the grocery retailers in your neighbourhood, where you get almost the same products at near about the same price in almost all shops, but you prefer to go to few particular shops—the reason is so obvious—you get better service there. This is one element which is difficult to duplicate for another retailer while product, price or promotion scheme can be duplicated in no time. One problem with customer service is, it is difficult to define as it means different things to different customers. l To some people it may mean the kind of treatment and help you get while visiting a retail shop. It may include things like how efficiently the sales people had explained to you the features of a product (may be for an electronic gadget) while selling or how good their recommendations were in terms of the shirt that looked good on you. Sometime they may have even prevented you from making a purchase as the vegetable you wanted to buy was not fresh. l To some people it may mean as ‘a hassle free return policy’ i.e. every time you went with complaints—the retailer had replaced the good. l To some it may mean sheer availability and depth of choices. Your sister likes a shop very much since whenever she goes there she gets a garment to her liking and very much within her budget within a very short period. There are enough articles of different styles to choose from within a wide price range. l To some it may also mean price, discounts and home delivery offered by a store. You like a neighbourhood grocery shop as they sell fresh products, their prices are lowest among retailers in your nearby area and they deliver products at your home within one hour of ordering. l To some it may also mean the loyalty scheme. You like a particular retail chain as every time you go there, you get some exciting offers for loyalty points earned by you. Which of this is customer service? The answer is so obvious—all these are part of it. This makes one thing clear that a retailer can have different strategies for customer service. Some can offer very large product selection as part of customer service, for some other retailer it may be offering value added services like home delivery and for another group it may mean simply making product available at cheapest price. We discuss this subject in supply chain context as each of these strategies have far reaching impact on designing a retailer’s supply chain. If a retailer wants to have no stock out and wide assortment, it may mean building high inventory. If an online retailer wants to deliver the product within 24 hours—it may call for faster mode of transport. In different retail scenarios, the elements of customer service may change. Figure 10.1 shows how different customer service policies dictate supply chain design.

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Fig. 10.1

Customer Service Policies Dictate Supply Chain Design

A supply chain strategy needs to be in place for another important reason—retailer’s consistency in service. This is a known problem in the industry—on a Saturday evening or during a promotion campaign or on festive days the service level is very different from Monday evening. On those days—you find customers complaining about long queues before the billing counter, not enough help from salespeople on the floor etc. A retailer can choose to offer a particular level of service (say a value retailer may choose to offer low level of service), but it is important to stick to that level. There are many examples of retailers who have built their businesses emphasising customer service. For example, Nordstrom’s is a highly successful retail company that guarantees customer satisfaction. As a customer, you know that you can return any product to them if you are not completely satisfied.

Customer Service Mix—One Size does not Fit All The kind of customer service a retailer needs to offer depend on many parameters like the type of store he has, the place where the store is located, the kind of customers he is targeting, the kind of merchandise he sells etc. These parameters can be grouped under following categories. Figure 10.2 defines different elements that decide the levels of customer service. Store image, location of the store and store format Different retail formats have different service expectations. In a small food canteen, you are perfectly all right with self service—however when you enter a restaurant in high street—your service expectation is very different. The same is true when you visit a value retail shop (like Big Bazar or Vishal Megamart) and a high end lifestyle store (like Wills Lifestyle).

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Fig. 10.2

Customer Service Mix

Type of merchandise sold Customer service also varies depending on the type of merchandise the store offers. FMCG. products, fresh foods and groceries are categories requiring very little service from store sales people. Consumers in supermarkets prefer to go through various brands, compare prices and finally take a decision to buy of their own. Only service he expects is assured quality and a fair price. On the other hand, specially store dealing in expensive jewellery, fashion apparels, furniture, consumer durables etc, the concept of in store service changes completely. Here, customers expect individual attention, with high level of service. The salesperson very often acts as a counsellor and advises the customer on the purchase. Target market income and price image If the target market for retailer is high net worth individuals and price image is high end then the service expectation will be different as compared to a value retailer. Competition Services offered by competitors also determine the kind of service the retailer needs to offer. In airlines industry almost every airlines offers today in flight entertainments, in the hotel industry almost every luxury hotel offers airport pick up and drop. Once most of the competitors start offering some service later it becomes the industry norm and customer starts expecting this service as the base level. Cost of services Retailer also needs to decide the service level based on the cost of offering that service i.e. the incremental cost versus. the incremental revenue it generates.

Customer Service Pyramid It is important for a retailer to understand the concept of customer service pyramid. This pyramid segments customer service capabilities and puts them into three tiers. These are as follows: Reliability This is at the base of the customer service pyramid. A retailer needs to do these basics well even though performing them properly may not give the retailer extra market share. If these basic core services are not done well, it will cause customer dissatisfaction and the retailer may loose even the existing market share. Examples of this can be: l Availability of the product l In store merchandising / technical support l No billing error

Retail Customer Relationship Management 247 No long queues before payment counter Proper packing l Installation on the dates promised earlier (if required) l Proper packing l Ease of order entry (mainly for e tailing) l Condition of product on arrival l Delivery on the promised date—reliability of delivery l Order completeness l Security of transaction (mainly for e tailing) Resilience Resilience means the ability to respond quickly in case there is a failure in customer service and this is the second tier of customer service pyramid. Example of this can be a retailer’s rush order shipment capability. It could be delivery from distribution centre in case there is a stock out in store or providing proactive communication to customer, if there is a shipment delay of an order which the retailer had taken over web. These capabilities make the retailer capable of maintaining its service level. Examples of this can be: l Proactive communication of order status i.e. communicating if there is a delay l Product recall systems l Response to customer enquiry l Emergency delivery when required Creativity/Innovation This is the top tier of the customer service pyramid and this means developing value added programmes for the customer. An example of this can be offering a special price to a particular individual customer based on his loyalty information or offering a special bundling pack based on his past buying history. This requires willingness of the retailer to experiment with new ideas. Examples of this can be l Customised product offering l Customised pricing l Packaging innovation—designing pack size based on individual customer’s requirement l Delivery innovation—guaranteed delivery within 30 minutes as in the case of Domino’s Pizza. l Excellent product and customer knowledge of retail staff Figure 10.3 shows the concept of customer service pyramid. l l

Fig. 10.3

Customer Service Pyramid

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Retailers first must have the base of ‘Reliability’ in place which will ensure their existing market share but to build a differential position in marketplace and increase market share, they need to develop capabilities in ‘Resilience’ and ‘creativity’ level.

Customer Service Over Retail Sales Life Cycle Customer service is important for a retailer during the entire life cycle of retail sales and the kind of activities under customer service changes at different stages of sales life cycle as per retailer’s objective. In pre sales transaction stage, a retailer’s main objective is to bring the customer to the store so providing the customer ‘quick access’ (by having presence at right location, access through web, phone etc) or communicating to the customer effectively the store’s value proposition. Once the customer visits the store, the retailer’s objective is to convert the footfall to a sale. Thus the kind of activities under customer service during this phase changes. Activities like sales counselling and explaining the features by a knowledgeable sales staff, providing credit etc., matters here most which can convert a sales enquiry to actual sales. Post the sales transaction, the retailer’s objective is to keep the customer happy, so that he comes back to the store again and again. Activities like quick return processing (in case there is any), providing after sales service, getting customer feedback etc., matters here most. Pre transaction services These are services provided to the customer prior to entering the store so that he actually enters the store. The objective is to make it easy so that a potential shopper can shop or learn about the store’s offerings and can easily find and purchase a product. These can be things like l Convenient hours and extended store hours l Internet Retailing—providing customer with a web site that makes it easy to find and purchase the product they are seeking l Easy customer access to the store i.e. prime real estate (fast food retailer McDonald’s believes in this) l Providing mail, phone access/accepting mail and phone orders l Information Aids—ads, demonstrations, brochures, newsletters, etc For an internet retailer, it can be things like the ease of browsing in the site, the variety and depth of merchandise available, online reviews available, material is in stock etc. Transaction services These are services provided to customers when they are in the store shopping and transacting business. Transaction services influence the ease with which a transaction can be completed when the customer is ready to buy and enriches customer’s satisfaction with the transaction. These can be things like: l Personal Selling—where a retailer’s sales person spends time with the customer, explains to him the features and recommends based on the need. This can be very important for a consumer durable retailer. l Product display—the way the products are displayed, customer can quickly find the things he wants l Price (example—Walmart’s everyday low price strategy is a great success) l Offering credit l Gift wrapping and packaging/Gift certificates l Trial room/in house alteration facility l Ensuring availability of merchandise (especially if it is on promotion and the customer had come to buy this particular item)

Retail Customer Relationship Management 249 No delay at billing counter and accuracy of billing Written statement of policies (policies for return, home delivery, credit etc.) For an internet customer, there can be added things like ordering convenience, Safety of transaction on net etc. l l

Post transaction elements These are services provided to customers after they have purchased merchandise or services. The objective of these services is to keep the customer happy, so that he becomes your lifetime customer and comes back to the store again and again. Example of these can be: l Complaint handling process—the way the complaints are handled, customers expect courteous treatment, a fair settlement, and prompt action l Warranty claim and merchandise returns—the way these claims are handled, obviously customers expect a speedy settlement l Installation (important for certain category of items like white goods, furniture) l Servicing and repair l Delivery (important for certain category of items like white goods, furniture which are typically delivered at a later date after making the purchase) For an internet customer these can be things like on time delivery reliability (whether the materials had reached him as promised), orders completeness (there is no breakage in consignment), order status information and tracking capability (can track status online) etc. Figure 10.4 shows how customer service parameters change over retail sales life cycle.

Fig. 10.4

Customer Service Over Retail Life Cycle

Ways to Improve the Customer Service for a Retailer Improving customer service is a multi step process which requires long term commitment and support from retailer’s top management. A retailer can take following steps to improve its customer service.

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Identify an initial list of service elements through customer service surveys It is important to have regular surveys to identify what service components matter to customer, where the retailer stands on these service components against competition. It helps the retailer to do modifications in the elements of customer service portfolio. Customer surveys and listening to customer through variety of channels i.e. customer hotlines, customer complaints, suggestions, interactions with the sales staff etc., helps retailers to identify which service elements to consider. Prioritise these service elements based on relative importance to customer Establish relative importance of those service components to customer. For example in the initial list the retailer identified through surveys that customers value credit terms, personnel selling and convenient location of the store as important service elements. However a prioritisation among these three may show that consumers consider credit from retailer the most important service element. Identify the company position on the key service components relative to competitors Here the retailer evaluates its competitive position. In the earlier example, if the retailer finds that already its credit policy is best in the industry, then it may not be interested to improve this further and will concentrate on something else. Identify which customers to serve—Customer profitability analysis and customer segmentation Retailers first need to analyse the costs of servicing different customer groups and then focus their marketing efforts to expand their market share of the most profitable ones. Special treatment for A class customers may be provided. For B Class customers services can be less or services can be at a premium. Some retailers are even looking at rationalising some of these customers. This concept is very well adopted in retail banking. Based on the transaction history, banks classify a customer over time as premium customers or normal customers. Premium customers are offered a series of benefits like special withdrawal limits at ATMs, personalised portfolio management services, less documentation requirement for any loan etc. Define clearly the service elements for focus and set standards and measures of performance At this stage the retailer clearly identifies a list of service elements for focus and set targets for each of them. For example Domino’s Pizza is passionate about delivery commitment as their most important service element and have set a target of ‘30 minutes delivery’ for the same. Blue Dart have set ‘Next day delivery’ as their target. Design the entire supply chain to meet this customer service target Select, train and empower employees also to meet this requirement. Measuring the gaps in service It is important to evaluate the actual quality of service provided. If retailer commits a certain level of service, customer expects the same. If the service provided by the retailer fails to match the customer expectations, the service is perceived as poor. Example of this can be if three times continuously a Blue Dart consignment has reached you late, and not on the next day as promised by them, you perceive the company’s service as poor. These gaps may occur for variety of reasons like: l Knowledge gap Here the difference occurs because of what consumers expect of a service may not match with what the management believes the consumers expect. For example, for some customers in supermarkets, price may be the most important factor. Others may prefer quality while another segment may prefer speedy checkouts whereas the management may believe that everyone goes to supermarket for best price. This gap is most dangerous because management may focus on entirely wrong things.

Retail Customer Relationship Management 251 Standard gap Here the difference occurs as the management perceives a different standard of customer service than what retailer perceives. For example, for a furniture retailer, the customer expects the goods to be delivered at his house by the next day whereas retailer has set a standard of delivering it within 3 days. l Delivery gap Here the difference occurs between the standard of customer service set by the management and the actual quality of service delivered. In the earlier furniture example, if the actual deliver time is five days instead of three days as committed by management, then these two days are considered to be delivery gap. It is important for the retailer to understand these gaps and take appropriate actions to close these gaps. Measure the benefits of providing customer services against their costs It is important that the retailer does regular evaluation of the cost and benefits of offering the customer service. This regular analysis will help retailer to understand what incremental benefits the different customer service elements are bringing. Based on this study, the retailer can do periodic reprioritisation of customer service elements i.e. drop some of them and re focus on some other elements. This is a continuous improvement exercise. l

Understanding the difference between customer service and customer satisfaction It is important to understand the difference between these two accounts. Customer service is a set of activities that a retailer takes up since it is viewed as important for meeting customer’s needs. For example a retailer may think that it is important to have qualified sales staff in his store—so that they can explain to the consumers the different technical features of the products he is selling. Having a set of such qualified staff who offers technical counselling to the people visiting the store is a customer service the retailer is offering. Customer satisfaction is how the customer measures externally the service performance of the retailer. In the above example, if the consumers do not give a good feedback about the actual performance of the store technical staff, then the retailer’s customer satisfaction on this particular parameter (i.e. technical counselling) is negative. The aim of judging customer satisfaction is to identify the gap between the customer’s perception of service and the actual service.

ORDER MANAGEMENT Managing orders efficiently is a key success factor for any supply chain. There can be several scenarios for retail ordering like: l There are cases where customers come and pick up things as per their requirement and there is no concept of order. Most of the food or grocery items fall in this category. l In some cases, the customer may select a design which is not in stock; customer orders the retailer which retailer delivers after specified time. The typical example can be a furniture retailer, a jewellery shop where you select the design from the catalogue, place an order, typically pay some advance and the shop delivers after few days at your home or you need to come and pick up from the store. l In any case the store needs to order its merchandise either directly to suppliers or store orders RDC (Regional distribution centre) who in turn orders suppliers. l Another scenario can be where a customer logs onto a retailer’s site and places order for items. Here are some examples of how leading companies manage their order management process and in turn have redefined their business model.

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Leading Retailers Use Order Management as a Tool for Competitive Advantage l

l

l

Benetton changed the game in fashion retailing—not through its design but through a completely new approach to making and distributing clothes. Fast, responsive and accurate, its order to payment process allows it to compete with higher margins than the rest of the industry. P&G’s electronic link with Wal-Mart sends a replenishment order as soon as an order is sold. This not only improves order to payment process but also makes P&G the preferred supplier to Wal-Mart giving them more volume of business. Dell computers became one of the world’s ten largest PC manufacturers by establishing a build to order mail order service as a new cost effective distribution channel for PCs.

Order Management Process Figure 10.5 explains the steps of any typical order management process. These are: l Enquiry by customer (verbal/phone/mail/order form) l Availability check l If stock is not available, notify the customer, notify when shipment can occur or give him the option of accepting in-stock, similar products l If stock is available then customer is informed and order is confirmed after doing the credit check of customer. If applicable, at this stage sales person’s incentive also can get updated l Checking for completeness and accuracy of order and order entry l Locating nearest warehouse from where order can be served l Order information transmission to warehouse l Order picking at warehouse l Transportation department arranges for shipment l Despatch of goods l Receipt of goods by customer and signing proof of delivery l Collection of payment

Fig. 10.5

Order Management

Retail Customer Relationship Management 253 Customer needs to be kept informed about order status during this entire cycle. Order management capabilities mean the following: l Order receiving capability through multiple customer touch points like internet, e mail, phone, SMS etc. l Capability of handling rush orders: This may call for having excess capacity for supplier. During a promotion period, if a retailer is experiencing a huge increase in sales for some particular merchandise, the retailer may place priority orders on few suppliers—capability of handling such orders may call for excess capacity. l Order communication: Ability to communicate order status to customers on a regular basis. This is especially important for e tailers. l Order promising capability: This may call for capabilities like n Profitable to promise: Should I take the customer order at this time? n Available to promise: Is inventory available to fulfill the order? n Capable to promise: Does my manufacturing capacity allow to commit this order?

Order receiving: Retail banking industry can be trend setter Retail banking has matured greatly over the years in terms of receiving an order. Today, there are many ways you can place order for a new service (like opening a new fixed deposit or for a new credit card). You can physically visit the branch and place an order, can go to net banking, can make a call to the bank’s call centre and place an order or simply send an SMS.

Order status communication: Learn from courier industry If you have booked a shipment through Blue Dart or DTDC today—it is easy to track the status of this order on internet. Order status is continuously updated till it reaches the customer. These service providers are getting into multiple channels today for communicating the order status like giving status through their interaction centres etc.

It is important to understand the difference in perception of order cycle time between a seller and buyer. For customer the order cycle time is from the point he has registered an order (i.e. customer had an enquiry, the retailer confirmed the product availability and the customer has ordered for it). However for a retailer number of working days he has taken to ship the material. Let us understand this with an example; a customer had ordered an item on Saturday afternoon at 2 P.M. on phone. As 12 O clock is the cut off time for retailer’s warehouse, Sunday being a holiday, the retailer could transmit the order to its warehouse on Monday morning. The retailer’s warehouse had taken four days to ship the order i.e. order was shipped on Friday morning. The order takes two days in transit and as Sunday was a holiday in between, the customer received it on Monday. So for customer the order cycle time was 11 days (from Friday to Monday after next Monday), whereas the retailer may think that his order cycle time was just 4 working days. It is important for the retailer to try to compress the order cycle time as perceived by customer with measures like 24 ´ 7 order taking at warehouse, electronic transmission of order information, better transport planning etc. Another good practice in order management is to prevent bunching. Typically retailers consolidate orders and pass on to warehouse and this increases cycle time. Orders should be transmitted

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to warehouse as and when received. However warehouse can do bunching of orders to make a logistically efficient load.

The Concept of Perfect Order The concept of perfect order is designed to measure the effectiveness of the order management process. It measures the percentage of orders that proceed through every step of the order management process, without fault, exception handling or intervention. Each step in the order management process must go smoothly for the order to be considered perfect. The steps may include order entry, inventory availability, accurate picking, on time delivery, correct invoicing etc. If anything goes wrong (or require manual interventions, exception processing or expediting), the order is not considered perfect. This metric measures the effectiveness of the order fulfillment process, crossing the boundaries of functional departments. E tailers and RDCs making despatch to store are beginning to measure the percentage of orders that meet the criteria of perfect order and finding to their surprise that less than 10 percent orders are perfect. They are reengineering their order management process. Figure 10.6 explains how perfect order requires coordination of different retail functions.

Fig. 10.6

Perfect Order Fulfillment Requires Coordination of all Functions

Perfect order—list of problems: l Order entry error l Missing information (e.g. product code) l Ordered item is not available l Inability to meet shipment date l Picking error l Late shipment l Late arrival l Incomplete paperwork l Early arrival

Retail Customer Relationship Management 255 Damaged shipment Invoice errors l Split shipments l Follow up required by customer Table 10.2 shows a list of measures that can be used to check the effectiveness of order management process. l l

Table 10.2 Perfect Order Measures Perfect Order Measure On Time Delivery/Order cycle time Warehouse picking accuracy On time shipment Product availability Product quality Invoice accuracy Payment accuracy Document accuracy Customer handling accuracy

Description Products are delivered to customer on time Correct items are picked in retail distribution centre in correct quantities Products are shipped to customer on time Product available to satisfy customer order Products are delivered in perfect condition—no defective or damaged consignment The whole order is correctly billed Payment is correctly updated in system, loyalty data is updated All documents are correct i.e. warranty document, insurance document, delivery note etc All queries from customer related to the order is handled efficiently— Order status information, customer complaints

MULTI CHANNEL RETAILING Retailers are increasingly leveraging their presence across channels—catalogue, web, store, call centres and kiosks. Retailers are using multichannel like store, internet and call centre for several purposes while some are using it for selling, and the others are using it for customer service. There can be different options of deploying this multi channel model for sales and customer service for customers like the following: l Buy online, pick up in store (sales and service—example Walmart’s site to store programme) l Check store item availability online (service) l Browse and purchase from e commerce site when in store (sales and service) l Cross channel returns—buying online and returning or exchanging at a store (sales and service) l Online access to account / loyalty programme information (service) Multi channel retailing is not only about sales; it can also help store employees and enable them to: View and order from inventory in other channels/stores View and edit customer profiles/history from the store l Access cross channel customer/order information from call centre Multi channel retailing is increasingly becoming the order of the day and following pressures are driving retailers to integrate multi channel initiative: l Customer expectation of seamless purchase and delivery option across channels l l

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l Increased cross channel consumer research and shopping patterns Figure 10.7 explains how multi channel retailing benefits everyone in the retail eco system

Fig. 10.7

Multi Channel Retailing Helps Everyone in the Eco System

Multi Channel Retailing Challenges Multi channel retailing emerged over time. In most cases a traditional brick and mortar retailer added a website and gradually introduced online store. Typically these lines of business are organised as separate divisions, each with its own IT infrastructure, rules and processes. So when customers want to do business with more than one channel, this is always a challenge to retailers. Retailers need to ensure consistency and efficiency across all channels, offer seamless purchase and delivery options to customer across all channels and ensure product information and prices are consistent across all channels to create a single brand identity across channels. They need to ensure that there is no inter channel conflict. This may even call for changing the organisational structure. There can be several issues related to inter channel conflict like the dominant channel (in most cases it is the brick and mortar channel) fears sales cannibalisation. Incentives programmes for sales team are not designed to promote cross channel selling and there is no cross channel overall metrics. Managing logistics is another challenge because in most cases inventory, merchandising and order management information are not integrated across channels and there is very limited visibility for inventory across channels. Aggregation of demand does not happen across channels i.e. the merchandise procurement managers for online store and brick and mortar store place orders for the same item separately loosing economies of scale and better supplier terms. There can be issues on customer management front as well like customer data not integrated or shared across all channels, customer have inconsistent buying and customer service experience across different channels (example: The same item is promoted heavily on online store but not promoted at all at brick and mortar store), lack of common understanding of customer and their

Retail Customer Relationship Management 257 shopping habits across channels inability to extend loyalty programmes/incentives across channels and no metrics to capture profitability of multi channel customers. As customers do not view different channels of same retailer’s businesses differently (if some one has bad experience about Walmart online store while shopping, he carries that image for Walmart as a whole) but as a single brand and company, it is important that the retailer is capable of serving them in a consistent and harmonious way regardless of the channel of interaction. This means developing several capabilities for the retailer like: l Presenting the retailer’s value proposition across channels in a consistent way from a customer perspective. This means that the retailer needs to have same pricing, promotion, assortment and return policy across channels. This means if a retailer is known as value for money shop in its physical format (say Bigbazar in India), he needs to be competitive over web in terms of price. l Customers expect seamless experience across channels i.e. buy online and get delivery at store or buy online and return/exchange it at store etc. This calls for high level of integration across channels i.e. at physical store you can validate that the return claim made by the customer is logical going through his sales transactions in online channel.

Leveraging Strength of One Channel for the Other Retailers can leverage the strength of one channel for the other. Leveraging can only happen when strength and weakness of each channel are known properly:

Physical Store Channel Advantages: l Chance to see and feel the product l Can adopt mass distribution strategy—has economy of scale Disadvantages: l Need to operate physical sites l Allocate inventory and manage sales on a store by store basis i.e. to allocate and manage inventory across hundreds of thousands of locations l Difficult to personalise customer interactions and needs to depend on sales associates

Online Channel Advantages: l Typically has only one central fulfillment centre in which inventory is managed, can have much higher number of SKUs, as in some cases the retailer need not hold the inventory at all—can ship it directly from the supplier once the order is received—a typical strategy Amazon adopts for many of its titles. l High personalisation capability Disadvantages: l Subscale distribution i.e. the need to ship directly to individual customers at comparatively high costs l No look and feel possible

Example of Leveraging the Best of Both l

Some retailers have used internet as a medium for easy ordering from a much larger assortment and used store asset for delivery i.e. offering to ship a product ordered online to the nearest

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Multi Channel Logistics—Capabilities Required Multi channel retailing requires logistics capabilities in terms of order management, inventory, merchandising, customer interactions etc. These capabilities are important for a multi channel retailer to acquire to succeed. Figure 10.8 explains the multi channel retailing challenges and logistics capabilities required to address it. These capabilities can be: l Inventory management Locating and leveraging inventory across channels and inventory visibility across channels. l Order fulfillment This can include things like leveraging online ordering and store pick up, common customer order database, consolidated view of customer order history across channels, integrated customer communication on order status etc. This can also call for advanced order management capability like when a fulfillment location for an order is not specified. In

Fig. 10.8 Multi Channel Challenges and Required Logistics Capabilities

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this case the cross channel order management systems should be optimally able to select the best logical location from which to fulfill based on geographic proximity, inventory level and retailer business rules. Today’s distributed order management systems also have the ability to place orders for products from any channel and access them from another channel. Customer service Multi channel retailing can provide enhanced customer experience; however this will need enhanced logistics capabilities in terms of store associates. They can see customer order history from any location to check status, apply loyalty rewards and process a return from another channel. By mining and analysing customer data, promotion offers can be personalised. Typical cross channel logistics capabilities required for better customer service are cross channel returns authorisation and management, integrated pricing and promotion across channels, managing multi channel customer loyalty i.e. calculating points for the customer across channels and redemption across channels, targeted customer e mailing based on shopping history and preferences, Cross selling and up selling based on products ordered, shopping history etc. Merchandising buying Cross channel integration can result in better economies of scale, price and terms from suppliers through consolidation of merchandise requirement from physical and web store for better economies of scale. Common masters Multi channel retailing need common item master, inventory and customer database across channels. Product and customer information should not be entered in one place from where it may be distributed to several channels i.e. web, brick and mortar and catalogue channels. Cross channel content management is important. Multi channel incentives and KPIs Metrics need to be made cross channel i.e. a particular item’s inventory turn can be measured cross channel based on total sales across channels and total inventory of the item across the network.

Multi Channel Retailing—Case Study Walmart’s Site to Store Programme—An Innovative Example of Multi Channel Retailing and Multi Channel Logistics Wal-Mart’s Site to Store Programme allows free shipping to Wal-Mart Stores for thousands of online items. The service, which the retailer tested first in selected stores for years offers free shipping to Wal-Mart stores on thousands of items offered through its website, Walmart.com (www.walmart.com). This service provides customers with another way to shop for Wal-Mart’s products both in stores and online. Online products complement the assortment of merchandise available in Wal-Mart stores, especially in electronics, baby section, Home section, Sports section and Toys. Items arrive in stores within 7–10 business days after the order is processed, and customers receive an automated email to indicate their order is ready for pickup. Walmart saw that nearly two thirds of the customers who used the trial service also shop in Wal-Mart stores on a weekly basis. Site to Store not only offers these customers access to thousands of additional online products, but also gives them the added convenience of picking up those items at the store during their weekly shopping trips without paying for shipping. A key advantage of Wal-Mart’s online channel is the ability to offer a much larger assortment of products through virtual shelf space, while its offline channel’s key strengths include its nationwide footprint with more than 3,300 retail store locations and a world class logistics network capable of efficiently delivering online products to customers at its stores. Site to Store leverages each of these strengths to provide customers with

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a robust multi-channel shopping experience. Thousands of products carried online at Walmart.com are eligible for the Site to Store service. Specific Site to Store messaging is featured on eligible product pages to let customers know the online item can be shipped to a local Wal-Mart store for free. During checkout, customers can choose the Site to Store option, select the store where they will ship their items and even see the amount saved on shipping. The Site to Store service also supports Wal-Mart’s sustainability efforts. Transportation efficiencies have been realised by consolidating individual shipments into pallets and fewer trucks. Also, system upgrades allow participating suppliers to consolidate multiple items of an order into single cartons, minimising the total number of boxes needed. Source: www.walmart.com (accessed on 3rd July 2009)

Multi Channel Retailing and Multi Channel Logistics in India Multi channel retailing is in its infancy it India. There are few brick and mortar Indian retailers who have opened their online shops like: l The Future Group have launched the e-tailing site: www.futurebazaar.com l Zodiac, has set up an online web-store: www.zodiaconline.com l Shopper’s Stop have put up their online web store www.shopperstop.com However they need to work on their multi channel logistics capability like ordering in one channel and getting delivered through other or other cross channel capabilities as discussed earlier. There are pure online retailers / e tailers who do not have any brick and mortar presence. Some of these are www.ebay.in, www.shopping.sify.com, www.shopping.indiatimes.com etc. However the most popular online buying category in India is still the services like rail ticket, airlines ticket, hotel booking, film tickets (the site www.indianrail.gov.in is the most commonly visited site for rail ticket booking and reservation) which does not require much of delivery and logistics capability as you can take a printout of a ticket sitting in your office these days.

RETAIL RETURN AND REVERSE LOGISTICS A couple of years back there was tremendous rage in India generated due to a Delhi based research lab’s report that all MNC and Indian companies made soft drinks which had pesticides contents in excess of the internationally accepted standards. The basic cause was contaminated water in India with pesticides used indiscriminately. But that could not excuse the producers to pass off contaminated drinks. At almost the same time came a controversial report about worms being found in Cadbury chocolates in Mumbai. It is not known finally what these companies in India (MNCs) did to react to the situation but the storm somehow settled down. It however had long term effects on credibility of soft drinks as safe products, with these being banned in most educational institute canteens. Large stocks of bottles were smashed by enraged protesters in various parts of the country and the ensuing debate took a nasty turn for MNCs, about their role in local markets and business ethics. Nokia Mobile phone batteries BL-5C (manufactured in China for Matsushita, Japan) have been recalled for getting overheated and bursting during charging—although most mobile sets generally get heated while in use for a continuously longer period—this is yet to be addressed by mobile manufacturers who are busy reducing instrument size. Another issue related to safety in mobile hand sets is micro/radio wave emissions that emanate from handsets which are being considered as health hazards. In perhaps the largest product recall in India, mobile giant Nokia recalled 46 million

Retail Customer Relationship Management 261 batteries pursuant to customer complaints across the globe. Recently, Nokia issued a ‘product advisory’ (the company does not call it a recall) for these BL-5C batteries which relate to a certain period of manufacturing. On the first day of the opening of its centre (16 August) for advice on the faulty batteries, Nokia India answered 20,000 calls and received 1.45 lakh SMSs. This incident shows the importance of return in consumer goods. Retail return is an important issue as depending on the retail channel (store, catalogue or web retailing), in developed countries this can vary around 5–15 percent of total sales. Internet and catalogue retailers, particularly those based in apparel retailing contribute to the highest proportion of returned goods. No retailer prefers this facility though it is an important element of customer service. Success or failure here can play havoc with retailer’s image. Before getting into details on this topic, let us first understand the reasons for which a consumer returns item at store: l Damaged/Defective products l End of life return—in some countries government rules necessitate this—products like battery, electrical and electronic products need to be returned back at the end of their life l Product recalls—these are common now a days—the most recent example is Nokia who recalled a particular model of mobile set in India a few months back as the battery was faulty l Product not sold as advertised—retailer may get into legal complications here l Warranty returns l Customer changing mind l Cancellation of order not yet received The first thing a retailer needs to have in place is a clear return policy. The next part of this chapter is devoted to this aspect.

Return Policy A retailer needs to have written customer return policy, with clear routes for escalation, in case there is a dispute in a particular case. The return policy needs to be displayed / communicated clearly to customer and store associates. Store associates should have all required information and authority to take decisions in presence of the customer for handling returns. Establishing return policy requires careful consideration i.e. if the policy is very complex, it may affect sales and on the other hand very liberal policies (such as exchange without receipt of original transaction) are open to abuse and fraud by customers and staff. A typical return policy should address the following issues: l Process for return Whom the customer should contact in store for return, what process they need to follow, what form they need to fill up, who will authorise the return etc. l Money return or exchange Whether the customer is allowed to return or exchange. Several retailers do not provide any money back but allow exchange. l Days to complete the process Within how many days the customer will get the replacement item or will get back the financial credit. l Any costs involved Who pays for shipping the returned goods back to manufacturer and for the replacement item from manufacturer/supplier? Most e commerce companies make customer responsible for return shipping. Some retailers charge restocking fee to offset costs associated with processing the return. l After how much time return is accepted Generally retailers define a period within which return is allowed and after which requests are not considered.

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A retailer needs to consider following aspects while creating the return policy: l Most retailers make production of the original receipt as must for returns. l Only refund in the same form of currency used for the purchase. For example, if the item was purchased with a credit card, issue a credit to that same card. If the purchase was made by personal cheque, typically retailers take few days for the refund to allow time for the original check to get cleared by bank. Typically most retailers do not encourage cash refund and either offer store credits or item exchange of equal value. Examine the length of time the store will allow returns. Some retailers limit returns to 30 days, others may allow returns for up to 90 days. Determine in what condition merchandise must be received. Some retailers charge 5 to 25 percent restocking fee for opened items, unless defective. Display the return policy everywhere for the customer to understand what the store will allow. Some retailers print return policies on sales receipts. Be consistent in enforcing the return policy without making exceptions for certain circumstances or for certain times of the year i.e. different rule for diwali purchase/New Year purchase etc. Require identification when accepting returns. Computer database can be used to track returns by customer and note any fraudulent practices. Train employees to spot return fraud.

Source: www.retail.about.com (accessed on 15th June 2008)

These days cross channel returns are growing significantly as a result of increased online buying i.e. retailers are buying online and coming back to the nearest store of the same retailer to take delivery or returning the items they bought online. This means return policies need to be adjusted accordingly. Policies need to be defined for all channels but can be adjusted as necessary for channel specific needs. For example, for web channel there needs to be a policy stating who pays transport for the returned merchandise. However this may not be required for brick and mortar channel.

Example of Return Policies Example 1: Company’s Policy may be Different During Different Periods of the Year: Return Policy of Best Buy The U.S. electronics retailer, Best buy limits the return period to 30 days of date of receipt. They will charge a restocking fee on returns or exchange of any product not retuned in 'like new condition', unless defective, damaged upon delivery or if the wrong product was delivered. However Best Buy had a different policy for holiday season's gift returns. If you make a purchase for US$250 or more with cash or debit card, you will not receive cash or debit card refund if you return the purchase. Rather, Best Buy will issue you refund by cheque in 10 business days. Source: www.bestbuy.com (accessed on 3rd July, 2009)

Example 2: Company's Policy may Differ Depending on Types of Merchandise Amazon has a list of over 28 different return policies for each category of products such as books, electronics etc. Best Buy will not accept computer returns after 14 days. Circuit City advertises a 30-day return policy. However, for digital cameras, camcorders, desktop PCs, notebook PCs, monitors, printers, scanners, projectors, PDAs, mobile video, GPS and radar

Retail Customer Relationship Management 263 detectors the return must be made within 14 days of the sale date, and (except where prohibited by law) are subject to a 15percent restocking fee if returned opened or in a non-factory sealed box. Source: www.amazon.com; www.bestbuy.com; www.circuitcity.com (accessed on 3rd July, 2009)

Example 3: Some Retailers can have Complex 'Partial Refund' Policy Partial refunds are much like restocking fees. The retailer will return the item, but only refund a portion of what was paid. An example of this practice is posted on Amazon.com. The partial refund policy is listed for: 'Any unopened media item or non-media item in original condition that is returned more than 30 days after delivery: 80percent of item's price. Any book that has obvious signs of use: 50 percent of item's price. Any CD, DVD, VHS tape, software, video game, cassette tape, or vinyl record that has been opened (taken out of its plastic wrap): 50 percent of item's price. Any item that is not in its original condition, is damaged, or parts are missing for reasons not due to our error: up to 50percent of item's price.' Source: www.amazon.com (accessed on 3rd July, 2009)

Return Process Having a clearly defined return policy is just the first step in an effective return management process. There are other key components in the process like return preparation, receiving, shipping an exchange or issue of credit, inspection, sorting and finally asset recovery which is made up of restocking, repackaging for sale, return to vendor, disposition and scrap. In case returns are processed in-house i.e. by retailer himself, there can be several steps in the process like: l The customer returns an item to the store. He fills out a returns form. For items of higher value, the store may have a separate process to validate the return. l The store personnel opens, sorts and inspects the item, processes it back to inventory and issues a credit. l The merchandise is then retuned to stock, sold as used, destroyed or liquidated by third parties. l All items come back to a centralised DC operated by merchant or manufacturer or by a third party fulfillment service provider. In case of cross channel returns i.e. customer buys in one channel and returns in other, there can be several options like: l Customer buys in store, collect from store and returns in store l Customer buys in store, collects from store, retailer collects the return from customer's location / home-generally common in case of heavy white goods l Customer picks in store, retailer delivers to customer's home, and retailer collects return from customers-common for furniture and white goods l 3PL on behalf of retailer delivers the material after the customer procured online and the customer returns to store l 3PL on behalf of retailer delivers the material after the customer procured online and the 3PL takes it back in case there is a return However there can be some common threads like customer needs to fill up a form detailing reasons for return, retailer receives the goods, checks condition of goods and match the goods with original purchase. Next steps are to issue a credit or ship an exchange item.

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Reverse Logistics This is the process relating to the flow of materials and linked information from the point of consumption to the point of origin for re-use, re-sell or simply destroying. Reverse logistics process can result in several benefits like fulfilling environment obligations of waste recycling—hazardous waste management etc., and cost reduction as some part of finished good can be recycled as raw material. Reverse logistics is not applicable for all products. Industries where returns are a larger portion of operational cost tend to have better reverse logistics systems and processes in place. Here is a list of cases where it makes more sense: l Papers and magazines l Electrical, electronic equipment, white goods—recycling of this is mandated by several European bodies like Waste Electrical and Electronic Equipment directive (WEEE) l Beverage—empty bottles l Battery products—major raw material lead is not environment friendly and needs to be taken back by manufacturer l Pharma products—the expired formulation and drugs for environment friendly disposal Many items that are returned, merely need repairing or re-boxing because the content is fine but the carton is damaged. In case goods are genuinely faulty, then it needs to be sent back to the manufacturer. Goods returned which are considerably damaged sometimes need to be disposed of in an environmentally friendly way. Some products need to be completely disassembled when components require sorting. Some major components remain appropriate for refurbishment and re use or resale as spare parts. Finally these materials which can not be recycled need to be discarded. Figure 10.9 is a good example of the different paths a product can take in reverse logistics.

Fig. 10.9

In Reverse Logistics Products can Take Different Paths

Retail Customer Relationship Management 265 Reverse logistics process is different from forward logistics process in several ways. Table 10.3 Difference between Forward and Reverse Logistics Supply Chain Characteristics

Forward Logistics

Reverse Logistics

Distribution

One to many distribution (Typically from factory to several distributors/ retailers)

Product quality

Consistent uniform quality (Product going through several quality checks before going out from factory gate) Forecasting is simple-scientific approaches can be developed based on past sales Pricing is uniform-generally every manufacturer has defined MRP(Max. retail price) Product packaging uniform for particular type of products Typically manufacturers track these costs regularly Logistics equipments like fork lift are designed for handling finished goods like cartons.

Many to one distribution (Product collected from several retailers and taken back to one central processing centre/ factory) Non consistent, non uniform quality (Products of different age and different quality comes back) Forecasting is very difficult as it is difficult to predict a failure

Forecasting

Pricing

Product packaging Distribution costs Logistics infrastructure

Supply chain network

Typical network consists of factories, warehouses, distribution centres etc.

Pricing can be complex and can be based on several factors like age, condition, chances of reusage etc. Mostly packaging is damaged or non existent Most manufacturers do not have any idea about these costs Logistics equipments are not designed for handling returned/torn down items— chances of losses during handling is high here Typical network consists of collection centres, grading centres, re processing centres etc.

Reverse Logistics Process There are four main activities in reverse logistics process like: 1. Collection 2. Inspection/selection/sorting 3. Reprocessing 4. Redistribution 1. Collection refers to bringing the products from customer to a point of recovery. 2. In inspection/selection sorting phase products are sorted according to the planned recovery option and within each option products are sorted according to their quality and recovery route. 3. Reprocessing includes: l Repair/Refurbishing l Remanufacturing/Retrievals—products are dismantled and their parts are used in the manufacturing of the same products (remanufacturing) or of different products (retrieval) l Recycling—very common in industries like pulp and paper, glass etc.

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Direct recovery includes: l Reuse: End of use returns often contain components that can be reused l Resale: Products can be sold at a discounted rate in secondary market 4. Redistribution is the process of bringing the recovered goods to new users.

Designing Reverse Supply Chain Network Designing reverse supply chain requires network entities which are different from forward supply chain (which is generally comprised of factories, distribution centres and warehouses). The typical reverse supply chain network for a retail company can have entities like: l Acquisition/Collection centres for returned/used products A retailer can install several drop points for customers to drop used products. For defective products an online customer can return it through direct mail system. Network design depends on different product types and needs of the customer. l Testing/grading operations Location of test and grade operations in the network is important. The location of the testing and grading facility is generally a trade off between transportation and investment cost. Testing collected products early in the channel minimise transportation cost-however this may mean number of operations centre and expensive test equipment and skilled labour that is needed for testing and grading. l Reprocessing These are specialised manufacturing or recycling centres which can produce from scrap etc. This requires high investments. Some manufacturers have integrated product recovery operation with original manufacturing process and can offer economies of scale that involves sharing of locations, workforce or manufacturing lines. l Redistribution It resembles a traditional network—however if collection and redistribution can be combined, higher efficiencies in vehicle loading can be achieved.

Example: Manufacturers are Introducing Networks for Managing Returned Products Panasonic's Collection Network for Recycled Products Panasonic Corporation of North America has announced a new nationwide electronics recycling programme to provide customers with an easy and convenient way to recycle their electronics devices. All products recycled through the programme have to bear the Panasonic brand name and products can be dropped off free of charge. This new electronics recycling programme makes it easier for people to get rid of their tech toys in a responsible manner. Consumers can drop Panasonic-branded electronics at one of the 160 drop off spots. The programme is managed by Electronic Manufacturers Recycling Management Company LLC, a joint venture between Panasonic, Sharp, and Toshiba. Source: www.panasonic.net (accessed on 15th May 2009)

Example: Retailers are Introducing Networks for Managing Returned Products Leading consumer durable retailer Best Buy offers free recycling drop-off kiosks at US retail store for cell phones, rechargeable batteries, and printer cartridges. Circuit City also offers customers cell phone and rechargeable battery recycling. Tesco mobile phone recycling scheme is one of the largest in Europe recycling few million handsets, saving several tonnes of harmful electronic waste.

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Example: Industry Associations are Forming Networks for Returned Products Recycling old batteries: Rechargeable batteries should be recycled to keep the heavy metals they contain out of landfills. The industry funded Rechargeable Battery Recycling Corporation in U.S. has more than 30,000 locations where batteries can be dropped for recycling. Those include many major retailers, including Best Buy, Home Depot, Staples, and Target among others. Source: www.rbrc.org (accessed on 15th May 2008)

How Government Regulations are Affecting Reverse Logistics The role of government is important in recycling and reverse logistics processes. In developed countries, governments have come up with several legislations to make recycling mandatory for certain kind of products as in Europe which has stringent legislations for recycling of e waste. In developing countries like India and China this is an area where governments till date have not come up with strong guidelines and preventive measures.

Europe Necessitates the Recycling of e-Waste by Law Waste Electrical and Electronic Equipment directive requires manufacturers of electrical and electronic equipment sold in Europe after 13 Aug 2005 to be responsible for end of life environmental disposal of this equipment. This includes refrigerators, computers, TVs, cell phones and variety of devices and appliances—all need to be returned to their point of sale for a safe and environmentally responsible disposal. Digital devices such as computers and cell phones have much shorter life cycle and has larger challenges. Challenge is also involved in deciding the destination of these electronic items once they have begun their reverse flow along supply chain and it is not a landfill dump. The directive of WEEE has strict targets in terms of actively promoting recycling and reuse of material and their parts. The EU expects to see four kgs of eligible equipment collected per country resident, per year, of which at least 70–80 percent by weight must be recovered rather than dumped, and at least 50-75percent by weight must be actively recycled. Source: Electronic Waste Recycling Act, 2003

Waste Recycling in India—Government Regulations and Control Yet to Mature E-waste recycling is a booming business in India. A study by Toxics Link, an advocacy group in New Delhi, found that metals from 183 defunct computers could yield as much as US $24,000. India currently produces 150,000 tons of e waste a year and illegally imports at least that amount from the West. The government has been slow to regulate disposal. Although it bars the import of used electronics equipment, that prohibition is easy to circumvent, insiders say, by simply labeling the stuff as 'mixed scrap metal.' and there are no guidelines for domestic e-waste. The Ministry of Environment and Forests, the country's top regulator, is yet to draft regulations on this subject. India is unlikely to impose any type of taxation or fee to cover recycling costs, as is done in other countries. An estimated 40 percent of all computers for home use are sold in informal marketplaces that are difficult to monitor. The more formal PC market is afraid that if costs rise because of a recycling tax, it will lose even more market share. As long as legislation is not there, the flow [of e-waste] will go to the informal sector. India has only two government recognised e waste recycling facilities, in Chennai and Bangalore. Together they recycle under 1,000 tons a year, less than one percent of India's total e waste and less than half the metal and plastic they take in. Industry leaders, like Singapore's Cimelia and Belgium's Umicore, recycle more than 90 percent. Source: An article by Daniel Peeper (www.toxicslink.org) (accessed on 3rd July 2009)

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Reverse Logistics Challenges Reverse logistics create many challenges for supply chain. Figure 10.10 explains these challenges.

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Fraudulent transactions This is one of the areas of concern for most retailers where a product which is not originally bought from the retailer is returned to the store. To control this situation retailers adopt various approaches like having policies in place (like to bring the store receipt along with the article) or to apply advanced technologies like RFID to detect such cases. Not core area of business For both manufacturers and retailers, reverse logistics and recycling are outside their core areas of expertise. Mostly retailers have outsourced reverse logistics and in U.S. it is to the tune of 80 percent as they do not possess the capability, infrastructure and skill to undertake recycling and disposal operations (like transportation networks, disassembly plants, recycling operations and disposal facilities). There are some retailers who are negotiating with specialists in different parts of reverse supply chain like transport, disassembly, recycling, disposal etc., and having supply chain integrators to manage such a chain of disparate specialists. In some European countries local municipality authorities handle reverse logistics by employing skilled people for a price. They process at few specialised super hubs to ensure maximum yield from recovered materials at lowest cost. However manufacturer have always an advantage in terms of maximising the use of recycled materials. Material handing equipments not designed for returns In material handling, supply chains are used to manage brand new neatly packaged goods through highly automated distribution centres—not rusted washing machines. Space problem for retailers Retailers do not have space to store these items as space is expensive and devoted to goods for sale rather than goods for recycling, but there are also significant image and safety problems associated with mixing the two flows of goods—one heading forward to customer and one heading back. Retailers do not want end of life products occupying their valuable retail space. Second hand products can be hot items The market for second hand or refurbished products has always been vibrant. Retailers are selling these through online auction marketplace such as eBay. This is a low cost mechanism for resale, where price sensitive consumers are quite willing to purchase refurbished products rather than brand new items

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Reverse Logistics in India India's leading retail chain Future Group has plans to have four hubs where damaged goods will be repaired and sent for resale in discount stores. The company has decided to set up 1,00,000 sq. ft. facilities at Mumbai, Delhi, Bangalore and Kolkata to fix a wide variety of damaged goods. According to Future Logistics usually, around 2 percent–10 percent of the goods come back depending on the type of products. Setting up these hubs would help trim losses that otherwise seem unavoidable. The goods would then go to various discount stores and will never be sold through the main stores. Reverse logistics hubs like those planned by the Future Group could help companies make the process of handling such goods less cumbersome and more importantly, less expensive. The goods that come in are sorted and classified as very minor, minor, major and very major, depending on the extent of repairs needed. Sorting is an important part of the repair process and the Future Group is becoming adept at this task. While the Future Group is building its own repair facility to deal with the problem, other retailers are content to stick to the existing system for now. At Hyper City, the company moves defective goods to its distribution centres. From there, these are returned to vendors and damaged goods are disposed of at the store level periodically. Similar are the responses from Shoppers' Stop, Spencer's and Spinach, owned by Wadhawan Retail. Till date, Indian retailers did not feel their losses are big enough for them to focus on reverse logistics separately. Less than five percent—in most cases two percent—of the sales is counted as loss from returned (defective and damaged) goods. So far, none of the other retailers have reached the size required to make such facilities viable. Ramky, India's largest waste management firm signed a deal with Singapore's Cimelia Resource Recovery to build a US$12 million e-waste recycling facility in Hyderabad, the first of its kind in India. In India, players like DHL India use 'reverse logistics' solutions for returns and parts management.

Use of Information Technology for Reverse Logistics Return processes can impact various IT processes for point of sale, authorisation of return at POS, loss prevention, video surveillance, pricing, updating of cross channel inventory in reverse logistics etc. Retailers are looking for system help so that they can track retuned products and follow it all the way back through the supply chain. Some companies are using technology like RF, two dimensional bar codes and RFID licensed plates for monitoring the status of such returns. It is also important to have several reverse logistics measurements in place such as return rates, recovery rates, returns inventory turn etc.

Application for Returns Management There are several vendors operating in this space-combating fraud and efficiency at the front end of the process, there are a set of vendors who concentrate on the back end i.e. return handling in distribution centres, processing of returns, claiming allowances from suppliers, cost of return logistics and opportunities for refurbishment of returned goods. l Loss prevention at front end, including returns: Applications that let the retailer specify algorithm at POS to detect high risk, possibly fraudulent transactions at POS that warrant further investigation. Leading applications operating in this space are aspect loss prevention, EPICOR (CRS loss prevention), SAP (Triversity Fraud watch) etc.

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Supply Chain Management for Retailing Returns front management at front end: Real time applications for prescribing and modifying returns policies, authorising cross channel returns with capability of retailer to orient customer service down to individual customer level at the point of return. Leading applications from Oracle Retail, SAP, Fujitsu (Return Centre), Retail expert (NaviStor) Management of reverse customer orders: Applications to manage reverse customer orders within the distributed order management environment including integration with third party systems to reconcile returns transactions. Leading applications are from JDS, Oracle, and SAP etc. Customer return reverse logistics: Applications and processes that manage, schedule and track customer returns and provide visibility of returns to the retailer, third parties and the consumer. Leading applications from Manhattan and Newgistics

RETAIL LOYALTY PROGRAMMES Loyalty programmes are an agreement between a customer and a retailer. In ideal situations these programmes are win win cases for both the customer and retailer as it allows a retailer to capture personal information and transaction information for a customer and in exchange the customer gets discounts, promotions, special services, rewards etc. This visibility into customer's buying trends enables retailers to stock shelves in a fashion that encourages extra purchases, and it responds to changing buying patterns through targeted marketing. Thus a loyalty programme can influence the buying behaviour of retailer's customers. Loyalty programme also affects retailer's supply chain because this information can be used for variety of supply chain issues like assortment planning, customised promotion planning, pricing discounts, special services etc. Figure 10.11 explains the simple process flow of a loyalty programme. However the real value addition of loyalty programmes come when retailers leverage the loyalty card information for marketing, merchandising and business strategy decision. This is actually used to design solutions products, prices, and services for better customer value i.e. customer specific store assortment, promotion scheme etc. Without the loyalty programme whatever information the retailer have about customer are all at aggregated customer level and nothing specific to individual customer. However loyalty programmes are not the only source of customer data and data can be obtained from various other sources like online purchases, promotion registrations, credit card transactions etc. Some of the top retailers are using this data, analysing it and changing the marketing and supply chain strategy based on this data. Loyalty programs can generate benefits like l Frequent shopping visits—repeat sales and larger baskets for existing customers (as there are reward points with each buy). l Higher rates of conversion on campaigns (as campaigns are more personalised) l Create new customers (as there is typically a cash incentive for making a first buy with the card). l Better customer intelligence. Loyalty programmes can offer different types of benefits to customers like: l Members can get discounts on listed price of products at the same or affiliated retailers. l Innovative services like few airlines who offer prestige programmes with perks like frequent flyers upgrades to first class, free flights and freedom from waiting in line.

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Fig. 10.11 A Simple Diagram of Customer Loyalty Programmes

Loyalty Programme Benefits—An Indian Example Pantaloon's Green Card Programmes offers exclusive benefits and privileges like: l Instant discounts with every shopping at Pantaloons. l Regular updates on collections and promos via catalogues, sms and email. l Special invites to the most happening events. l Extended exchange periods and complimentary drops for alterations. l Exclusive billing counters. Pantaloon's Big Bazaar card offers exclusive benefits and privileges like: l No finance charges on EMI purchases at Big Bazaar. l Voucher worth Rs 250 to be redeemed against purchase of Rs. 500 or more at any Big Bazaar Outlet on payment through the ICICI Bank–Big Bazaar Credit Card. l 1 kg sugar FREE per month. l Special payment counters for Cardholders. l Priority entry to Cardholders during high traffic. l Special preview day during annual sale at Big Bazaar. l Comprehensive insurance for primary Cards upto Rs. 20 lakhs. l Baggage insurance upto Rs. 25,000. l Hospitalisation benefit policy upto Rs. 50,000. l Comprehensive travel related insurance. l Zero lost card liability. Source: www.pantaloon.com (accessed on 10th June 2008)

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Loyalty Programme Best Practices Following issues need to be remembered while designing a loyalty programme. Figure 10.12 lists these items.

Fig. 10.12 Loyalty Management Best Practices

Not only repeat sales but information about individual customer is the most important asset for retail loyalty programme All most every organised retailer today has retail loyalty programme—it is almost becoming like 'me too' approach. Most of the retailers use it for repeat sales— however and important asset of the loyalty programme is the kind of customer data it generates. Data alone is of not any use unless it is analysed—meaningful insight is generated out of it and this is used for a variety of retailing decisions like deciding new store locations, store layouts, merchandise and assortment planning, promotion planning etc. Unfortunately very few retailers use loyalty data for such critical supply chain decisions and use it as a sales tool. 'One size fits all' approach for loyalty programme Almost every loyalty programme offers similar kind of benefits i.e. same broad discounts, regardless of individual customer's purchasing history and behaviour, accumulating reward points with every purchases and giving discounts based on achieving certain buying thresholds. These programmes make no difference between the important customer for the retailer and someone who is not so important and do not make the valued customers of the retailers feel special. In this case actually retailer is not taking advantage of loyalty card individual data analysis and working on aggregated data available from POS system. Loyalty data gives an opportunity to retailer to consider one-to-one offers at the point of sale, unique services based on his sales history that make customers feel special which can make much difference especially for a high value purchase. In most cases, to consumers also all programmes of different retailers

Retail Customer Relationship Management 273 look same and there is no special drive to join any particular programme of any particular retailer. Store staff needs to be trained properly in the loyalty programme Store staff needs to be trained sufficiently to explain the customers the benefits of the programme, the process of registration, the process of point redemption etc. Multi channel loyalty programmes Programmes should be consistent across channels i.e. members should be able to access, receive, and redeem rewards in any channel. Hassle free registration to the programme and reward on registration Registration to the programme should be made easy. Registering by feeling up a form is traditionally the most popular method, so many retailers offer multiple channels of registration nowadays (like online, kiosks, POS etc.,) and sometime retailer's own staff fill up the form. It is common in any of the Big Bazaar outlets that a ICICI bank's sales agent fills up the form for you as the loyalty programme is jointly administered by Future Group and ICICI bank. Customers are generally given some instant reward like crediting few hundred points or some cash discount for enrolment. Customer's privacy need to be respected Customer's privacy needs to be kept in mind for which retailers should have defined privacy policy about using customer data. Customer's data gathered out of loyalty programme needs to be cleaned This needs to be cleaned on regular basis to do any useful analysis. Data analysis software can help This software can help in customer segmentation and analysis. Only customer segmentation will help retailers to understand his most important customers and focus an marketing and sales efforts effectively like personalised communication, personalised discounts etc. Loyalty programmes need to have KPIs Loyalty programmes need to have some KPIs like increased sales, more customer visits etc. These KPIs only help in understanding the ROI of this programme. Loyalty programme needs collaboration between departments If only marketing and sales department manages loyalty programme then loyalty data will never be used for merchandise planning, better assortment decisions or other supply chain decisions. So marketing needs to collaborate with other departments while running such programme. Loyalty card data is captured at point of sale-no pre sales, post sales data Loyalty card data does not contain information about pre sale customer data i.e. how consumers navigate through sourcing, searching, comparing, and choosing products and services and very little post sale customer data i.e. return or recall information. Leading retailers are using technologies like in-store kiosks, retailer Websites etc., to increase the amount of pre sale customer data and integrating with supply chain i.e., fulfillment and reverse logistics to increase the amount of post sale customer data. Information technology solutions for loyalty programmes There can be different technologies that together helps store loyalty programme. These are: l POS systems that record actual transactions l Reward Point management system that maintains reward point balances and lets customers redeem points l Customer data warehouses that store, standardise and clean data l Customer analytics software that helps in predictive modelling—data mining, and analyse customer transactions to retrieve useful insights from that to take merchandising and promotions decisions

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Customer segmentation tools to slice different customer segments based on predefined attributes l In store CRM and campaign management solutions that helps in sending targeted promotions/ communications to customers while they are shopping at store l Loyalty rule management tools that can manage complex rules like: n The number of points that can be earned depending on type of loyalty membership and type of item n Expiration of points and rewards for a member beyond a particular date n Customised bonus opportunities for each member depending on type of membership and buying history. n Point thresholds that trigger specific bonus/incentives. This can be aspects like getting a special bonus gift as soon as you reach Rs 10,000 of purchase in a single month. So typical loyalty applications will have functionalities in the areas of POS integration, customer data storing and cleaning, customer analytics, customer segmentation and different loyalty rules management. Leading retailers like Datavantage, Fair Isaac, Blue Martini, Fujitsu etc., offer applications in loyalty management space. Some retailers integrated loyalty applications with customer data mining tools to predict customer buying behaviours. This includes: l Gathering and integrating historical and behavioural data from all retail channels-store, Website, mail order catalogue, and store associate. l Validating and correcting customer data as in most cases it is wrong or incomplete. l Predict and apply decision support for managing customer buying behaviour. This helps retailers to gather expense and revenue data per individual customer, calculate margin per individual customer, make predictions about individual customer buying behaviour and provide action plans for managing individual customer buying behaviour. l

State of Loyalty Programmes in India In India though almost every organised retailer operates some kind of loyalty programme—these programmes are in the first stage of evolution. Retailers use these programmes mainly to drive repeat sales. Data derived are rarely analysed to take strategic decisions like store location strategy, merchandising and assortment strategy, promotion strategy etc. Using data for such kind of decisions will need two fundamental capabilities—strong analytic software to analyze this data and managing the loyalty programmes by a cross functional team of marketing, merchandising and store management and not marketing alone. In India as retail industry is new—very few of them have invested in analytics applications and loyalty programmes are still managed by sales and marketing team. However many of retailers in India analyse POS sales data at aggregated level and take decisions on promotions, discounts etc—analysing loyalty card data will be the next logical step-to get insights into individual's preferences and design promotions, special discounts etc., based on individual's likings. One more thing to remember is designing a customised SMS is easy but to design customised assortment as per the liking of every individual customer is almost impossible in a physical store-this may be an easier option in an online store.

Some Good Examples of using Loyalty Data Effectively Tesco applies POS and loyalty card data to regional assortments. Using POS and loyalty card data, Starbucks drives regional assortments at each store on a weekly basis. Zara's store clerks carry personal digital assistants to wire sell-through insight directly to factory managers and designers.

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RETAIL KIOSK Self services are becoming part of our everyday life and people prefer to use ATMs these days then going to banks or utilising kiosks to check into hotels or flights. Kiosks offer similar experience as online shopping and people prefer to do research, compare prices etc., before taking the final buying decisions. Kiosks are pretty popular in western countries and presently catching up in India. Customer familiarity with automated teller machines and computer technology has contributed to the consumer's interest in use of Kiosks.

Kiosk Benefits Kiosks can provide variety of benefits as shown in Figure 10.13. Benefits can be as follows: l Provide product information: Most cases Kiosks are used for this facility. There are several examples even beyond retail industry like educational kiosks, e governance kiosks, kiosks in village etc. Customers can learn features of various products and compare. Kiosks can also be used for product demonstrations, product reviews and price checking. l Ability to order out of stock items. The ability to access the web can allow customers to access the company website and order products that are out of stock or special order items. l Do not require store staff and thus reduces cost. l Need not train store associates in providing product information thus reducing training costs. l Reductions in costs and staff through the implementation of self checkout lanes. l Guided selling and marketing ability to provide up sell and cross sell offers based on past purchases and helps suggestive selling.

Fig. 10.13 Kiosks can Provide a Variety of Customer Service

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Supply Chain Management for Retailing Provide incentives: Incentives such as coupons can be printed directly from Kiosks based on loyalty card information. The customers need not clip their own coupons and remember to bring them to the store which can increase unplanned purchase. Access gift registries: Customers can access, print and buy from New Year, baby, bridal or other type of gift registries. New demand for self service photo kiosks has been driven by the growth of consumer use of digital photos. Provides a good shopping experience. Customers use kiosks to find items in store i.e. to check inventory availability. Customers can get loyalty information-point accumulated etc. in kiosk. Global inventory and multi channel order management ability to find/locate product in any location or from manufacturer.

Challenges with Kiosks: Occupy precious retail space and require maintenance/support of the equipment. Leading vendors of Kiosks are IBM, NCR and Wincor Nixdorf.

Kiosk–Indian Example Future Group is Setting up Kiosk for Services Future Group is extending its retail offerings into everyday customer services. It has launched Future Services, under which it has set up six verticals that would offer services to customers—bill payments, utilities, homecare, pest control, wedding planning and services, travel, beauty and wellness. Pantaloon Retail will look at setting up servicing kiosks across Big Bazaars, Home Towns and the malls that will be developed by them. The kiosks will be branded 'Mr Right', under which the services will be offered. Over the next few years, Pantaloon Retail plans to scale it up to 600 kiosks in the top eight metros. The first such kiosk was launched in Milan Mall in Mumbai. Initially, most services would be outsourced to third party vendors like Future Services who have tied up with cleartrip.com for travel. Source: www.financialexpress.com (online edition) (accessed on 10th June 2008)

Future Group is Setting up Foto Depot Kiosks Having created a niche with Depot, a retailer of books, music and gifts, the Future Group, has now turned to another retail concept, Foto Depot. The company has been piloting the photo retailing format, powered by Hewlett Packard's printing technology, at three stores in Mumbai since the last six months. The company would soon enter into a tie up with HP and would probably lease the printing equipment from the latter. At Foto Depot, customers can get themselves clicked and get their pictures printed on a variety of fun surfaces and products like T shirts, wallpapers, mugs, collages etc., in just 10 minutes. They can walk into Foto Depot with any source of image such as camera phone, digital camera, memory card, USB pen drives, negatives and CDs, download the images on the touch screen kiosks placed at the stores and walk away with an output of the image on the medium of their choice. Source: Business Standard, 20th Feb 2009

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Reliance Money Ltd is Setting up Kiosks for Increased Presence RML intends to compete with strong retail brokerage players like ICICI Direct in currently providing a range of trading options to clients. Is trying to expand operations in several ways and has about 2,500 kiosks now and plans to have 10,000 kiosks in future. Source: Business Line, Kolkata, 31st May 2007

Coffee Day Setting up Kiosks at IT/ITES Offices and Malls The company wants to leverage the burgeoning demand for convenience foods and eating-cumshopping experiences at destination malls that are mushrooming all over the country and offices of the IT and ITES segment. The corporate sector already accounts for 80 per cent of the company's kiosks with Wipro, Infosys, Convergys, Kanbay, Cybage, Geometric Software and Msource on its regular clients list. Source: The Financial Express, 26th February 2004 (www.financialexpress.com)

Tatas tie up with Microsoft to set up MS@Retail Kiosks in 'Croma' Stores to Provide Home Networking Solutions Tatas have joined hands with 'Microsoft,' the world's biggest software maker, to set up a chain of kiosks to provide home networking software under MS@Retail brand in its 'Croma' chain of durables stores. Source: 26th October 2007, IndiaRetailBiz

Retail Advanced Payment Technologies There are different advanced payment methods retailers are using today to improve customer service as no one likes to stand in a long queue before the payment counter once the purchase is done. Some of these methods help consumers in other ways i.e. they need not carry payment cards or wallet. Some of the popular payment technologies used by leading retailers these days are: l Mobile phone payment This method allows customers to pay via mobile device (i.e. mobile phones and PDAs) and transactions are processed over wireless network. This includes processing credit, debit and prepaid account cards. l Biometric payments Not very popular till now—however this is one of the safest payment technologies. Retailers need to authenticate individual's identity and initiate payment using biometric finger scans. This does not need a payment card and consumers need to authorise payment at biometric applications kept at POS or customer service areas. l Contact less payments This method is getting popularity with many leading retailers adopting it. Here payment transactions are enabled by a contact less chip embedded in payment cards. The chip communicates with a reader that uses RF (Radio frequency) and RFID is part of this machine to machine communication. This payment card embedded with an RFID chip improves customer self service, speeds up the transaction, brings process efficiency and integrates with loyalty applications. l RF scanners Checkout with RF scanners is semi automated. The customer gets a cart and scanner before shopping. While shopping, every purchases are scanned before they are put in

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Supply Chain Management for Retailing the cart. This scanning adds the item to the on line purchase total. If the customer changes his mind i.e. wants to return back something, they are scanned again and removed from the on line total. When the customer is finished shopping, he checks the scanner and then pays the total due. Some time store clerks randomly perform purchase audits as the customers leave the store. Self checkout This is a self service alternative for consumers in high volume/high traffic stores. A self checkout terminal consists of a scanner, monitor and payment mechanism which customers can use to scan, bag and pay for their purchases. This does not require help from any store personnel. Smart cart Here customer gets pre-approval from a debit or charge card. The customer then shops using a Smart Cart. As items are placed in the cart, RFID tags on the products communicate with the Smart Cart computer. The cart knows when an item is added, and also knows if an item is removed. After the last item is put in the cart, the customer enters the security and checkout portal, triggering several events like validating the cart contents, computing sales total, completing the transaction, updating in hand inventory, and triggering reorders.

GREEN RETAILING—WHAT IT MEANS FOR CRM Demonstrating itself as a responsible retailer is another way to build good customer relationship. Effective recycling i.e. taking measures so that the products at end of life can be recycled help environment sustainability and better product lifecycle management. This is especially important for items like plastic, electronic items etc. Let us see what leading retailers are doing on this front: l Leading consumer durable retailer Best Buy offers free recycling drop off kiosks at US retail store for cell phones, rechargeable batteries, and printer cartridges. Circuit City also offers customers cell phone and rechargeable battery recycling. l IBM's multibillion dollar GARS unit collects 20,000 end-of-lease machines each week and then resells, refurbishes, and dismantles them. l Sainsbury's built recycling centres alongside distribution centres. l Tesco mobile phone recycling scheme is one of the largest in Europe, recycling few million handsets, saving several tonnes of harmful electronic waste. l Wal-Mart partnering with Hewlett-Packard started the programme 'Take back' days to supplement the in store recycling of cell phones and ink cartridges. The world's largest retailer have also introduced 'Electronics Sustainable Value Network' to make electronics products in WalMart store more environmentally sustainable, and to educate consumers about appropriate recycling practices.

MEASURES OF RETAIL CRM It is important to have measures for different processes of customer relationship, which only ensures that the gaps are identified and improvement initiatives are worked upon. Some typical measures that can be taken for different customer relationship management processes are shown in the Table 10.4.

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Table 10.4 Measures for Customer Relationship Processes Area Overall Customer Relationship Customer Service Order Management

Loyalty Management

Recycling Cross channel inventory turn

Cross channel customer satisfaction Cross channel sales Return management

Reverse Logistics

Measures Percentage increase in cross sells and up sells Percentage increase in customer awareness of products Percentage increase in customer referrals Percentage increase in customer satisfaction Cost of providing a particular service Percentage of on time delivery of orders Percentage of orders shipped of correct quality Percentage of orders shipped without any error in billing or any other shipment document Percentage increase in converting the non customers to customers through the programme Percentage increase in sales basket size i.e. sales value for existing customers registered in the programme Percentage increase in repeat purchase for loyalty cardholders Percentage increase in recycle percentage through retailer's initiatives An item's inventory turn can be measured cross channel based on total sales across channels and total inventory of the item across the network Measurement of customer satisfaction across channels An item's sales can be measured cross channel based on total sales across channels Average time taken for completing a return Customer satisfaction measure with return process Return as percentage of sales Cost of return as percentage of turnover Reverse logistics cost as a percentage of total logistics costs

Conclusion Retail customer relationship processes affects different areas of retail supply chain design i.e. inventory strategy, transport planning, order management capabilities, reverse supply chain network etc. l Customer service means different things to different people. The concept of customer service pyramid and customer service mix is discussed in this chapter. It is important to understand the customer service elements over a retail sales life cycle. Retailers can adopt variety of strategies to improve customer service, some of which is discussed in this chapter. l Retailer's customer relationship also gets affected by how efficiently he can manage his orders. Order management process starts with a customer enquiry and ends with error free delivery of customer's consignment at defined delivery location. Any error in any part of this process causes customer dissatisfaction. Perfect order is a good measure for checking the correctness of a order management process for a retailer. l Customer's expectation of seamless sales and service across different channels calls for multi channel logistics capabilities for retailers. There are strengths and weaknesses in every retail

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Review Questions 1. What is meant by retail customer service? 2. How customer service impacts retail supply chain design? What is the supply chain design elements that can get impacted based on customer service strategy? 3. Explain the concept of customer service mix and customer service pyramid? 4. How customer service elements change over a retail sales life cycle? 5. What strategies retailer can adopt to improve its customer service? 6. Explain the concept of perfect order? 7. Explain the order management process. 8. Why a return policy is important for a retailer? What a retail policy should contain? 9. Explain the reverse logistics process. 10. What are the elements of a reverse logistic supply chain network? 11. What are the challenges of reverse logistics? 12. Tell differences of forward and reverse logistics. 13. What are the best practices of retail loyalty management? 14. What kind of customer services a retail kiosk can provide. 15. Discuss the different advanced payment technologies.

Objective Type Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

What is the difference between customer service and customer satisfaction? What are the three gaps in customer service? What are the causes of retail return? Three levels of customer service pyramid are , and Reliability is at the level of customer service pyramid. Three pre transaction customer service elements are Easy access, . The aim of post transaction customer service elements is to keep the customer Multi channel retailing means ordering online and at store. In channel conflict channel fears sales . There can be three gaps in customer service: gap, gap and gap.

. and .

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Assignments A. Study three different retailers and list what elements they think are part of customer service? How those elements are measured? What kind of strategies these retailers have for customer service improvement? B. Study retail return policies of three retailers and compare? Check out with them how their reverse logistics is handled? C. Compare the loyalty programmes of two different retailers, one in the value retailing segment and the other in fashion retail segment. What are the differences? Go to these two retailers and try to find out how success of their loyalty programmes is measured? How these programs are administered? D. Take a retailer who has presence both in online format and in physical format? Compare their product offerings in different formats? Whether they run same kind of promotion or return policies across channels? Take some sample articles and compare the prices.

[CHAPTER]

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LEARNING OBJECTIVES

Food and Grocery Retailing Supply Chain

In this chapter we will explain the following concepts: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Food and Grocery retailing Food and Grocery supply chain characteristics Fresh fruit and vegetables supply chain Contract and corporate farming Managing the cold chain Food safety Food processing Fresh fruit and vegetable retailing—An Indian perspective Retail Deli section Dairy retailing Livestock and Poultry retailing Food Services Technology for food and grocery retailing supply chain

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FOOD AND GROCERY RETAILING Food and Grocery is the largest retail segment globally and in some countries it is close to 50 percent of the total retail spending. In developed countries this percentage is less due to high disposable income i.e. in U.S. it is around 24 percent and in countries like India where most of the average person’s monthly earning goes for food—this can be as high as 50–55 percent. A study tends finds a typical Indian consumer spends 24 percent of the total food and grocery spend on fresh fruits and vegetables, thus making this an important segment within food and grocery. Food segment is also the largest due to large number of retailers. They attract consumers almost on a daily basis to a retail store. More importantly the every day purchasing behaviour for items in this segment, force customers to visit the store more frequently. This increasing footfalls can be directed towards increase in sales, particularly for impulse buying items. Indian food and grocery segment is estimated to be more than Rs 6,50,000 crores and organised retailing constitutes less than one percent of this figure. Grocery can be divided into the following items: Segment

Category

Fresh perishable categories Food Grocery

Beverages Pulses Packaged food

Non food grocery

Items Fruit and Vegetable Dairy items like Milk, Butter, Ghee, Card, Yoghurt, Cheese, Milk powder, Condensed milk Poultry items like Egg, Chicken Livestock items and Fish—different kind of meat and value added meat products Bakery and fresh confectionary items like Bread, Cake, Pastry, Patty etc. Ice cream Coke, Pepsi etc. Rice, different types of dal Packaged confectionary items: Biscuit, Chocolate Staples like salt, atta, oil, tea, spices etc. These are also sold in loose form Highly branded packaged items like Noodles, RTE, Coffee, Ketch up, Baby food etc.

Soaps and Detergents

Different soap categories (Normal, Glycerin, Medical), Detergent (Bar, Powder), Surface cleaner

Dental care, Hair care, Personal care (Male, Female, Kids) products Others

Tooth paste, Tooth brush, Shampoo, Conditioner, Hair oil, Hair dye, Razor, Shaving cream, after shave lotion, Deodorant, Boot polish, Napkins, Skin care products, Kid's care products etc. Mosquito repellant etc.

In developed countries it is common to buy all the grocery items from the super market. However in India different shopping options are available. l Non food grocery items, packaged food grocery items, pulses and few dairy items like butter, ghee, milk powder etc., are available at next door grocery shops, Haats, Bazaars, government fair price shops, cooperatives (like Kendriya Bhandaar, Apna Bazaar, Sahakari Bhandar etc.,) and in different categaries of modern retail stores (like supermarkets, hyper markets etc). l There are special shops for procuring fish, chicken or meat and most of the modern retail stores do not store such non vegetarian items as India has a large population of vegetarian people.

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Recently, few retail chains like Sugana chicken is emerging in the country as organised chicken retail chain. l There are special shops for bread and ready to eat confectionary items. Generally grocery stores in India do not store items beyond bread in this category. It is common for confectionary stores to stock cold beverages like Coke and Pepsi. Organised retail chains like Monginis, Cathleen, Sugar N Spice etc., are emerging in this category. l There are milk shops in every area and they store national (Amul, Mother Dairy etc.,) and local milk brands and other dairy products. Amul have their exclusive retail chains as well which sell only Amul products. l Almost all retail chains in the country have formats specialising in food and grocery selling. Some of them are as follows: n Food bazaar n Food world n Nilgiris n Reliance Fresh n Spencer’s daily n Spinach n Nature basket n more n Safal n Sabka Bazar n Seven Eleven n Trinethra n Giant n Margin Free Traditionally, Indians are used to buying their grocery items from their neighbourhood baniya/ kirana stores. The kirana stores focus on dry food products because the infrastructure for cold storage is lacking. The majority of fresh produce is sold in mandis or from the carts of mobile vendors. Initially the food retail format was seen in A class cities like Mumbai, Delhi, Chennai which had cooperative stores like ‘Apna Bazaar’ in Mumbai and ‘Kendriya Bhandar’ in Delhi. In mid eighties, a few food stores were set up in metros in India like ‘Nilgiri’ in Bangalore, ‘Food Land’ in Mumbai ‘Spencers Food Stores’ in Chennai. Until the late 1990s, food retailing was mainly concentrated in the south of the country and there were retailers like Food World, Subhiksha, Nilgiris etc., mainly due to low cost of real estate in Bangalore or Chennai compared to Delhi or Mumbai. The concept of food retailing is changing in India where people are getting accustomed to buying their monthly ration from Food Bazaar or Food World—that is evident from special schemes of retailers i.e. Big Bazaar offers special prices on groceries between 1st and 8th of every month in select cities. The reasons for such changes are: l Changing life style which gives lesser time to individuals for shopping. Need for convenience is getting the priority and shoppers like to pick up everything from one place instead of going to five different vendors for grocery, vegetables, fresh foods, milk and chicken. On an average a supermarket stocks upto 5,000 SKUs against few hundreds stocked at an average kirana stores. l Increased disposable income—unlike earlier days, people no longer hesitate to get into a posh air conditioned retail shop for buying everyday necessities like milk and vegetables.

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Increasing number of working women and impact of western lifestyle. People prefer credit card as better option for paying instead of cash. Several corporates offer things like food coupon (example Sodexho coupons) as perquisites to employees which can be exchanged only at organised retail stores l With increased volume, retailers are also providing products at reasonable price and everyone is targeting value for money. Food and grocery retailing involves several stakeholders starting with the farmer i.e. grower of the crop to food processing company, several middlemen and finally end up with the retail store of food service centre for consumption of the final customer. Figure 11.1 explains different stakeholder of food eco system. l l

Fig. 11.1

Food Business Eco System—Several Stake Holders

Food retailing in India is increasingly seeing different formats like l Cooperative stores like Apna Bazaar in Mumbai l Super markets like FoodWorld, Nilgiris l Hypermarkets like Big Bazaar, Star India Bazaar l Cash and carry stores like Metro l Discount stores like Subhiksha Mostly retailers in India are region specific like RPG Group (with chains like Food World, Nilgiris, Subhiksha etc.), is mostly in South, Sabka Bazaar is mainly in and around Delhi and Radhakrishna Foodland is Mumbai centric. Few like Big Bazaar have pan India presence. One of the main reasons for such regional presence is substantial investments and high set-up costs required by grocery retailers for setting up buying/distribution infrastructure. It can only be justified by having a large number of stores in the same region which share the same distribution centres or warehouses etc., and thus reducing the overall supply chain costs.

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FOOD AND GROCERY SUPPLY CHAIN CHARACTERISTICS As we discussed earlier, Food and Grocery is not one segment and comprises of several categories having different supply chain characteristics as follows: Grocery category Fruits and Vegetables

Dairy items

Meat and chicken

Bakery and confectionary

Beverages

Pulses

Supply chain characteristics No brand. Short shelf life requiring cold chain. High wastage as there is no adequate cold chain infrastructure in country. Sourcing from many small suppliers from unorganised sector, Freshness of the item matters. In India people prefer to buy it from mandis where price bargaining is common. Corporates are getting into contract farming. Number of intermediaries in the chain and price fluctuates daily and during the day. Food processing industry is important. Short shelf life of few hours for raw milk and requires cold chain. Dairy items are sold as fixed price products and there are international brands (like Nestle), national (like Amul, Mother Dairy etc.,) and regional brands (like Nilgiris, Mahananda). Except raw milk every other product is processed product. Complex supply chain. Mostly unbranded/unorganised sector with few national players like Sugana chicken from organised sector. The concept of freshness and quality is largely driven by whether the animal/bird is slaughtered in front of the customer in the retail shop. Recent incidents of bird flu have caused serious food safety issues for these categories. Unlike western countries volume of processed meat is extremely low in India. Some retail shops in India do not store these items as India has a huge vegetarian population. In developed countries meat has structured supply chain in terms of livestock farmers, primary and secondary processors and distributors. Many intermediaries and prices fluctuate regularly, generally priced high on days of greater demand (weekends, festive days etc). Different parts of the body and different types of cut (only legs, Kima cut etc) can have different price. Cuts can be also based on consumer’s religion (Halal cut) Cake (estimated market size of Rs 1,100 cr) and pastries (Market size of Rs136 cr) is largely unbranded market, however presently there are some organised players emerging in this sector like Monginis, Cathleen, Sweet N Spice etc., who have their exclusive shops and also selling through other confectionary stores. Freshness of the product matters. Britannia and Modern Industries owned by HUL holds the majority market share of bread industry. Biscuit market size is around Rs 2,100 cr and mostly dominated by brands from Britannia, Parle, ITC etc. Bread and biscuit comprises 82 percent of the market. Distribution strength is important. Dominated by few large brands like Coke, Pepsi etc. Available in hotels, restaurants, confectionary stores; organized sector, cold chain is important. Reverse supply chain i.e. return of empty bottles/crates from consumers are taken care of by retailer. Direct delivery from the bottling plant to the end retailer is common specially in western countries. Frequent sales promotion is common. These days milk and coconut based beverages are coming to market from companies like Amul Basic items. Available in different grades/quality/price range. Not branded except some categories like basmati rice. Stored by every grocery shop. Items (Contd.)

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Supply Chain Management for Retailing (Contd.) have long shelf life. Can follow various supply chain routes like farmers coming directly in Haat/Bazaar and selling to consumer, coming to grocery shops through wholesaler/distributor and to final consumer etc. Packaged food items Can include items like noodles, ready to eat items, Coffee, ketch up, Baby food etc. Follow the same distribution channel as that of non food grocery items and dominated by brands like Nestle, HUL, ITC, MTR etc. Sales promotion is common. Staples like salt, atta, oil, For these categories consumers gradually shifted from unbranded products to tea, spices etc. branded categories. There are global and local brands in these categories from companies like ITC, Tata, HUL, Pillsbury, MTR etc. Retailers frequently introduce private brands in these categories and have their own suppliers. Bundling is common where retailers combine items (say atta, oil and spice as monthly value pack) at special prices. Promotion is common. Goods can be supplied directly from CPG companies to retailers or through conventional channel of wholesaler, distributor etc. Non food grocery items like Dominated by known brands from large global and local players like HUL, Soap, Detergent, Dental care, P&G, J and J, Colgate, Dabur, Nirma etc. In developed countries CPG Hair care, Personal care companies supply products directly to retailers—however in India this is true products only for few large retail chains—otherwise the products are distributed from manufacturer to distributor to wholesaler and finally to retailer. As brands and brand loyalty is a factor, private lebeling is done for very select products like detergent and not for products like tooth paste. Manufacturing is sometimes outsourced. Sales promotion is common.

FRESH FRUIT AND VEGETABLE SUPPLY CHAIN Fresh food supply chain is complex as the item needs to reach from the seller to the final customer within few hours or maximum a day. Globally, supply chain for fresh foods involves several complexities as shown in Figure 11.2. These are: l Short shelf life for the item l Managing the cold chain from origin to the point of distribution

Fig. 11.2

Food Supply Chain Challenges

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Transport cost as a percentage of product cost is high Sourcing from many small suppliers/farmers l Agricultural commodities are subject to sharp price fluctuations l Freshness of the product matters a lot. Consumers prefer well stocked store as that sends a message that the produce is replenished more regularly, and is likely to be fresher. Signals of hygiene and cleanliness, such as staff wearing gloves and clean aprons, serve to reinforce the critically important impressions of freshness. Some consumers even like to see the shelves being replenished while they are shopping—it creates that ‘just in’ impression about the goods. They also do not mind seeing dirt or grit on the fruits or vegetables—it adds to the feeling that the produce has come straight from the farm. l Generally fresh food items are procured before 10 A.M. each day or between 5 and 7 P.M. These are non office hours and peak shopping times that retailers need to adjust to. In addition to the above complexities, food supply chain in developing countries like India faces many other supply chain challenges like: l India is the second highest fruit, vegetable and milk producer in the world but cold storage availability is just for 10 percent of the products, resulting in huge wastage l Food processing industry is in its nascent stage in India. Currently, some of the large Indian players like ITC, MTR, Godrej, Amul and some of the MNCs like Cargill, Conagra and Tropicana have shown interest in contract farming, food processing and introduction of ready to eat—heat and eat dishes. l Spot Auctions: Farmers are typically left with this option as they have no choice as they are bound to sell their produce to agents or the wholesaler cum commission agents because of the nature of the products which are perishable and the farmers want to sell their produce as earlier as possible. l There are many intermediaries in the food value chain and there can be as many as five middlemen between the farmer and the consumer, compared to only two in U.S and other developed countries. Most of these middlemen only add margins increasing the cost of the end product and without any real value addition. l High price sensitivity influences consumers and they do not mind changing store even if there is a small percentage price difference between two stores. l There is no system available at the backend i.e. at firms and intermediary level and no scientific system of demand forecasting, inventory management etc. Figure 11.3 shows how the price of fresh foods increases as it moves through the supply chain. Close to 60 percent of MRP is lost in just giving commissions to different middlemen in the chain which can be completely saved if the crop is sourced directly from the farmer. This approach is called contract farming which is discussed next in the chapter. l l

CONTRACT AND CORPORATE FARMING Retailers take variety of approaches to respond to these supply chain challenges like: Contract farming: Here the retailer enters into an agreement with the farmer with buy back guarantee. This is a win win situation for both retailer and farmer—for the farmer it reduces the risk as he is ensured of a reasonable price for his produce and for the retailer he is guaranteed of a regular supply at predefined price. There is another model of contract farming, without buyback guarantee where the farmer is provided inputs for farming but there is no assurance that the retailer will buy

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Fig. 11.3

Huge Difference in Farmer gate Price & Retail Price—Effect of Middlemen

their produce and they can sell it in the open market. In India selected consumer good manufacturers like HUL and ITC are doing contract farming; however unlike U.S. this model is till date not very popular among Indian retailers as this requires sufficient volume of trade to justify entering into this kind of agreement. In contract farming, typically retailer engages some technical staff/crop specialist who helps the retailer with technical inputs and monitors the progress on regular basis. The farmer works according to company specifications and once the crops are harvested there is a buy back by the retailer.

Issues with Contract Farming l

l l l

Variety: There are around 45–55 types of vegetables and 20–25 types of fruits regularly available in the market (including the seasonal ones). Each class of fruit comes in several varieties. Since one farmer produces only one variety, the retailer needs to maintain a relationship with numerous farmers. Small size of farms. Uncertainty in the quality and productivity of an individual farmer. Dependence on external factors; weather, pests.

Contract Farming—India Story Federation of Farmers’ Association (FFA) of Andhra Pradesh has initiated a move by setting up eight cooperatives in the state for mango which has helped in mitigating losses to an extent of Rs 2–3 crore. About 4,000 farmers over 1,40,000 acres are working across eight cooperatives in Chitoor for mango production. This is being sourced by Coca-Cola to an extent of 3,500 tonnes of mango. FFA has forged relationships with ITC in Medak district in Andhra Pradesh for sourcing vegetables on about 200–300 acres with over 700 growers and is in talks with Heritage Foods for l

l

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l

l l

l

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supplying over one lakh bags of Sona Masoori rice. ITC is also planning expansion of its retail initiative Choupal fresh across the state. ITC gives licence to buy soyabean directly from farmers in Vidarbha. The company offered the farmers better quality seeds to increase the yield along with transport facilities to bring in their produce. The company has also set up a complete cold chain for ensuring the availability of fresh products in the market, besides direct linkages with farmers for sourcing farm fresh produce. A cooperative movement is already in place for dairy products in association with National Dairy Development Board (NDDB). Pepsico has been one of the first companies in India to do contract farming, but now the cola and foods giant and several other companies have drawn up ambitious plan for corporate farming, thanks to recent and forthcoming changes in the agricultural produce marketing committee (APMC) act of various states like Punjab, Haryana, Gujarat and Maharashtra. Uttaranchal had allowed companies (such as Reliance agro and ITC) to buy flowers, fruits and vegetables directly from farmers. In Maharashtra, Food Bazaar started procuring Alphonso mangoes from farmers directly. It has tied up with the Maharashtra State Agricultural Marketing Board (MSAMB) to buy directly from the farmers. The farmer and the retailer jointly fix the price.

Source: www.financialexpress.com (accessed on 25th May 2007 and 9th October 2007); www.krishakayog.gov.in (accessed on 22nd June 2008); www.manage.gov.in (accessed on 22nd June 2008)

Corporate farming In this method the retailer owns everything, with his own land on which they do the cultivation with the help of its field executive to facilitate the entire process. The advantage is there retailer controls everything and has better control on hygiene of the product. One of the main disadvantages of this is the risk involved in it, and it requires a many time, effort and resources. Initial investment to purchase the land is very high.

Corporate Farming Cases McDonald and Trikanya Trikanya Agriculture supplier of iceberg lettuce to McDonald’s India is one of the good examples of successful contract farming in India. Working with McDonald’s helped Trikanya to get exposed to better agricultural management practices and technology like capability of growing lettuce all over the year instead of only during winter. Trikanya also got help from McDonald’s in terms of selection of high quality seeds, advanced drip-irrigation technology and a cold chain system comprising of a pre-cooling room to remove post harvest field heat, a large cold room and a refrigerated van for transportation to maintain required temperature and humidity. Source: www.mcdonalds.com (accessed on 22nd June 2008); www.articlesbase.com (Article on McDonald Supply Chain by Amit Singh Bisht) (accessed on 22nd June 2008)

Pepsico Given the huge wastage that takes place in fresh products every year, corporate farming can be a boon for Indian farmers. Pepsico is setting up a citrus greenhouse in Punjab with capacity to grow 4.3 million plants—the highest in the world. The Agri Centre of Excellence in Ludhiana, Punjab will carry out crop trials, modern farming techniques, plug plant trials and intensive research and development. Source: www.manage.gov.in (accessed on 22nd June 2008)

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MANAGING THE COLD CHAIN Cold storage is a requirement of fresh food supply chain. In India the food market is estimated at Rs 3,50,000 crore and almost 20 percent of this gets wasted i.e. losses almost amount to Rs 70,000 crore as there is not adequate cold chain infrastructure. Cold chain is a logistics network that provides a series of facilities for keeping ideal storage conditions for perishables from the point of origin to the point of consumption i.e. from farm to fork as some food companies define it. The chain starts at farm level (e.g. harvest methods, pre-cooling) and continues up to the retail level. Some retailers are using RFID technology to monitor the temperature and shelf life of products. A well organised cold chain reduces spoilage and retains the quality of the products. The main feature of the chain is that if any of the links is missing or is weak, the whole system fails. Cold chain can offer several food temperature levels (frozen, cold chill, medium chill etc.) to suit different types of products i.e. vegetables, meat, ice cream or fruits. The Cold chain logistics infrastructure generally consists of l Precooling System, including mobile precooling l Refrigerated infrastructure required at rural markets l Transit cold storage/storage facilities l Cold chain containers l Refrigerated transport system l Refrigerated railway wagons l Refrigerated cargo containers l Refrigerated Retail Outlets As food is a highly cost sensitive supply chain and cold chains require good investment, it puts higher logistics challenges on food supply chain. Moreover there are several government regulations to maintain hygiene and standards for food retailer/manufacturer. Typical products suited for cold chain are: l Fruits and vegetables l Meat l Fish and seafood l Dairy products l Beverages l Pharma products Standards for cold chain management can differ depending on product. Following example shows storage temperature for different dairy products: Product

Storage condition

Shelf life

Butter Ghee Powder Cheese Ice cream Paneer Butter milk Peda Khoa

0° C or below Cool and dry place Cool and dry place 5° C 18° C Vacuum packed 4-6 Deg 8° C or below Room temperature Room temperature

1 week 1 year 18 months 6 months 6 months 10–15 days 1–2 days 15–20 days 15–20 days

Source: An article by BS Nataraj, Senior Manager (Market Development), NDDB, Bangalore. (www.dairysociety.org) (accessed on 3rd July 2009)

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There can be strict specification for the type of cold chain vehicle to be used. As an example, for dairy products insulated vehicle with following specification is recommended. Structure Panelling Floor Rear Door Air Deflector Paint

MS Sections, Pipes, angles, channels(14G Single) Outer: Aluminum Sheet (16 G)Inner: Aluminium Sheet (18 G) Galvanised Ducting (22G)Aluminum chequered plate (10 G)MS ‘C’ channels or MS strips Double Leaf On the top of driver cabin (folding/fix) Primer 1 Coat, Enamel 2 Coats

Source: An article by BS Nataraj, Senior Manager (Market Development), NDDB, Bangalore. (www.dairysociety.org) (accessed on 3rd July 2009)

Retailers can use a variety of cold chain equipments like refrigerators, coolers, deep freezers, insulated boxes etc.

Cold Chain in India McDonald’s have already spent around Rs 300 crores on cold chain development while, Amul plans to invest Rs 100 crore for the same. HLL and Nestle too, have been developing cold chains for their refrigerated products. FieldFresh (a joint venture between Rothschilds and Bharti), a company that exports fresh fruit and vegetables lost several containers of grapes, mushrooms and okra as the existing cold chains are barely good enough to handle sturdy crops like potato; so handling sensitive fruits like grapes and okra was a new challenge. Reliance plans to set up high tech, temperature controlled warehouses for fruits and vegetables across the country where sorting and grading of fruits and vegetables will take place. Then it will set up pre cooling centres in these warehouses to absorb the heat out of the fruit or vegetable, to prevent early rotting. Setting up one such centre costs between Rs 4–5 crore. The biggest problem in the country today is post harvest losses where every year the country looses huge crop as small farmers do not have financial strength to invest in such infrastructure. This requires creation of common utility infrastructure for small and marginal farmers with Public Private Partnership (PPP), both in the Government and Private Sector. The country needs almost 33.5 million tonnes of cold storage capacity out of which present cold storage capacity available in the Country is around 20.5 million tonns. Potato requires close to 85 percent tonnage of India’s current cold storage capacity.

FOOD SAFETY Like pharmaceuticals, food is another product category which has maximum safety concern from retailer’s perspective. The concern is becoming a global issue with recent incidents like bird flu, recent reports of massive meat and poultry recalls, guidelines from the World Health Organisation, controversy over genetically modified crops and raw materials, and increasingly, stringent controls by Food and Drug Administration (FDA). The ultimate aim being that a safe product is delivered to the end customer; retailer alone can not make this happen and a number of entities play a major role here—food manufacturer needs to design, develop and make products that conform to specification and are safe for consumers, logistics providers need to ensure that the products are stored in perfect condition and there is no contamination during transport and finally the retailer needs to ensure right storage condition and no contamination in the retail store. Figure 11.4 explains that problem with food safety can happen any where in the supply chain. Another important consideration for retailers today to the daily section which sells processed foods. Retailer takes responsibility of food processing as well. If something goes wrong with one container or one package is tainted, there is a risk of negative publicity for retailer. The resultant food scare may follow a company for years, causing sales and/or market share to plummet. Here are some examples:

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Fig. 11.4

Food Safety can become an Issue Anywhere in the Supply Chain

The most well known product safety issue is the Coca-Cola crisis in Europe in 1999. It was reported that 33 school children took ill on 8 June 1999 after drinking the beverage bottled at an Antwerp plant and later another 80 people in France were afflicted by intestinal problems. European authorities were quick to respond by stopping sale of the drink. Coca-Cola had to recall and destroyed 17 million cases from five European countries and had to set right its production facilities. A leading global pharma company announced a recall of its best selling arthritis drug. Sales of the drug were estimated to be US2.5 billion a year. The recall came after strong media publicity that the drug had doubled the risk of heart attacks and strokes in long term users. As soon as the company made the announcement, its stock price fell about 27 per cent. The company also took a major public relations hit. Source: www.expressindia.com (accessed on 24th April 2000)

So food safety measures need to be built in all supply chain processes starting from product design to logistics execution and typical steps can be: l Designing and developing products as per safety standards As retailers are using private labels extensively these days and adopting to large scale contract manufacturing, they need to pay attention to the manufacturing/farming process of food items that they take active interest in growing. This calls for taking right process control measure to manufacture as per specification. Technologies for process control, quality management and recipe management can help here. Retailers also need to pay attention to the sourcing process when the product is sourced from CPG companies.

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Logistics execution processes like warehousing and transportation need to ensure that the products are always stored and transported under perfect conditions and there is no contamination. This is typically a shared responsibility between food manufacturers and retailers as some part of transportation and storage is taken care of by manufacturer (storing at factory warehouse and transport from factory to retailer’s DC) and some part by retailer (storing at RDC, transport from RDC to store etc.). l Products need to be tracked and traced across the full lifecycle of manufacture and delivery. RFID applications can play a major role in this kind of track and trace processes that bring supply chain visibility of the full lifecycle of the product, as it moves from manufacturer to customer. l There needs to be an efficient process of product recall Where the retailers know which consumer possesses the product now and has an efficient reverse supply chain process that can bring it back to retailer/manufacturer within quickest possible time. Increasingly, food manufacturers and retailers are using simulated recalls to check their capability in this area. However retailers need to remember that recall is expensive and generally not effective as always only a percentage of the product can be recalled. It takes time to sense the need for a recall and then time to act on it. In cases where retailers track items by unit have greater chance of recall than in cases where it is tracked by case/pallet. However item wise tracking has its own cost implication. l Controlling and tracking several third parties Mostly, food products are manufactured by third parties and distribution is again handled by third, party provider and most of the contract manufacturers source ingredients directly. This incorporates much complexity in the supply chain and tracking products across multiple systems spanning over multiple organisations has become complex. l Make realistic brand promise Most retailers and food manufacturers have increased their brand claims of health and safety and product performance over the years and this includes ‘organic,’ ‘hormone free,’ ‘allergen free,’ etc. Making a claim and having supply chain capability to deliver is are two different topics. It is better to make claims what your product development team can make and what your supply chain can deliver. HACCP (Hazard Analysis and Critical Control Points) is a system for analysing production or product handling processes to detect hazards and risks of contamination within those processes. HACCP is increasingly recognised as the reputable and effective vehicle for ensuring food safety. HACCP’s application covers the entire food production process, from the purchase of raw materials till end use by the consumer. Dairy companies, in light of the vulnerability of their products to contamination, are under pressure to comply with HACCP standards, and consistently strive to improve quality/sanitation control systems. Another important factor of food safety is labelling the products and labels should contain true information about the product that ensures safety and proper standards. There are national and international guidelines (from authorities like Codex) for food retailers on this. Standards on labelling have become mandatory with a specific mention of the name of the food item, and date of manufacture and storage instructions. The pharmaceutical industry experiences offer best practice opportunities for food manufacturers to learn and adopt. Leading retailers are using food safety and freshness as a new source of competitive advantage these days and not just as a regulatory driven sunk cost. l

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Wal-Mart Stores, Inc. has become the first nationwide U.S. grocery chain to require suppliers of its private label and other food products such as produce, meat, fish, poultry and ready-to-eat foods to have their factories certified against one of the internationally recognised Global Food Safety Initiative (GFSI) standards. The GFSI now lists Wal-Mart among the companies who have agreed to improve food safety through a higher and consistent auditing standard. GFSI standards provide real time details on where suppliers fall short in food safety on a plant by plant basis, and go beyond the current FDA or USDA required audit process. Under the GFSI programme, producers of Wal-Mart and Sam’s Club private label and other foods sold in the U.S. must be audited by independently trained, approved and licensed auditors who are experts in their industry. The GFSI requires food suppliers to achieve factory audit certification against one of its recognised standards, which include Safe Quality Food (SQF), British Retail Consortium (BRC), International Food Standard (IFS), or an equivalent such as Global-GAP. Wal-Mart has published a schedule to suppliers requiring completion of initial certification between July and December of 2008, with full certification required by July 2009. Audits will be completed by approved third party auditing companies. Source: Walmart website accessed on 4th Feb 2008

FOOD PROCESSING Food processing is an upstream industry for food retailing i.e. proceeds of this industry is sold in retail stores. However it is important to discuss this topic here as several Indian retailers are planning to enter into this segment as backward integration strategy. For example, Reliance Retail has acquired 20 acres of land from Haryana Government at Saha and Rai and plan to build two food processing units at an investment of Rs 100 crore. The plants would be engaged in processing, packaging and distribution of fruits, vegetables and milk products. Backward integration is mainly with two purposes—to have more markup and to get assured supply at stores round the year. India’s food processing sector covers fruits and vegetables; meat and poultry; milk and milk products, fisheries, plantation, grain processing and other consumer product groups like confectionery, chocolates and cocoa products, mineral water etc. India is known for exporting Basmati rice and tea. However processed food manufacturers see tremendous opportunity in exporting processed buffalo meet (India ranks first in world cattle population, 50 per cent of buffalo population and buffalo meat is surplus in India), exporting egg powder, frozen egg yolk, albumin powder, several varieties of fish etc. The biggest challenges for food processing sector are: l Lack of infrastructure like cold chain, modern equipments for food processing etc. In most cases the cold storage or processing unit is so far from farmer’s place that it is not possible to bring the crop there. l Lack of adequate quality control and testing infrastructure l Many middlemen involved l The farm output is not suitable for processing l Seasonality of raw material which does not ensure feed for the processing units through out the year. For example units for processing tomato puri can run only during particular months of the year The government has taken several steps to encourage Public Private Partnerships (PPP) in food processing area to bring much needed investment in terms of cold storage and food processing units. Different state governments have set up ‘Food Parks’ with private investment and to promote exports of processed vegetables and fruits. Creation of Agri-Export Zones (AEZs) and setting up of perishable

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food product cargo complex will also boost export. Some of the successful models are partnership of West Bengal government with Pepsico (through Frito-Lay India), corporate partnership with Andhra and Karnataka governments etc.

FRESH FOOD RETAILING—AN INDIAN PERSPECTIVE Agricultural distribution in India is complex. Every farmer in India today grows a crop that his neighbour grows. When the product is ready, he takes it to a mandi, a market for trading agricultural products. That is where a chain of middlemen come in. Some sell the produce and grains to marketing companies; others bring it to a bigger mandi. Here it gets sold to a wholesaler, who brings it closer to the city. Finally, the wholeseller sells it to the retailer—small kirana stores across the city. There are at least three to six layers of middlemen in the process and reducing just the chain of middlemen can bring the price down by 25–30 percent. Fresh food retailing is hotting up in India. Reliance group promoted Reliance Fresh, Godrej group promoted Nature’s basket, Wadhawan Food Retail Group (WFRPL) promoted Spinach are all trying to enter this market—though none of them are pure play fresh fruit retailer in that sense and sell vegetables, fruits, breads, poultry, fish, staples, spices etc through their outlets. Some of them are trying to differentiate themselves by unique offerings like Godrej’s Nature basket has exotic fruits and vegetables such as kiwi, cherries, broccoli, bamboo shot etc, that are not easily available in sabji mandis. There are several local players as well in this segment such as Greens and Grains in Bangalore or Adani’s in Ahmedabad. Export to retailers in U.S. and Europe have become another good option. Gautam Thaper’s Global Green Company Limited based at Bangalore export close to 100 crs of gherkins to the western markets. In a joint venture with the Rothschilds, Bharti had launched FieldFresh to export fruits and vegetables to UK, Europe and Middle East and had done an export of 30,000 tonnes of produce in 2007–08. It acquired 300 acres from the government of Punjab to start with. There is much lots of action from food companies as well. For instance, Fun foods tied up with Pantaloon to set up salad bars in Food bazaar outlets. The idea is to offer consumers a variety of fresh salads with different dressings. Consumers can either make their own fresh salads or choose from a ready set of recipes. Mother Dairy is soon launching its hot snax brand of frozen snacks, while Amul has just had a series of beverage launches. The old way to shop for vegetables i.e. Go to the sabzi mandi at 7 a.m. (to get fresh produce) is changing as there is a rush for sabzi bazaar for all organised retailers. There are eight companies that have entered the fray and more are expected to queue up. Nature’s Basket, Fresh Basket (HyperCity), Reliance Fresh, Fresh@Vikrampuri (Heritage Foods) and Spinach have already set up shops. Together they will be investing over Rs 40,000 crore by 2011. Growing at about 28 per cent annually, it is attracting bigbang investments. As with most emerging economies, food accounts for over half the expenditure of an average family. Fresh produce accounts for 50 per cent of the Indian shopper’s food and grocery bill compared to 15 per cent in the US. Almost every modern retailer is therefore experimenting with either a counter for fresh produce in its existing hypermarket format or setting up dedicated outlets. Already around 4 lakh sq ft retail space has been dedicated to fresh produce retailing. Store footfalls have risen by nearly 25 per cent. While trips to stand-alone stores have become twice-a-week, if not a daily ritual for many, hypermarkets are mostly weekend destinations. Source: India Today, Vegetable Retailing, 2nd April 2007

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RETAIL DELI SECTION Retail deli section is common in organised retail stores these days. Most of the leading retailers like Big Bazaar, FoodWorld, Shopper’s Stop, Trent etc. have opened deli section in their stores and these sections have witnessed good footfall in the past especially during festive sessions. Deli section also makes retailer unique in a way as retailers can offer differentiated offerings here. In India typically deli section restrict themselves to vegetarian offerings like bakery products, namkeens, sweets etc whereas in western countries it is common to have processed meat and main courses as part of standard retail deli offerings. Deli section poses different supply chain challenges for as retailer in some cases he take charge of processing foods also here i.e. actual production is done by the retailer. It can range from baking bakery items, processing chicken and meat and preparing for some ready to eat curry. Shopper’s Stop is planning a deli section in few of its stores which will have items like smoked ham, ready-to-use pasta, curry sauces, salad dressings, soups, salads and main courses for those in a hurry. The chain is also likely to have a section of ready-to-eat and ready-to-go meals (microwaveable) for the shopper with convenience on top of his mind. Source: Hindu Business Line, Pune, 27 May 2005 Trent Ltd. the retail arm of the Tata Group, has launched its second hypermarket ‘Star Bazaar’ at Andheri and this hypermarket claims to be different from other common food retail outlets. One of the unique segments is live Bakery and Deli section where shoppers will find fresh and hot bakery products like doughnuts, puffs, varieties of bread made in front of the visitors. The store also offers cakes which are available in different designs and flavours. Bengal sweets and namkeens are also added to the offering list. Source: FnBnews.com (accessed on 16th July 2008)

DAIRY RETAILING The world over, milk is big business in retailing as it ensures footfalls and dairy products constitute 15 per cent of the retail business. Most large multinational retail majors also have their own branded dairy produce.

Dairy Industry in India India has one of the largest buffalo populations in the world. India is among the world’s largest producer of milk. India’s milk production is more than 100 million tonnes and according to estimates released by Dairy India 2007, total production of milk in the country will touch 120 million tonnes in 2011, with the organised sector accounting for as much as 30 percent. Milk industry size is estimated at Rs 227,340 crore. New Zealand is the world’s largest producer of dairy milk which supply close to 29 per cent of the world’s demand. In comparison with developed economies the market for dairy products in India is still in an evolutionary stage and largely dominated by liquid milk with tremendous potential for high value products such as ice cream, cheese etc. The dairy sector in India is dominated by billion dollar GCMMF’s Amul, NDDB’s Mother Dairy and MNCs like Nestle. There are strong regional brands as well like Nilgiris in Karnataka, Mahananda in Maharastra, Red cow in west Bengal etc. Players like Britannia have already entered into dairy

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business. The National Dairy Development Board (NDDB) and the National Co-operative Dairy Federation of India (NCDFI) were established to coordinate the dairy activities through cooperatives in all the States of the country. The former provides financing for development while the latter manages a national milk grid and coordinates the deficit and surplus milk and milk powder across the states of India.

Recent Trends Global brands are looking at Indian market Import of dairy products have been freed from licensing and imported brands like Le Bon, Laughing Cow and Kraft have hit the shelves in metros. Large global dairy players like New Zealand based Fonterra (currently has a joint venture with Britannia) and Denmark based Arla Foods are making their plan for entering Indian market. Large Indian companies want to enter dairy segment Some big names in India Inc, such as Reliance, Bharti, Coca-Cola and PepsiCo, also want to enter into dairy business. Reliance Retail has stepped into the dairy products sector with a national ‘pilot’ launch of its liquid milk in Hyderabad. Reliance has national plans to launch three variants of liquid milk (family milk, low fat and whole milk), diversify into a range of value added dairy products and to enter the cheese making sector. Reliance is looking at Punjab to make their dairy hub with 85,000 farmers supplying milk to Reliance directly and had signed a deal with the Punjab government to source about seven lakh litres of milk everyday from farmers in the state. Existing players are upbeat on this segment Nestle is upbeat on dairy segment and has built Moga in Punjab into a procurement haven, from where the company sources its milk requirement, about 10 lakh litres per day. The dairy division, which has been growing at 20 percent against Nestle India’s 10–11 percent growth, plans to introduce a spate of value added products in the liquid milk, milk powder and yogurts categories. Other plans include bringing in global dairy brands like Nido to India, capacity expansion at its existing manufacturing facilities in Moga (Punjab) and Samalkha (Haryana). A set of joint ventures planned in this segment Nestle has tied up with several regional dairies to extend its national footprint like Andhra Pradesh-based Heritage Foods India Ltd in the south, Bengal Nester in the east and Dynamix Dairy Industries. These joint ventures are for sourcing milk, processing and packaging. Britannia industries has entered into a joint venture with the Fonterra cooperative, New Zealand for getting access to better technologies in sourcing, manufacturing, upgrading product quality and distribution of milk. The Fonterra group will provide advanced technical know how and learning from the international market. New health segment As consumers are increasingly becoming health conscious, there is considerable potential in the value added category and the consumption of processed milk is growing at an attractive rate in India. Cola majors, Coca-Cola and Pepsi, are keenly eyeing the dairy business in India and wants to enter milk based beverage segment in India, especially with the increasing shift away from carbonated soft drinks to healthier beverages and exploring options in the tetrapack milk format. Nestle India is expanding its liquid milk portfolio with specially formulated milk for people who may be lactose-intolerant or diabetic. Considering the current consumer inclination towards health and wellness, dairy products such as ice cream and cheese were not being considered by Nestle due to ‘not so healthy’ reputation, despite contributing a fair share of revenues to the dairy business worldwide. The focus is to be on healthy products such as liquid milk and its variants as well as yoghurt. The only brands in value added milk beverages in India are packaged milk brands like Amul, which sells flavoured milk with the sub-brand Kool. Other milk products like ice cream

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and yoghurt are also making the health pitch. Amul has already launched the Prolite brand of probiotic ice creams. Nestle too, has launched Nesvita, a probiotic variant of yoghurt which is low on fat and assists in better digestion.

Dairy Supply Chain A simple dairy supply chain is shown in Figure 11.5. Typical issues of a dairy supply chain are as follows: l Nowadays the consumer requires not only a healthier product, but also a more differentiated product. This has led to a proliferation of finished good lines, particularly in the area of low fat, UHT, cheeses, a variety of partial skimmed milks and other products. l Being a perishable product, often milk gets sour, especially in the summer season, as produce has to be physically carried in individual containers. l Milk is a commodity that has to be collected twice a day from each cow/buffalo. l Incoming raw materials (i.e., milk) may vary considerably with respect to material attributes such as fat content and solids. Manufacturers of further processed products must be able to adjust their manufacturing ratios in real-time to account for this variability. l For a dairy processing plant, when raw milk is received it is necessary to test it for several attributes. This information must be attached to the batch of milk and tracked through the process. This could be information such as temperature, milkfat, solids and microbiology. This information is be attached and tracked to subsequent products through the various stages of manufacturing. It is an absolute requirement for dairy processes to be able to track quality characteristics. l Sometime agents decide the prices and the off take from the farmers as per the season. l In developing countries milk collection is decentralised as most producers are marginal farmers who would deliver one to two litres of milk per day. Amul collects six million litres of milk per day from around two million members.

Fig. 11.5

Dairy Industry Ecosystem

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A majority of the suppliers are small or marginal farmers who are often illiterate, poor, and with liquidity problems as they lack direct access to financial institutions. Tracking product in various package sizes (from individual serving packages for consumers to bulk packages for processors and food service providers). Most of the dairy manufacturers follow a process of lot numbering based on specific numbering rules from which for each SKU expiration date, manufacturing date, and shelf life date can be tracked. In case of any product contamination, the reason for the same can be tracked from this information.

Case Study Amul’s Supply Chain Amul, the dairy market leader of India is a good example of how a company has effectively managed one of the most complex supply chains in the world. Amul has a complex supply chain. Amul’s supply chain complexities: l Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers, converts the milk into branded, packaged products, and delivers goods worth Rs 6 crore (Rs 60 million) to over 5,00,000 retail outlets across the country. l Gujarat Cooperative Milk Marketing Federation (GCMMF) the largest dairy federation of the world collects 5.71 million litres of milk a day from vendors. l The large part of Amul’s business is based on milk—which has a shelf life of less then 12 hours. l The whole chain works on just in time inventory principle—wholesale dealers carry inventory that is just adequate to take care of the transit time from the branch warehouse to their premises. The nature of the product necessitates if and it also improves dealers’ return on investment (ROI) l More then 60 percent of Amul’s suppliers are illiterate and extremely small, can supply one to two litres of milk a day and do not have enough liquidity. l The cold chain is at the heart of milk and dairy supply chain. From the point milk is collected to chilling units to processing plants to packaging to distribution, a particular temperature needs to be maintained. l Amul supply chain is the best example of how each supply chain partner can effectively leverage their core competence—the union just concentrates on its core strengths i.e. milk processing and production of dairy products. Marketing effort and all brand developments are done by GCMMF. All other activities are entrusted to third parties. These include logistics of milk collection, distribution of dairy products, sale of products through dealers and retail stores, provision of animal feed, and veterinary services. GCMMF works with the unions in determining product mix, product allocations and in developing production plans. The unions, on the other hand, coordinate collection logistics and support services to the memberfarmers. l Amul creates value for all its supply chain stakeholders by providing quality product at reasonable price to its customers; provide handsome returns to suppliers i.e. farmers and thus combines effectively their market and social responsibilities. For every rupee of GCMMF sales an average of 80 paise go to farmers.

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Product range Liquid Milk (nine varieties), Milk Powders (five varieties), Butter, Ghee (two varieties), Bread Spread, Cheese (three varieties), Cocoa Products (two varieties), Sweets (three varieties), Ice Cream (several varieties), Condensed Milk, Edible Oil (nine varieties), Mineral Water, Fruit Drinks.

How Amul Manages the Supply Side of the Chain Effectively Amul have taken several strategies its support to small suppliers like l It purchases all milk that member farmers produce i.e. offers buy back guarantee for the suppliers. l Amul is aware of the liquidity problems of small firmers so it pays in cash to all its suppliers as soon as delivery is made. l Amul provides provision of veterinary services, support for cold storage facilities at the village societies, and educates the members. l Takes different initiatives to develop suppliers in long term through social change. l Unions negotiate annual contracts with truckers, ensure availability of trucks for procurement, establish truck routes, monitor truck movement and prevent stealing of milk while it is being transported. l Each union has a separate department that services the needs of the societies and also has the primary responsibility for developing new societies in their district.

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Common marketing organisation All dairy products are marketed by a common marketing organisation i.e. Gujarat Cooperative Milk Marketing Federation or GCMMF who has 42 regional distribution centres, serves over 5,00,000 retail outlets and exports to more than 15 countries. In addition to outbound logistics, GCMMF takes responsibility for coordinating with the distributors to assure adequate and timely supply of products. Common brand GCMMF provides umbrella branding to all the products and the two brands that GCMMF supports are AMUL and SAGAR. All dairy products are sold under these two brands. Daily distribution to retailers GCMMF distributes its products through third party distribution depots that are managed by distributors who are exclusive to GCMMF who in turn supply to retailers most of whom are small. Multi channel retailing Liquid milk also gets distributed by home vendors who deliver milk at homes. Since 1999, GCMMF has started web based ordering facilities for its customers. Other services GCMMF also offers 24 hour veterinary services, animal husbandry services for better cattle management, an animal feed factory, milk can production facility (which was later sold to a third party), strong linkages with the Gujarat Agricultural University in Anand for training professionals, and management of contracts with trucking service providers for pickup of milk and delivery of milk products across each union. Price AMUL generally follows a low price strategy to make their products affordable. Starting with liquid milk, Amul has introduced several value added products in its portfolio while ensuring supply of basic products.

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Increasing retail presence Amul has set up close to 900 Amul Priority Outlets in franchisee model which can stock the full range of Amul products from icecream, chocolates, cheese and sweetmeats. These outlets are also free to stock other brands in non-competing categories. Amul plans to increase its presence at various points of sale like railway stations, highways, chemists and supermarket outlets. Innovative distribution formats Amul is planning to introduce 24/7 ATM (Any Time Milk) milk vending machines which are popular in the west but yet to catch up in India. These ATMs will have supply of milk sachets of various sizes dispensed to end users via coins and tokens. Some of these are already setup in Gujarat on trial basis and Amul has planned to replicate this all over the country. Advantage of this approach is that it provides high convenience to customers and reduces commission charges to be paid to retailers. However ATMs will need commercial rental outflow from the company.

How Amul Effectively Uses Technology to Manage the Supply Chain Amul has taken a number of IT initiatives to bring efficiency in managing their supply chain. These initiatives are unique in the sense that they are spread across areas where infrastructure is very poor and most of the users of these systems have very low education level. These initiatives have helped Amul to have milk collection information at more than 10,000 villages, available to dairies to enable them make faster decisions in terms of production and distribution planning and disease control of close to a million animals. It also links all distribution offices, distributors and field offices spread across the nation. Some of these initiatives are as follows: l A ERP based supply chain planning system. l A net based dairy kiosk at some village societies for dissemination of dairy related information. l Automated milk collection stations at village societies. l GIS based data network connecting villages societies to markets. l The GCMMF cyber store delivers AMUL products at the doorsteps of the consumers in 125 cities across the country. People can buy Amul products on the Internet in these cities. In 1996, when very few in India had heard of the Internet and B2C commerce—Amul had set up this website. l AMCUS, the Automatic Milk Collection Unit Systems. l In future all villages supplying milk to Amul will be connected with the Internet. Source: Working paper of IIM-A—Managing complex network in emerging market by Pankaj Chandra and Devanath Tirupati; an article by Sanjay Mewar in www.chrmglobal.com (accessed on 30th June 2009)

LIVE STOCK AND POULTRY RETAILING Live stock is an important ingredient of our daily consumption and a critical component of retailer’s fresh food portfolio. Unlike India, where it is still not a common part of organised retailer’s portfolio, in western countries there is a specific section in stores which usually deal in it. Live stock consists of: l Poultry meat and poultry products l Red Meat l Fish items In India, there is a parallel market for it and most of the organised retail chains do not handle it. Recently a few organised retail players like Sugana chicken started looking at this sector.

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Poultry Retailing in India Market India occupies fourth place in the world for egg production and fifth place in the world for poultry meat production. The Indian Poultry Industry provides direct and indirect employment to about three million people and contributes about Rs 29,000 crs to the National GDP. The sector is steadily growing at a healthy rate of 15 percent in broilers since last two decades.

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Physical handling and shelf life In India, eggs are still transported in open condition and in non-refrigerated vehicles. The entire chain of distribution and physical handling up to consumer is in open trays exposed to varying temperatures of seasons and agro climatic conditions. Shelf life of eggs is therefore restricted to 11–14 days in summer and 18–20 days in winter. Availability The egg is still sold as a commodity in India and purchased by consumer mostly from the shop next door for daily use. It is a marketer’s nightmare to ensure sufficient availability of eggs to consumers as it is a perishable product. It is to be made available at number of shops and stocked sufficiently to meet daily needs of consumers. Poultry traditionally developed in concentrated pockets in AP, TN, Punjab, Haryana and Maharashtra. The availability of eggs is high in few states in urban and semi urban centres, but in rural centres and rest of the country, the availability is low. Safety The recent bird flu had created much concern on food safety issues globally. Perception of freshness The broiler industry operates completely as a live bird market (or ‘wet’ market), with birds retailed as live birds and slaughtered in front of the customer in the retail shop. Customers have, over the years, developed a perception that fresh poultry meat purchased as live bird and slaughtered on site in their presence is better in quality as problems with frozen chicken may be difficult to detect until it is thawed. Daily price fluctuation Broiler bird trading is very volatile where prices are determined based on demand-supply in a given market for the day. The broiler prices fluctuate widely depending on season (issues like marriage season or festive season can influence price). The little scope for sale of frozen products further causes price fluctuations. There is a wide gap between producer’s price and consumer price and middlemen make money in the process. Processed chicken The market for frozen or chilled poultry products is limited to few institutions i.e. hotels, fast food restaurant chains and few urban consumers accounting for hardly two percent of total volume. Globally, as open slaughtering of bird is not permitted, processed chicken make bulk of volumes and trends may pick up in India as well. Contract farming Unlike other agri products, organised corporate contract farming is still not very popular for poultry products.

Suguna—A case study on managing poultry supply chain effectively Suguna a leading seller of poultry products in India operates stores in several states and sells different poultry products like portioned fresh chicken, tender chicken, eggs, sausages etc., and has plans to introduce ready-to-cook and ready-to-eat chicken and mutton products in future. The total poultry market in India is estimated at Rs 20,000 crs and Sugana is one of the few organised players (few others are like Arambagh chicken). The company has a plant at Udumelpet, is looking at setting up another plant at Nashik

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and having its own breeder farms, hatcheries, feed mill, chicken meat processing unit, trading and transport divisions and research and development wing. It has over 2,000 franchisee poultry farms affiliated to it in Tamil Nadu, Karnataka and Andhra Pradesh. The company is eyeing public telephone booths, icecream parlours and bakery shops as the vending points for its ‘ready-to-eat’ chicken range and all these vending points just need two key equipment—a microwave oven and a refrigerator. It has effectively managed supply chain challenges of poultry retailing like:

Organised Contract Farming in Poultry Sugana is pioneer in introducing contract farming in India. In contract farming all the inputs such as day old chicks, feed medicine and daily care are the products owned by Suguna. The farmer only has to take care of daily management of the farm until the birds grow to the stage of marketability and he is paid for this as ‘growing charge’. The farmer also provides the space/shed where the bird is grown. Sugana offers a buy back guarantee for the farmers and they do not carry any risk such as market volatility, price fluctuations etc., and are assured of a regular monthly income.

Product Safety To prevent issues like bird flu, Sugana have taken strict measures like bio security measures for the prevention of not only bird flu but any other form of insecurity for the health of the birds. Source: The Hindu Business Line (online edition) (accessed on 4th July 2003 and 10th January 2006)

Meat Supply Chain Unlike India, meat constitutes a good part of the daily diet in western countries and globally, meat supply chain is worth few million dollars. In India, typically raw meat is purchased from meat shop where the shopkeeper alone takes the responsibility of slaughtering the animal, chopping it as per the customer requirement and selling it fresh, unlike western countries where the meat is sold as frozen meat in super markets. Along with raw meat, a host of value added products are also sold. A traditional meat supply chain involves following activities l Livestock farming and marketing l Primary processing l Secondary processing l Distribution

Livestock Farming and Marketing The starting point of the chain is hundreds of livestock farmers who grow the livestock. There can be different ways in which livestock are marketed: l Individual farmers Make their own private arrangements for the sale and transport of livestock direct to an abattoir or livestock markets. In developed countries like India this is mostly the case. l Producer marketing groups These are producer cooperatives that market livestock on behalf of their members. l Dealers and buying agents They operate independently or on behalf of specific abattoirs; they assess the stock on farm and arrange for the transport to abattoir, where the livestocks are purchased. They may also purchase livestock from auction markets.

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Auction markets They sell livestock. Typically, producers are responsible for the transport of livestock to the market and the buyer for the transport from the auction market. Auctions sell stock on a commission basis, typically a percentage of sales price. Certain countries have strict bio-security and animal welfare measures for governing the marketing and transport of animals. There is legislation or standards for all facilities used for bringing animals together. Premises must be licensed by a veterinary inspector and rules about the length of journey time and the provision for feeding and watering animals during stopovers. l

Primary Processing The agents involved in the slaughter and primary processing of carcasses include: l Abattoirs (first stage primary processing)—the slaughter and dressing of stock carried out in licensed plants. l Cutting plants (second stage primary processing)—this is cutting into primals usually accompanied by vacuum packing, boxing and palletisation of the product. This can include production of consumer portions and diced and minced meat often retail packed ready for shop display. l Minced meat and meat preparation plants (third stage primary processing)—breaking down primals into mince and special products such as quick grill steaks. Cold stores, abattoirs, cutting plants and cold stores have to be licensed by government bodies.

Secondary Processing Secondary processing of meat undertakes further preparation to produce a product ready for sale by the retailer or caterer to the final consumer. This includes: l Catering butchery: The production of portion-controlled packs and cuts meeting the specifications of the food service/catering trade (e.g. hotels, restaurants, hospitals etc). l Retail packing: The production of ready packaged and labelled meat for sale in supermarkets. l Prepared meats and recipe products: The production of uncooked meat products such as burgers, sausages or reformed products, ready to cook convenience meats, breaded and coated products, with flavourings or seasonings. l Manufacturing: The cooking, curing, drying/smoking or canning of products; the preparation of foods and ready meals for which meat is an ingredient. Close to 30 percent of meat is eaten as a processed (value added) product; therefore the secondary processing sector is extremely important. The fastest growing sector of the convenience market has been that of chilled food products, especially ready meals.

Distribution Meat and meat products are distributed through several channels like: l Wholesalers including meat suppliers, depots, traders, importers, exporters etc. l Supermarkets and Retailers—the large supermarkets are supplied via their own central distribution depots, which source fresh product direct from the specialist cutting and retail packing plants of the large abattoir/processors. l Traditional butchers l Independent grocers l Food service companies—this may mean commercial establishments such as restaurants, hotels, guesthouses, pubs, cafes, events and functions caterers, tourist attractions or local authority or government establishments in the areas of education, health care, prisons, police, fire service etc.

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Packaging Meat products have special packaging requirements. Like in every other industry, packaging here also has two main functions: to protect and preserve the product and to carry information about the product. Shelf life varies considerably depending on the packaging used. The precise shelf life will also depend on the condition of the meat when packed, storage conditions and the quality of the packaging materials. There are different types of packing options like vacuum packing, over wrapping and Modified Atmosphere Packaging (MAP).

FOOD SERVICES Higher disposable incomes, change of food habits and greater urbanisation is increasing the habit of eating out globally and food services market is booming. There are a variety of establishments of different formats which fulfill such need. The table below shows a few of these formats. Group Organised retail chains

Sub group Coffee chains Global fast food chains Global ice cream chains Confectionary chains South Indian hotel chains Other hotel chains

Example Barista, Coffee day, Starbucks Mc Donald’s, Burger king, Subway Baskin Robbins, Mc Donad’s Monginis, Cathleen, Sweet N Spice Kamat, Sarbanabhavan Haldiram’s

Resturants

Full service restaurants, Restaurants as part of hotel, Airport restaurants

Pubs/Bars

Pubs / bars at high street, bars as part of hotel chains

Fast food centres

Takeaways, Fast food centres

Caterers

Caterers serving food in airlines, rail, hospitals, employee canteens, student hostels, special events like marriage, party etc.

Others

Home deliveries, Dabbawalas (Good example is Mumbai Dabbawalas) etc.

There are very few organised food service retail chains in India. Most of the global retailers in this space had started their operation in India during last few years and few of them are bringing their global supply chain best practices in this country. It is worth studying few of those in the next section. The total out-of-home food consumption is estimated at Rs 40,000 crore in India, which is five per cent of the total food consumed in the country according to a FICCI knowledge paper. The organised food segment is estimated at Rs 2,500 crore or roughly 6.3 per cent of the total out-of-home food pie and comprises both foreign and Indian restaurant chains. The factors driving growth of out of home food consumption are the youth, for whom eating out is a fad, growth in disposable income and increasing prosperity enhancing purchasing power which provide ample opportunities for food services sector.

Coffee Retailing The Coffee Café industry is currently one of the biggest and fastest growing sectors in business. The industry consists of a mix of individual cafés, hotel cafés and retail café chains. Large retail chains

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like Qwikys, Barista, and Café Coffee Day have opened up outlets around the country. Organised coffee retail segment in India is growing at 25 percent to 30 percent and have players like Coffee day, Barista, Quiky’s, Mocha etc. However more of the top two global players i.e. Starbucks and Gloria Jean’s Coffee is still not operational in India. Barista coffee was established in 1999, exists in over 22 cities, operates over 140 outlets nationally and offers a range of coffee varieties with other eatables. Barista sources its coffee beans from around the world, but a major supplier is TATA Coffee, part of the TATA Group that owns a large stake in Barista. The order and delivery process at Barista is based on self service. Coffee Day (Amalgamated Bean Coffee Trading Company Limited) has a rich coffee growing tradition since 1875 and the largest coffee exporter of India. Coffee Day has several agents, 50 collecting depots and two curing works at Chikmagalur and Hassan. Café Coffee Day currently owns and operates 213 cafes in all major cities in India and pioneered the Café Concept in India. Café Coffee Day product mix constitutes a wide range of products that appeal primarily to Indian coffee and snack lovers. Coffee Day’s most unique aspect is that it grows the coffee it serves in its cafes. Typical supply chain issues of coffee retailing are: l Selling Merchandise is a part of coffee retailing Barista sells various kinds of merchandise through its stores like Coffee Mugs, Blue Curacao, Barista French Press, Barista Coffee Beans etc., whereas Café Coffee Day also sells merchandise like caps, T Shirts, Bags, Mugs, Coffee Filters, Coffee Powders, Coffee Mints, Pens etc. Barista’s merchandise is mostly imported. l Location is the major consideration for coffee outlets Coffee majors look for strategically located outlets. For example Barista has tie-ups with Planet M, Crossword and the Taj group of hotels for setting up Espresso corners within their premises and along with ABN AMRO, Barista has introduced a concept called Bancafé i.e. a café in the bank premises. Café Coffee Day targets airports in big ways and has several airport outlets in different formats like takeaways and lounges that gives it a special brand image.

Pizza Retailing According to industry estimates, the organised pizza sector was worth roughly Rs 780 crore in 2008– 09. All pizza retailers provide options both for dine-ins and take-away—while Pizza Hut specialises in dine-ins, Domino’s is the leader in home deliveries. Domino’s philosophy rests on two principles—limited menu and delivering hot and fresh pizzas within half an hour. In 1982, Domino’s Pizza established Domino’s Pizza International (DPI) responsible for opening Domino’s stores internationally and opened its first store in Winnipeg, Canada. In 1983, it inaugurated its 1,000th store. With new pizza chains like Pizza Hut, Domino’s Pizza faced intense competition because it had not changed its menu of traditional hand tossed pizza and the other pizza chains offered low priced breadsticks, salads and other fast food apart from pizzas. Domino’s entered India in 1996 through a franchise agreement with Vam Bhartia Corp. Pizza Hut, a global pizza retailer entered India in 1996, and opened its first restaurant in Bangalore. Pizza Hut now has more then 100 outlets. Yum! Brands Inc is the owner of the Pizza Hut chain worldwide. Yum is a Fortune 300 company and owns Kentucky Fried Chicken, Pizza Hut and Taco Bell restaurants worldwide. Pizza Hut is believed to have close to 50 per cent market share of the organised pizza retailing segment in India. Pizza Hut chain operates in India through four franchisees—Devyani International in the north, Favorite Food India in Mumbai, Dodsal Indmag in Gujarat, Andhra Pradesh and Karnataka, and Pizzeria Pure Foods Restaurants in Tamil Nadu and rest of Maharashtra. The restaurant has a tie up with PepsiCo’s range of products, under which it serves all Pepsi Foods carbonated beverages, Tropicana fruit juices, and Aquafina bottled water.

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Internally, Pizza Hut has adopted practices adhering to an umbrella operation by the name of CHAMPS (Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality, and Speed).

Managing the Supply Chain Effectively Managing Pizza supply chain is complicate simply because there are several complexities involved in managing a supply chain that promises delivery of finished product within 30 minutes to ordering. Supply chain challenges faced by some Pizza retailers in India are as follows: Challenges of indigenous sourcing Both the leading pizza retail chains in India started with importing most of their ingredients. Pepperoni and jalapeno needs of Domino’s Pizza are flown in from Australia and Spain respectively. Pizza Corner used to import all its potato requirements from Canada. Cheese and olive oil also used to get imported. For Pizza Hut chain, cheese is imported from New Zealand. Gradually these companies started building indigenous sources. Tricon Restaurants which is running several Pizza Hut stores had developed indigenous sources for all ingredients and that resulted in reduction in prices. Yum had also helped in developing the local supply chain for Pizza Hut and currently 95 per cent of the ingredients they use are locally produced. They now import very few specialty items like pepperoni. Challenge of maintaining uniform test One of the important attributes of a food service chain is maintaining a uniform taste across all its outlets. To handle such chains Domino’s Pizza and Pizza Corner have set up commissaries in different cities. Domino’s has five commissaries and Pizza corner operates four. The inputs sourced from various places are supplied to the commissaries in reefers / refrigerated trucks for process and production of base material. The pizza dough and other items prepared in commissaries are then sent to the retail outlets again in reefers. Based on the distance between the retail outlets and the commissaries, the temperature inside the trucks is fixed so as to set the dough to a required level when it reaches the outlets. Retail outlets have to exhaust the processed dough within three days of delivery. However, due to some reason if they fail to do so, the entire quantity is discarded. Challenges of operating a supply chain for low cost variant (Domino’s nano pizza) To break out of niche segment and to reach out to the masses, Domino’s has recently brought out Pizza Mania, a new range which has pizzas priced at Rs 35, plus taxes. As this is priced considerably lower than the existing range, but have everything that a regular pizza has, a seven inch base, cheese and topping—the company had to redesign almost all supply chain processes to cut costs and adopted a six-sigma strategy to identify areas of opportunity for cost cutting. It had taken several steps like: l Improved labour efficiency by optimising on staff, focused more on hiring youngsters on a part time basis during peak hours. l Bought more fuel efficient bikes and installed speed governors on them for safety as well as better mileage. l Built a separate supply chain at the vendor end. l As cheese constitutes 40 per cent of the cost of a pizza, the company identified a new vendor and evolved a new liquid cheese blend for this range. l At the company’s R and D laboratory in Noida, the company designed low cost toppings which include shallots or spring onions, soya granules, chicken pops and chicken sausage. Effective design of store location and logistics network Domino designed its own logistics model for India four years after they entered India. It had developed its procurement strategy for its key raw materials like wheat, baby corn, tomatoes, spices etc. Domino decided to source wheat from Jalandhar (Punjab) as it is cheapest there and Domino’s refrigerated trucks got the wheat back

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to the commissary in Delhi. Commissary processed the wheat and prepared the pizza dough. The pizza dough and other items prepared in commissaries were then sent to the retail outlets again in refrigerated trucks. The temperature inside the truck was fixed based on the distance between the retail outlets and the commissaries. As trucks had to go through Chandigarh, while going to Jalandhar and Chandigarh has a cosmopolitan population, Domino opened an outlet there. Thus for this location, Domino had not incurred any additional cost for transportation of products. Thus Domino had opted for locations of its outlets selectively.

Ice Cream Retailing India’s ice cream segment is around Rs 1,200 crore mainly dominated by unorganised sectors with few organised players like Baskin Robbins, Hindustan Unilever, Amul, Mother Dairy, Vadilal etc. Kwality Walls of HUL is the most prominent brand and HUL is number one in terms of market share. Several multinationals like McDonald’s, Movenpick, Blue Bunny and Nestle are eying this market and McDonald’s is also selling ice cream these days mainly through their own outlets. The domestic ice cream market is small in relation to those of other countries i.e. in terms of per capita consumption. India’s per capita consumption is about 250 ml against 1.2 litres in China and 22 litres in the US which suggests immense potential for this category. Baskin Robbins is the world’s largest ice cream franchise, with more than 5,800 locations, and sells ice cream in over 30 countries. It operates through a joint venture in India with Maharashtra Dairy Products and operates close to 400 outlets across 65 cities in three formats (namely kiosks primarily inside malls, parlour and lounge of big size) in India. HUL’s strategy is mainly focused around its power brand Kwality and to cater to volumes at the low-end segment, HLL has launched Kwality Wall’s softies through its patented wet-mix system. This low end channel involves a totally different supply chain system to fight against local competition and retailers need specialised softy machines.

Managing Ice Cream Supply Chain Merchandising Ice cream marketing needs attractive merchandising display. A good example is: In the 1920s, Unilever, to sell its Wall’s ice-cream, printed the logo ‘W’ on cards and distributed them. If a child in a household displayed the card at the window, it was a signal to the ice-cream salesman on a push-cart to stop by. Different modes of distribution There are different modes of ice cream retailing. The most common ones are: l Parlours: Mainly an urban phenomenon, Baskin Robbins is the most common name in this segment. The company has chosen the franchisee route to merchandise its products. l Push-carts: The oldest mode of ice cream distribution and continues to be a powerful draw with companies such as HUL still using it. l Restaurants: The good example of this is McDonald’s which is selling ice cream through their own outlets. l Net: Now companies such as Amul and Baskin Robbins sell their products through the Net. However this is a niche channel. Location of manufacturing facility and cold chain The location of manufacturing units is a major factor because of the perishable nature of the product. HUL had adopted a policy of decentralised manufacturing to reduce supply chain costs. This is one of the reason why there are very few pan India players in this segment and most of the players are regional ones.

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Case Study McDonald McDonald’s is one of the most successful food services retailing model in the world. It works on four simple principle—Quality, Service, Cleanliness and Value—offer a limited menu of high quality, served fast in clean surroundings and at very reasonable price. The first McDonald’s restaurant opened in 1955 and since then McDonald’s opened few thousand restaurants globally. McDonald’s is a story of high standardization—its products—handling and cooking—procedures and kitchen layouts—every stage of production and distribution is standardised and strictly controlled. There are different models of running McDonald’s stores—most of the restaurants are franchised, in some cases joint ventures are used when the understanding of the local environment is critically important and few of the outlets are owned and operated by McDonald’s corporation.

McDonald Supply Chain in India The way McDonald’s has developed its local suppliers for its India operations are worth studying. The company spent six years and around Rs 450 crore to set up the food supply chain even before opening its first restaurant in the country. It had made good investment in cold chain infrastructure to maintain freshness and crispness of its ingredients. Sourcing ingredients and contract farming McDonald’s needed a particular variety of potato for manufacturing its world famous French fries and the company is very strict about its quality standards which is the same across the globe. This quality of potato of particular length, high solid content and low moisture content was not available in India at that point. McDonald’s and its partner, McCain Foods Pvt. Ltd., started working with farmers in Gujarat and Maharashtra to develop this particular grade of potato. McCain Foods helped farmers with inputs from agronomists, with technology inputs like better irrigation system, sowing seed treatments, planting methods, better storage methods etc., to develop the potato crop suitable for McDonald’s Potato Wedges. Managing the cold chain effectively McDonald’s has provided technical and financial support to Vista Processed Foods Pvt. Ltd (suppliers for the chicken and vegetable range of products) for setting up world class infrastructure in cold chain management and hi-tech refrigeration plants for manufacture of frozen food. Vista has invested in state of the art technology for both the chicken and vegetable processing lines. These two lines are totally segregated to ensure that the vegetable products do not mix with the non-vegetarian products. McDonald’s assistance helped Vista to achieve world class quality and be the obvious choice for other esteemed customers like star rated hotels, hospitals etc. Managing distribution effectively McDonald’s India distribution is managed by Radhakrishna Foodland (P) Ltd. i.e. it serves as distribution centres for McDonald’s restaurants in Mumbai. Both partners had one expectation from this relationship—‘Cold, Clean, On-time delivery’ i.e. ensure that all McDonald’s restaurants are supplied without interruption, products

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conforming to acceptable standards at lowest local costs to the system. The Distribution Centre (DC) is responsible for procurement, quality inspection programme, storage, inventory management, deliveries to the restaurants and data collection, recording and reporting. Value added services like repacking of promotional items are also carried out at the DC. The DC ensures that all products, which arrive at McDonald’s restaurants from suppliers all over India, are absolutely fresh and as per McDonald’s quality standards. McDonald’s introduced Foodland to F. J. Walkers of Australia, and this association helped Foodland to design Foodland’s distribution system to handle large volumes and devising delivery schedules. Foodland had also invested in leading ERP solution from SAP to bring supply chain efficiency. Source: www.mcdonaldsindia.com, www.articlesbase.com (an article on McDonald Supply Chain by Amit Singh Bisht) (accessed on 3rd July 2009)

Case Study Food Delivery Supply Chain—Mumbai Dabbawala Are you aware of the only supply chain in India which got an award from Forbes Global magazine as Six Sigma certified. It means having an error rate of one in 16 million deliveries. Perhaps you are thinking of some Fortune 100 company but you will be astonished to know that this supply chain is run by people half of whom have not even completed their primary education. Yes we are talking about the famous Dabbawala supply chain system. According to Forbes the Dabbawalas work with 99.999999 percent accuracy. Believe it or not this six sigma supply chain is also among the cheapest cost delivery systems in the world and still the maximum rate that a Dabbawala charges (depending on the distance carried) is about US $12 a month. Providing six sigma delivery at lowest possible cost—this supply chain remains a wonder to many analysts and researchers. Globally this is an interesting supply chain case study in management schools. Berkeley University in California teaches the logistic system of Dabbawalas as a case study and many Indian business schools as well have the Dabbawala logistics system in their casestudy agenda. The British Broadcasting Corporation and the Australian Broadcasting Corporation have done features on this delivery system. The most interesting news is that Prince Charles was so impressed with their service that he had even invited a few Dabbawalas to his marriage in London. The Bombay Tiffin Box Suppliers Association is an association of 5,000 deliverymen supplying lunch who are called Dabbawalas. The delivery system started almost 100 years back when there was not many fast food centres in Mumbai. People had to leave early in the morning for their workplaces and were not in a position to get their lunch packed. Most of the people still prefer home cooked meal on a regular basis. This lunch delivery service with about 100 men used to collect lunch packed in three or two tier metal boxes (called dabbas) from subscribers’ homes and

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delivered them to their workplaces. Today, the 5,000 Dabbawalas make about 2,00,000 lunch deliveries. They collect lunch boxes from homes in the morning and take them to the nearest railway station. From there, each of the boxes are coded according to the station of origin. The Dabbawala team at the collection and delivery point, and the destination, sort out the (dabbas) and take them to the next intermediary stations, where they are sorted out again for area wise distribution and delivery. So a single lunch pack could change hands, three to four times in the course of its daily journey, yet they get delivered without a mistake since they are so well coded. This complex multi tier delivery system became famous for their clockwork precision and efficiency. Recently this system had become more efficient by using some popular technologies of today like mobile phone, SMS and internet. Till date new business had come mostly through word of mouth, now Dabbawalas have established a Web-based and mobile phone ordering system which is like a central ordering facility where one can call for a Dabbawala’s service by just hitting the Web site or through an SMS. Critical learnings from Dabbawala's supply chain management: 1. A supply chain can learn six sigma efficiency only by better coordination and commitment of players Dabbawalas make close to 3500000 deliveries and returns per month i.e. 7000000 per month i.e. 7 million deliveries and returns. There is close to 15 partner transactions for each delivery / return i.e. 105 million transactions per month i.e. 105 million chances of making a mistake. On an average there is only one mistake in every two month. This had really more than six sigma. 2. Product tracking is one of the key capability in a high volume supply chain Dabbawalas had designed a great Dabba coding system. This contain all details like: Code for Dabbawala at source station, Code for dabbawala at destination station, Code for destination station, Building name, Floor number, Suburb area code etc. This coding system is the essence on which the entire supply chain runs and this drives the entire distribution and replenishment system. 3. Better supply chain is all about managing operation cycle time better Managing time is all about this business. Food need to reach on time every time. Every player in this supply chain understand this simple principle. 4. Better supply chain management is all about better process design Technology can only be an enabler: this supply chain was working with very high efficiency even before the adoption of technology. Current technology adoption like SMS or web based ordering made it better. We frequently forget these basics and that old equation: Old Process + New Technology = Costly Old Process 5. Pride about your work can make a difference is that of "Annadata" and take pride in it.

Every Dabbawala believe that their role

Source: Article "Mumbai Dabbawalas—the lessons they taught me" by Sunil Karve, Founder Trustee and Vice Chairman—MET League of Colleges.

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TECHNOLOGY REQUIREMENTS FOR FOOD AND GROCERY RETAILING Like any other retailer, food and grocery retailing needs technology support in areas like inventory management, ordering, sourcing, demand forecasting, replenishment planning, warehouse and transport management, performance reporting etc. However there are some typical technologies which are more useful for retailers in this segment. These are described below. Scale management Though packaged foods are becoming popular these days, many grocery items, vegetables, fruits, fish and meat items are still sold by weight and a weighing scale is the first requirement of a retailer. Some of the large grocers at any point have 20 to 30 scales of various brands and types per store. Maintaining these scales, ensuring accuracy, regular calibration, and getting certificate from regulatory agencies regarding the correctness of scale at regular interval is retailer’s responsibility. Catch weight management It applies to the meat/diary industry, where not only ‘standardised’ products are handled, the weights can vary from piece to piece, either due to biological variations or because of weight loss during storage. This variability should not be lost by using fixed conversion factors, because this would mean that many business processes would be based on incorrect values. It affects procurement process, sales process, billing, credit/debit note management and inventory management. All these need to update these two quantities in parallel. Inventory accounting to handle correct material values production process to manage the correct yield and consumption for inbound and outbound processes, correct costing of goods along with cost planning and actual postings. A distinction between a logistic unit of measure and a valuation unit of measure is necessary. While the logistic unit is the leading unit for all processes in operative logistics (i.e. in every goods handling process), the valuation and payment flows take place on the basis of the valuation unit. As a logistic unit piece, cases are often used while for the valuation unit weight units like kg or lb are used. The Catch Weight Management business scenario consists of the following five business scenarios: l Procure to Pay l Order to Cash l Manufacturing l Inbound and Outbound Logistics l Inventory Accounting Example ABC is a cheese manufacturing company that needs to track exact weight of each block as billing is done based on exact weight. This ‘exact’ quantity differs from the standard quantity per block. For example, a case of whole cheese may contain multiple blocks with an average case weight of 50.1 lb. Since the weight of each individual block may vary, the total case can weigh either over or under the ‘standard’ case weight. Therefore, tracking one case in inventory and then billing a customer for one case will not be accurate enough. To correctly value the inventory, as well as bill the customer appropriately, it is necessary to also capture the total weight of the blocks within each case. The end result is that each case has its unique actual weight that rarely equals the standard weight. Therefore, we must maintain and utilise inventory in both a case and a weight measure. Dairy retailer’s system should be able to track the fact that current inventory shows both standard weight and ‘exact’ weight.

Food and Grocery Retailing Supply Chain # Cases 1 Case 1 Case 1 Case 1 Case 1 Case 5 Cases

Weight (lb) 50.6 49.7 51.3 50.1 48.8 250.5

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50.1 lb

RFID for managing fresh items Generally RFID tag cost does not justify using RFID for most of the grocery items. However leading retailers today are using RFID for high cost fresh items (like high cost meat) where managing inventory on real time basis and controlling remaining shelf life for products is important for reducing shrinkage and wastage. Statistics tell that nearly 25 percent of all fresh product get spoilt before reaching the store and RFID can help here – the cost of this loss justifies RFID investment. RFID tags with sensors have the ability to monitor temperatures, humidity, and other conditions in-transit, helping suppliers better manage product freshness, reduce wastage and replenishment. Days are not far away when you will see a smart tag affixed to a filet of fish and a package of meat. RFID also supports traceability of products through the supply chain—increasingly important for public health ramifications. Some other technology areas important for grocery retailers are: l Centralised order creation l Recipe management l Technologies that help in managing shelf life l Time phased replenishment planning l Computer assisted ordering (CAO) capabilities for perishables at the store level l Shrink management Software vendors specialising in meeting the requirements for food and grocery, dairy and perishable items are called Fresh item management (FIM) software. Some of the leading vendors in this space are: Invatron Systems’ Applied Data Communications’ P-Cubed (Perishable Production Planning), Park City Group’s Fresh Market Manager, Red Prairie etc. These softwares help in tracking inventory received, produced, sold, marked down and thrown away, manages and tracks production runs in all of the fresh item service areas of the supermarket, minimizes shrinkage and unnecessary waste, helps Direct Store Delivery (DSD) receiving for perishable departments, markdown tracking and analysis, can calculate the cost price for the product, which can be used with a target gross margin and price point rounding to generate a recommended retail price etc.

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Conclusion Food is the largest retail segment accounting for close to 50 percent of retail purchase of Indian consumers. Buying food and grocery in organised retail stores is something which got popular in India during the last decade through still an urban phenomenon. The high disposable income, the effect of western lifestyle and convenience are the main factors driving this change. Almost all retail players in India have presence in this segment in different formats. Food and grocery can be broken down to several segments and each of this has its own supply chain characteristics. Fresh food supply chain has several supply chain challenges in terms of highly perishable product, cold chain requirement, requirement of fresh products and number of middlemen. Increasingly, retailers and different food companies are getting into contract farming by directly working with farmers to get crops straight from the field and then processing it. This ensures supply for the companies and results in reduced cost by removing farmers from the chain. This is a win win situation for both farmer and the corporate who are venturing into this as farmers get better price and buy back guarantee of their products and for corporate it is much lesser payout from what they usually pay to middlemen. ITC and McDonald’s are few successful models in this direction. Fresh food needs cold chain from the point it is harvested the retail store for maintaining its freshness. Cold chain consists of several facilities like pre-cooling facility, refrigerated transport system and container and refrigerated retail space. India every year looses a good part of its crop production due to inadequate cold chain infrastructure. Some of the global retailers like McDonald’s have made investment in this as part of their India supply chain strategy. India desperately needs a many public private partnerships in this area to build the infrastructure. Food safety is another important issue in food retailing. There are strict regulations like HACCP which food retailers need to adhere to, to ensure that food kept in store shelves are not contaminated and will not cause any possible hazard. Retailers use a variety of tools and technologies like RFID and lot control for ensuring it. This is becoming a global issue with recent happenings like bird flu and bio terrorism acts in various countries. Some retailers are getting into food processing for building the backward integration. India has huge opportunity in this area as lack of processing causes much wastage in the food value chain. This chapter also discussed supply chain issues of dairy retailing, poultry and live stock retailing and several forms of food service retailing. There are few interesting case studies in this chapter in the form of Amul, McDonald’s and Mumbai Dabbawalas.

Review Questions 1. 2. 3. 4.

What are the reasons for growth of organised food retailing in India? What are the supply chain characteristics and challenges for fresh food retailing in India? Explain the concept of contract farming? Why retailers are interested in it? Give few examples. What makes up a cold chain? Why is it required? What are the challenges of cold chain management in India? 5. Why food safety is important? Explain the different approaches retailers take to ensure food safety?

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6. What are the challenges of food processing in India? 7. Explain the supply chain challenges of dairy supply chain? What are the recent trends in dairy retailing? How Amul has managed these challenges? 8. What are the supply chain complexities in meat and poultry retailing? Explain the meat supply chain. 9. Explain the typical supply chain issues with Pizza retailing, ice cream retailing and coffee retailing. 10. Explain the concept of catch weight management. 11. How RFID can help in food supply chain? 12. What is the message from Dabbawala case study?

Objective Type Questions 1. 2. 3. 4.

FIM stands for . PPP stands for . HACCP stands for Catch weight management is important as in case of food products different from weight. 5. GCMMF stands for

. weight can be .

Assignments A. Study one dairy and one ice cream manufacturing company. How they ensure cold chain from point of manufacturing to the point of consumption? Study their cold chain infrastructure. B. Study food processing industry in India. What kind of initiatives government has taken to encourage growth in this sector? C. Food service sector is mostly dominated by unorganised players and regional players in India. In this chapter we discussed about retailers who have pan India presence. However there are few famous regional retail chains specialising in regional taste like Kamat, Sarabana Bhavan, Haldirams etc. Study the supply chain of these food service chains.

[CHAPTER]

LEARNING OBJECTIVES

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In this chapter we will explain the following concepts: 1. 2. 3. 4. 5. 6. 7.

Apparel and footwear retailing—Understanding the segment Apparel retailing supply chain Pre Pack planning Apparel retailing in India Apparel supply chain innovations Footwear retailing Footwear retailing case study

Apparel is the second largest retail category after grocery and of late, Indian consumers have started spending on branded clothing. The domestic clothing, textile and fashion accessories market is estimated to be at Rs 80,000 cr and about 13.6 percent of this market is believed to be organised. Apparel retail is the largest segment of this sector and accounts for almost 39 percent of the organised retail sector. The textile manufacturers were among the first to get into branded menswear in the Indian market. Apparel retailers are visible now in high streets, standalone departmental stores, malls etc. Apparel retailing which started as a metropolitan

Apparel and Footwear Retailing Supply Chain 321 phenomenon is no longer restricted to metros and companies are now branching to smaller cities. Apparel retail in India is characterised by the existence of a large number of regional, national and international brands. In the large urban centres, apparel retailers, like Shopper’s Stop, Westside and Pantaloon have popularised their private labels, which have attracted urban shoppers. Westside retails only its own private labels, while for the other stores, 20–30 percent of their apparel turnover is from private labels. In most cases, customers have loyalty to a store rather than any particular garment brand.

APPAREL AND FOOTWEAR RETAILING—UNDERSTANDING THE SEGMENT In the last section of food and grocery retailing, we discussed the major driver of supply chain as freshness and price. In this section we will discuss the next major segment of retailing i.e. Apparel and footwear where the major driver of supply chain is design, style and latest trends. If you do not like the style, colour or design of the apparel in the shop, you will even not bother to ask the price. Before discussing the supply chain characteristics of this segment, it is important first to understand the composition of this sector from an Indian perspective. The apparel and footwear sector can be broadly classified into men’s apparel, women’s apparel and children’s wear. Each of this sub segment can be further classified into Formal, Casual, Indian wear, Inner wear, Sports wear and accessories. We have included home furnishing textile items also in this segment as they also have similar supply chain characteristics in terms of colour, print, style and variety. Category

Sub Category

Typical Items

Apparel

Menswear

Formal Casual Ethnic/Indian Sportswear Innerwear Accessories Winter wear

Shirts, Trousers, Suit – Pant, Blazers T-Shirt, Jeans, Shirts Kurta - Pyjama, Dhoti Kurta, Sherwani Track Suits, Polo Shirts, Shorts Vests, Briefs Belts, Ties, Handkerchiefs, Socks Jacket, Sweater, Shawl

Womenswear

Traditional/Indian Western Informal Winterwear Innerwear

Saree, Salwar, (Ghagra, Choli) Top, Jeans, Skirt, Frock T-Shirt, Slacks, Capri, Midi Cardigan, Sweater, Shawl Lingerie, Blouse, Saya

Gents Ladies Kids Hawai/Sandal Rainy season special Sportswear Accessories

Formal shoes

Kidswear Footwear

Footwear

School shoes

Socks, Laces, Polish, Brush, Belt, Wallet, Leather Bag, Ladies handbag, Schoolbag etc.

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Each item can be available in several varieties. Just think about a common womenswear of India i.e. sarees. It is available in different varieties like printed, cotton, silk, handloom, (batik), (Chikan), (Dhanekhali), (Dhakai) Maslin etc. Within silk again, there are innumerable varieties like Baluchari, Kanchipuram, Cotki, Shiffon, Batik, South silk, Benarasi etc. In India almost every state has its own variety like Jaipuri Kota, Bihar Madhubani print, Oriya Cotki print, Gujrathi print, Kashmiri print etc. In any saree shop almost every SKU is different in style, colour or price point. Retailer wants to keep the variety for faster turnaround; however this puts pressure on him of managing thousands of SKUs, ordering in small lots and physically arranging the actual storage location of the item.

APPAREL RETAILING SUPPLY CHAIN Apparel supply chain stake players This textile and apparel supply chain is complex comprising several players like apparel designers, different raw material suppliers, spinning facilities, extrusion processors, dyeing and colouring processors, weaving and knitting factories, garment manufacturers etc., in the back end. They supply to an extensive distribution channel comprising wholesalers, distributors and retailers at front end. This supply chain is perhaps one of the most diverse in terms of the raw materials used, technologies deployed and products produced. There can also be several agents who secure and consolidate orders for producers. Apparel development processes Typical business processes in apparel development are: l Style Development or Style Design from Buyer l Sample Making and approval from Buyer l Market Testing l Bidding and negotiations for capacities l Final Style Approval, Ordering to vendor and management of customer order l Bulk fabric booking, fabric testing and approvals, fabric and trims procurement l Pre-production samples approval l Production Planning, Material and Factory Capacity Planning l Sub contracting in overload scenarios l Production (cutting, sewing, finishing, packing) l Garment inline and Final Inspection l Shipping and Invoicing These processes are shown in Figure 12.1. In most cases an apparel retailer does not carry out each of these activities and typically concentrate on style design, sample approval and market testing of samples, bidding and negotiating for capacities, finalizing the vendor for garment manufacturing and fabric bulk booking. The garment manufacturer (In case of an European/U.S. retailers, these manufacturers may be based at China, India, Bangladesh or other developing countries) does the processes associated with garment making and shipping like detailed production planning, production, finishing, packing, final inspection, shipping, invoicing etc. Inventory management is joint responsibility of retailer and garment manufacturer.

SUPPLY CHAIN CHARACTERISTICS Apparel supply chain characteristics are shown in Figure 12.2. Fashion, Style and Design Apparel retailing is largely led by fashion. A retailer needs to keep watch on what teenagers are wearing as they are the trend setters. Seasonal variations on stocking

Apparel and Footwear Retailing Supply Chain 323 pattern need to be understood. For some high end fashion apparel retailers once an item is sold from the outlet, he ensures that there is no repetition of the same i.e. every time the consumer visits the store he gets something fresh. It gets replaced by different design, style, and colour.

Fig. 12.1 Apparel Development Process

Fig. 12.2

Apparel Retailing—Supply Chain Characteristic

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Large number of SKUs Each style has different sizes, dimensions, colours and fabric attributes that lead to numerous SKUs for single style. This requires dealing with huge amount of styles and SKUs in planning and operations. New product development and time to bring it to market Success of apparel retailing depends much on how frequently they can introduce new fashion and new range. As new range may get copied quickly by others or may become out of fashion in few months, the winners are those who can bring it fast. We will discuss a few case studies where leading retailer like Zara had made this as their best competitive weapon and could introduce new ranges in few weeks, whereas others took months to do the same. Overall demand and supply lead-time in apparel retailing is one of the longest. The garment we are wearing today might have been conceived in development studio around two years ago if it is a new style. Supply chain cycle time is 2-3X total season cycle times and 6-9X profit season cycle times for many styles. Consequently, consumer demand for popular styles is frequently not satisfied and profit opportunities are lost. Store layout Importance of store layout, décor is very critical. A casual buyer visiting the store frequently likes to see changes in the layout otherwise he may carry the impression that stocks are not selling at the store. Seasonality This affects apparel sector and hence it becomes critical for a retailer to clear off the stocks at the end of every season otherwise he may have to incur substantial inventory carrying costs, allocate scarce shelf space. End of season markdowns is common for apparel retailer. Seasonality also includes stocking seasonal merchandise like winter clothing or special footwear for rainy season. As these are kept in store for limited period, forecasting their demand, allocating space for them, and deciding which merchandise to remove from display for accommodating the seasonal ones need to be planned carefully. As every season has new ‘styles’ (items), this makes demand forecasting a big challenge given that relevant demand history is not available. Private labels This is most common in apparel retailing where almost every retailer has his own brand. Think about women wear market in India for which there is no national brand. Some of the leading retailers in India like Westside only sell their own private labels in their store and the same is true for global retailer like Zara. Private labels bring its own supply chain complexity in terms of design, manufacturing, planning, packaging, quality inspection etc., where the retailer has to take active interest. Manufacturing outsourcing It is very common with retailers in developed countries like U.S. and Europe to generally outsource a good part of their manufacturing operation to countries like India and China for reasons like low labour cost, abundant supply of raw material etc. Leading retailers of Europe (like H and M, Benetton) and U.S. (like J.C. Penny, Walmart etc.) are following large scale outsourcing strategy these days to remain competitive. Except providing inputs on design, quantity requirement and incoming quality control, every other operation of manufacturing is outsourced. Global supply chains Supply chains of medium to big players in this industry are truly global wherein sourcing of fabrics and sub-mats and trims is done from different countries (mostly China, Korea, Hong Kong, India etc.), manufacturing happens in different countries (China, India, Hong Kong, Vietnam, Thailand, Malaysia, Caribbean Islands etc.) and products are shipped to and sold in big markets such as America, Japan, Europe etc. In few cases even manufacturing of one’s garment happens in different countries due to rules, regulations and restrictions. Sales promotion Apparel retailer also needs to understand the critical role sales promotion is playing. Effective promotions induce purchase acceleration and require a separate inventory management strategy.

Apparel and Footwear Retailing Supply Chain 325 Attribute level planning Garment style can have various attributes such as size, colour, dimension (as length in pants), and type of cloth and fabric type. Attributes play very important role in garment planning and operations business processes. Fabric needs to be procured, received, inventoried and issued to production at attributes levels such as colour, fabric type, width, construction etc. Garments need to be planned, produced, inventoried and distributed at attribute levels as well depending upon buyer requirements. Attribute level planning can be complex due to possibility of numerous variations. Fabric procurement This is a long lead-time process that involves fabric capacity bulk booking, informing colour breakdowns to fabric suppliers, colour and shrinkage testing and final delivery schedules. Since garment colours are not known till later stages, fabric booking and procurement planning is a challenging process. Material and capacity planning This is a challenging process because of factors like last minute changes to the styles and BOM by the buyer, quality defects in fabrics, late fabric deliveries, rejections on production lines, sample failures etc. In a typical case, buyer first blocks capacity with manufacturers by intimating orders months in advance so that fabric can be booked at mills and other priority processes can be triggered. Only information available at this time is style number and bulk quantity at style level. Without knowledge of colour and sizes of end garment items required, phantom items and codes are used to plan capacity and to initiate procurement process for long lead time items. This helps production planners to look for other alternatives such as other factories, subcontracting etc., to meet the production plan in case of capacity overload or capacity mismatch and also helps sales team to get idea of available-to-promise capacity during negotiations or capacity auctions. Garment manufacturers are actually in business of selling factory capacities and not selling garments. Production capacity management is thus a key in meeting buyer’s expectations in terms of delivery and price. Assortment planning Assortment planning in apparel retailing is complex and success of this business depends a lot on the kind of reach assortment a retailer has. The first thing a customer looks for in a typical apparel retail store is whether they have wide variety of offerings i.e. style, design, colour at the particular price point he is looking for. Assortment planning complexity is due to the following reasons. It is necessary to make all the assortments of a particular product line available on the shelf at the same time. The availability of a complete range of an item necessitates considerable assortment planning at every link of apparel supply chain i.e. from store ordering plan, retail head office procurement planning, transport planning upto textile manufacturer i.e. all should plan and work on the right mix. Proliferation of lot sizes makes the assortment planning more complex as everywhere in the supply chain there is economy of scale issue i.e. individual SKUs need to be ordered in small lot and there are lot of SKUs. SKUs need to be combined while transporting to make full truck load and factories need to be able to produce in small lots. Back end textile manufacturing consists of both batch and continuous processes and requires all the assortments of a style to move together out of factory warehouse. This necessitates harmonisation of manufacturing lots in a way that makes the entire component (assortments of a style) available during garment cutting stage. However, each component has differential processing time, making it difficult to push the entire ‘assortment of product’ together through the ‘manufacturing leeway’ of apparel chain. For instance, in an assortment comprising white and colour fabric, white products reach final warehouse earlier as processing time for white goods is considerably less than that of colour merchandises. And higher the number of product components, more difficult it would become to achieve this synchronisation across product process continuum.

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PRE PACK PLANNING Pre pack planning is a supply chain issue for apparel and footwear retailers. Let us understand this issue with the following example. You had liked the shoe that you had seen in the window display of the store. You want to buy it now and enter the store. You got the right style, the right colour but now the required size is missing. You are frustrated and the retailer also definitely did not like it. Perhaps the same shoe is not selling well in another store and is getting markdown after a few days. This is frustrating and costly for retailers but now just think from his perspective. Is it practically possible for him to predict the exact size required by every customer?—if he tries overstock perhaps all possible sizes, he will pay more for inventory and will eat up more shelf space and there is a high chance of mark down as well. The problem occurs mainly for two reasons—one of them known to us is forecast accuracy when you can not predict exactly what the customer demand will be. The second one is improper pre pack optimisation. To start with let us understand what a ‘Pre pack’ is.

What is a Pre Pack? A pre pack can be defined as a combination of different SKUs of different quantities packed in a particular dimension and weight for handling efficiency in supply chain. For example SKU A of quantity X, SKU B of quantity Y and SKU C of quantity Z can make a pre pack carton of a particular size say 2ft ´ 3ft box having maximum weight of 8 kg. A pre pack can be made of SKUs of different style, colour and size. Generally a pre pack combines a single style and many colour and sizes or a single style and colour with different sizes. Usually the second one is more common. An example can be a pre pack of formal men’s shirt containing 10 white and 10 blue colours in different sizes—large, medium and small in 40:30: 30 proportions. (example of single style different colour and sizes). Another example can be formal men’s white shirt of 20 in different sizes—large, medium and small in 40: 30:30 proportion (example of single style, single colour and different sizes). A pre pack of shoes can have shoes of same style and black colour but of different sizes; again a case where a pre pack is differentiated by just one aspect ‘size’. There is no rule on the size of a pre pack. The only consideration is, it should be handled without problem i.e. not too large or too heavy. Figure 12.3 shows different pre pack combinations for a 15 unit pre packs based on requirement of different store clusters.

Fig. 12.3

A 15 Units Pre Pack can have Number of Configurations based on Store Cluster

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Why Pre Pack—Advantages of Pre Packing The basic idea of having pre packs is that it reduces handling in the supply chain. Just imagine instead of handling a pre pack of white shirts, if you need to handle those 20 shirts individually— this means you need to enter data 20 times at each touch point in the supply chain. Your manual handling will go up 20 times which may increase chances of error. Another advantage of having pre pack is, it reduces the cost of secondary packing. You can pack each of the 20 shirts in a low cost plastic packaging or even without any individual packet, can put in a carton and bring from manufacturer to retailer without any problem. However, if these need to be shipped individually then it will require much costlier packaging than in the earlier case. Thus pre pack increases flow through efficiency in the supply chain and reduces cost. In apparel and footwear industry pre pack is a common practice. This is mainly because of large variety of SKUs in different size/colour/style and having low individual demand per SKU.

Disadvantages of Pre Packing The major disadvantage of pre packing is that it reduces flexibility in supply chain. Whenever a pre pack is sent to a store it may not meet individual store’s exact demand for different sizes. There will be instances when some sizes will be left out without selling and for some there will be stock out. In case the pre packs are delivered from vendor to a retail chain’s warehouse and from there to individual store, then the retailer at times open the pre packs (which were actually ordered from vendor perhaps few months back) and re package them based on latest demand projections and stock positions of store and redistribute them to store. In this way if pre packs need to be opened at any point before they reach store, additional cost and time is incurred. Problems in pre packing occur mainly because of forecast inaccuracy and time difference between ordering and sales. As an example, ordering for garments occur before the season starts and the arrival happens at retailer’s godown months after. By that time the demand pattern may change in the stores and now they have to be allocated to store based on actual demand for SKU. If store demand cannot be fulfilled in terms of pre packs, there are two choices l Open pre packs and ship individual SKU units to store l Ship pre packs and allow for overstocking for certain SKUs at stores Both of these have different cost implications.

Pre Pack Configuration Design This means how you decide what comprises a pre pack i.e. whether pre pack of men’s formal shirt will contain both white and blue or it will be two different types of pre packs of white shirt and blue shirt. In the next level the decision can be if it is only white, then in what percentage small, medium and large shirts will be packed—is it 40: 30: 30 or 50: 25: 25 etc. Typically the decision can be to have different pre pack configurations like one pre pack of men’s white shirt in 40:30:30 combination of large, medium, small sizes, the other pre pack can be in proportion of 25:50:25 sizes and the third one can be of 25:25:50 proportion. So pre pack configuration decision can be broken in two parts: Determining different sizes for pre packs i.e. weight and dimension of carton and determining the composition of each pack.

Pre Pack Optimisation So the challenge of pre packing is to come up with an optimal number of pre pack configurations and determine the composition of each one. For example, the optimal number of configurations for

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all men’s wear for a retailer can be carton sizes of 3 ft ´ 3 ft, 3 ft ´ 4 ft and 3.5 ft ´ 3.5 ft with compositions like 30 : 30 : 40, 25 : 50 : 25 and 30 : 40 : 30 of large, medium and small sizes. Too large a number of configurations may lead to complications in the supply chain and too less a number may lead to greater probability of opening pre packs. A decision also has to be made whether to pack everything in pre packs or handle some individual units as well.

How Software can help in Pre Pack Decision Nowadays software is helping pre pack optimisation. The major bottleneck of manually optimising pre packs is inability to process massive data and inability to address thousands of pack sizes. Retailers are using automated planning solutions with powerful analytics to forecast each store’s future sales and inventory needs by size and economically match pack level supply to optimally meet the need. These tools first determine size demand and then make optimal case pack ordering and allocation recommendations. SAS is one of the leading vendors in pre pack optimisation space having two applications i.e. size profiling and pack optimisation. Size profiling It generates size profiles for each store i.e. looking at past demand data, it first determines for different size, style and colourwise demand patterns, then through store clustering it combines stores which have similar style, colour, size combinations and create a set of optimal size profiles that need to be ordered. Pack optimisation Once size profiles are decided, pack optimization determines optimal quantities of each case pack configuration needed to best meet size level demand forecasts and recommends the profit maximising combination of packing configurations (such as pre packs, case packs and bulk packs) to purchase. These pack level purchase order recommendations can be sent directly to purchasing system.

APPAREL RETAILING IN INDIA Trends in Apparel Retailing in India From franchise to company owned Larger textile manufacturers like Raymond, Arvind Mills, Madura Garments and Zodiac Clothing built retail networks through franchise route in the past to expand as market size was small. Now companies are building their own retail stores to sell its flagship brands. For example, Raymond’s is revamping its own retail chain known as Raymond’s Shops and focusing on readymades. Madura Garments is opening its own stores to sell the company’s flagship brand Peter England. However franchising is still a preferred route and number of brands like Lee, Wrangler, Allen Solly, Nike, Reebok, Zodiac, Wills, and Arrow follow franchise route to have retail presence. New age of fashion is still a niche market Fashion is increasingly playing an important role in apparel retailing in the country. The fashion trends which were just restricted to few large cities some years back is becoming popular in small towns also these days. Unlike Europe, fashion is still a small market in India. In India there is a small population of consumers who can afford to change their wardrobe with changing styles every season and that is the problem to build scale for every fashion retailer. Though readymade garments are becoming popular in India—beyond cities in villages and small towns, custom tailoring is quiet common. One of the reasons for this is the cost of custom tailoring which is very high in Europe is quite affordable in India. Indian ready to wear market is dominated by menswear that has a longer fashion change cycle than womenswear. In India there is a fashion conscious segment but their numbers are too small as yet to provide a good enough

Apparel and Footwear Retailing Supply Chain 329 base for an organised fashion retailer like Zara in Europe. In India while styling of women’s clothing does change frequently, the low cost of custom tailoring allows the consumer to update her wardrobe within her budget. Foreign labels Foreign labels are popular in India and a number of foreign retail brands are active in the country like Levi Strauss, Benetton etc. Typically, global apparel brands operate through franchise but now few of them are setting up their own outlets like Ralph Lauren has set up its own stand-alone stores, showcasing all company’s brands. Every organised retail chains are getting into apparel retailing Almost every retail player in India has apparel retailing section like: l Future group is expanding their Pantaloon stores. l Delhi based Ebony has set up stores in northern India. l Lifestyle, a part of the Dubai based Landmark group now owns several stores across various metro cities. l Bangalore based Raheja owned Shopper’s Stop is planning several outlets in next few years. l Tata’s Westside is expanding in all major cities. l ITC’s Wills Lifestyle have presence in all metros. l Spencer’s is planning to open shops in Tire 2 metros. l Reliance is getting into this business with Reliance Trend stores. l Value retailers like Big Bazaar and Vishal Megamart opened apparel section in all their outlets. l Relatively new entrants like Globus, Hypercity and Tata’s Star India Bazaar are expanding. Brands are mainly present for men’s apparels In menswear India has several key players like Arvind brands, Madura garments, Raymond’s/Park Avenue with key brands like Arrow, Louis Phillippe, Van Hausen, Park Avenue, Allen Solly etc. Different sub segments have leadings brands of Jeans like Levi’s, Lee, Wrangler, Ruf N Tuf. Sportswear has brands like Reebok, Nike, Adidas etc. Kidswear segments have very few national brands like Gini and Jony, Liliput etc. Future Group has a stake in Liliput. Womenswear in India is mainly dominated by organised sectors In India, there is no national brand in womenswear. That is difficult to believe as the market size is close to 18,000 crs. (assuming 45 cr of woman population in the country, and assuming purchase of Rs 400 per head per year, this estimate is on lower side). Due to higher percentage of working women population these days who can afford branded clothing and look forward to dress smart, western clothing segment of womenswear is growing and brands like Allen Solly is actively looking at this segment. Reliance plans to introduce brands in these segments. Raymond’s has made a foray into the womenswear segment with its flagship brand Park Avenue and casualwear label Color Plus. However till now there is only a handful of labels available in this segment and most of them are brand extensions. Denim brands such as Lee, Wrangler and Levi’s are also tapping this growing segment. Raymond’s is opening separate stores for Park Avenue’s womenswear range. Westside rolled out womenswear store in Delhi. Apparel retailing getting popular in rural India Branded apparels are getting popular even in rural India. In 2004, ITC’s Chaupal Sagar became the first hypermarket to hit rural Madhya Pradesh. ITC has come up with a special low cost apparel range called Springfield and has made its debut at this mall. Selling through multiple formats Apparel retailing can occur through multiple formats, for example an Arrow shirt would be retailed through stores like Shopper’s stop, Pantaloon etc. and also through the company’s own retail outlets.

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Case in Point: From Apparel Manufacturing to Retailing—Madura Garments Madura Garments is moving from being a wholesale garment manufacturer to a retail led company through the launch of Peter England People, the apparel and accessories store. From manufacturing and marketing its four famous labels—Louis Phillippe, Van Heusen, Allen Solly and Peter England—the company is now planning to become a front-end retail player. This disintermediation is happening in order to interface directly with the consumer. Peter England People (PEP) is just one of the several initiatives that Madura is taking to get closer to consumers. Already, close to 40 per cent of the sales happen through the company’s direct retail (company owned or company operated) network. In future, the company’s retail operations will deliver 70–80 per cent of all branded apparel sold by the company. Three years ago, only 10 per cent of Madura’s brands were sold through the direct retail channel, while the rest came from channel partners (multi-branded outlets, department stores, franchisees and others). Already, the company directly retails apparel through 4.5 lakh square feet while partners account for only three lakh square feet. Controlling the retail space is just one part. Even the product mix is changing. From primarily offering formal wear, Madura is providing end-to-end wardrobe solutions, including accessories to complement and strengthen its core apparel offering. It will also enhance its presence in women’s wear where it already has extended the Allen Solly and Van Heusen brands, and look at the youth segment more aggressively. It is entering the children’s segment, too, with Allen Solly dabbling with a kids wear range. In future the company will begin retailing luxury brands complete with salons, made-to-measure apparel and so on, aspiring to be the Indian answer to high-end retail chains such as Harvey Nichols, Barneys and Lane Crawford. But why defocus on the traditional apparel retailing channels and create one of its own? There are solid reasons why the company is planning to control the front end of the chain 1. The first reason is the humongous margins that organised retail chains expect from manufacturers. Margins in some cases can be as high as 50 per cent. Large volume brands especially could find this demand too steep, as they play the low margin high volume game. That probably explains why brands like Peter England do not find shelf space in organised retail formats such as Westside, Shopper’s Stop or Lifestyle. That is because these outlets have their private labels. Turn the margin story the other way, and it reveals a huge business opportunity. If retailers are demanding huge margins and mostly getting away with it, there is a huge incentive for companies to get into retailing themselves. Moreover, direct retail helps companies in getting an additional 20 percentage points in margins compared with retailing through partners. 2. Direct retail also helps companies in overcoming the inherent disadvantages of organised retail chains. A brand such as Allen Solly or Van Heusen, for instance, would get probably 200–500 square feet of display space in an organised format retail store like Lifestyle or Shopper’s Stop. In comparison, an Allen Solly exclusive outlet could be around 2,500 square feet and stock the entire range up to 1,000 stock keeping units. 3. Own store also provides better brand experience. For instance, an Allen Solly women’s wear could be in a different level than men’s wear in a large retail chain. When the entire chain is controlled by the company itself, the destiny of every SKU is controlled and thus delivering a superior experience that translates into value. 4. The final argument in favour of direct retailing relates to customer feedback. In a retail outlet, the consumer votes with cash. Feedback is also more direct compared to the feedback coming from partners that could be filtered. Everyday feedback that comes from outlets helps in a deeper understanding of consumer behaviour that results in better product planning and faster turnaround of inventory. Source: www.financialexpress.com (accessed on 18th September 2007); An article “Front End Game” by Prasad Sangameshwaran in www.business-standard.com (accessed on 27th May 2008)

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Emergence of Value Fashion Retailing Company owned factory outlets are a popular format in India for retailing branded apparel. However recently the leading retail groups in the country are also getting into it i.e. selling branded fashion wear at discounted prices throughout the year. Industry analysts believe that Rs 200–Rs 800 price bracket is the largest segment of apparel and footwear retailing and growing at healthy rate. That is more the reason that every organised retail players and apparel manufacturers are getting into it through specialised formats, factory outlets etc.

Case in Point Future Group’s Brand Factory Tracking the emerging opportunities in value fashion retailing, Future group opened ‘Brand Factory’, positioned as a mega discount store chain offering fashion brands at factory prices. The size of Brand Factory stores will fall between 60,000 and 1 lakh sq ft each selling branded wear at factory prices. This will be part of Pantaloon Retail and operate as an SBU and will store men’s wear, women’s wear, sportswear, kids’ wear, footwear, mobiles, cosmetics, accessories, luggage for both men and women etc. Most of the brands that are currently present in Pantaloon’s ‘Central’ malls are going to be part of the new venture offering fashion brands at low prices on all 365 days of the year, 120 best brands at 20 percent–50 percent discount. Brand Factory brings together well known Indian and International brands. Some of the Indian and international brands that will be on offer are Arrow, Esprit, Van Heusen, Louis Philippe, Levis, Titan, Lee, Pepe Jeans, Wrangler, Lee Cooper, Nike, Adidas, Biba, Liberty, Red Tape, Nike, Reebok, Adidas, Revlon, Maybelline and many more. Brand Factory will raise the bar of expectation and experience when it comes to ‘Brand + Bargain shopping’ targeting the huge middle class. Source: Economic Times, Hyderabad, 30th Nov 2006

Reliance Trends Reliance Retail marked its foray into the affordable fashion apparel format with Reliance Trends in Gurgaon. The company plans to set up hundred such stores over the next three years with focus on tier II cities. Reliance Trends, besides housing a variety of international brands such as Wrangler, Reebok and Lee, will also have a number of indigenous brands John Players, Peter England, Indigo Nation and designer labels such as Anita Dongre’s AND. Each of the new apparel stores will stock about 1,00,000 pieces of garments of 100 well known national brands. Reliance has also employed 30 odd Indian and international designers to create garments under 25 odd private labels. Keeping with Reliance’s commitment towards private labels, almost 30 per cent of Trends’ collection will comprise private labels such as Sparsh (Indian women wear), Networks (formal office wear), Netplay (casual collection for an evolving workplace) and Panda (kidswear). Addressing requirements of all segments of customers, namely, men, women, and children Reliance ‘Trends’ will offer clothes at all price points beginning from Rs. 199. Source: The Hindu, Business Line, 12 Oct 2007, www.thehindubusinessline.com

Arvind’s Megamart Arvind Mills has stepped up expansion of its Megamart stores. Megamart, initially started off as a factory outlet of Arvind’s apparel brands, has now transformed itself into a distinct retail asset offering even outside brands at factory prices.

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Sportswear Retailing is Picking up in India Sportswear is not necessarily something worn while playing but anything more casual in approach and inspired by active sports. Today, this market is fragmented into many categories like ethnic/ festive wear, careerwear, Friday dressing, jeanswear, loungewear, casual or street wear and club/party wear etc. Today, sportswear companies are not interested only in making sports shoes, (which might get used for a 45 minute game and then kept in locker) but more interested in sportswear line that may be used all day. Sportswear takes inspiration from active sports like rugby t-shirts that takes inspiration from the spirit of the game and is appealing to anyone who wants to dress up smartly and in some way identifies with the sport. Globally, with health consciousness getting embedded in our mind and consumers are more well travelled, sports-inspired clothing, which are stylish but comfortable is gaining popularity. In Europe, sportswear clothing has bloomed majorly because of the affluent aging population which is youthful in spirit, leads an active lifestyle and likes to reflect their spirit by dressing up in smart-casuals when not at work. Today, international brands have adopted a more lifestyle led positioning for sportswear to appeal to a wider audience. Typical garments include shorts, tracksuits, t-shirts, polo shirts, underwear etc. There is much happening in sportswear retailing in India in recent times. l In India Allen Solly, brought in the concept of Friday dressing i.e. relaxed dressing. l There are other sports inspired casualwear brands in India like Proline, North Star, USI etc. l During the last decade global sportswear brands such as Reebok, Nike and Adidas entered India supported by the growth of sports telecasts and sponsorships for cricket, soccer, basketball, tennis etc. l In 2006, Nike got the rights to become the official kit sponsor for the Indian cricket team for five years and its famous ad ‘Just Do It’ during the Champions Trophy made it a household name. Nike is in India since June 2004 and has good market share in India’s sportswear market through its footwear, apparel and equipment products and is known for its range of footwear products inspired by sport. l Adidas is a major German sports apparel manufacturer and is the second largest sportswear manufacturer in the world. In 2006, Adidas acquired Reebok globally and its presence in India is 11 years old. It has approximately 235 exclusive retail showrooms across the country. l Reebok started its operations in India in 1995 and has a pan-India presence through 500 standalone stores and is the largest sportswear brand in India. A good percent of its turnover is attributed to apparel clothing range. Reebok started a programme called Reebok University Programme, aimed at training women for fitness, most of whom later ventured out as either gym trainers or personal trainers and are the real brand ambassadors for the company. l ITC’s Wills Lifestyle’s label, Wills Sport, is positioned as a sportswear brand, a relaxed wear line. l Lifestyle maintains a dedicated department for its sportswear category and keeps brands like Kappa, Nike, Adidas etc. l Nautica, an American sportswear brand entered India in May 2006 and currently has some stores along with five shop-in-shops through Central, which is a lifestyle store of Pantaloon, and Shopper’s Stop.

APPAREL RETAIL SUPPLY CHAIN INNOVATIONS 1. Postponement or Delayed Differentiation—Way to Handle Product Proliferation Product postponement is a common strategy in apparel industry as there are thousands of varieties of finished products of different colour, style and size can be produced from few raw materials (say

Apparel and Footwear Retailing Supply Chain 333 raw fabric) with different types of finishing operations. Apparel manufacturers prefer to differ the final processing as late as possible and do it close to the season when there is more clear visibility of actual orders of different size, style and finish requirements. This gives them the advantage of economy of scale through aggregation of demand across multiple SKUs i.e. upto raw fabric production everything can be done in bulk in large quantity (provides economy of scale). After that, all styles and sizes having similar colour can go for dyeing together (provides economy of scale again). The final stitching and knitting operation can be based on particular style and size requirement. In apparel manufacturing stage, delayed differentiation has considerable impact in trimming down number of batches to enhance operational performance and responsiveness.

Case in Point: Reebok Reebok is a good example of using the concept of product differentiation to bring supply chain efficiency. Let us see how.

The Problem Reebok is a leading sportswear retailer. The major challenge in sportswear retailing is the demand for a particular T-shirt embedded with the team name and logo can suddenly increase just after the team won the game. It is never known before the game as to which team will win and the retailer can not keep the T-shirts ready. In the same way the T-shirt with the star player’s name in that day’s game i.e. man of the match can be of very high demand just after the game is completed. Again something not known to the retailer before the game. The demand for a player specific jersey is inherently more volatile than for a given team. Meeting such customer requirements within a short period of time is a major challenge in the sporting goods industry. Reebok deals with number of sportswear like jackets, shirts, jerseys, and hats customised with team logos and players’ numbers emblazoned on the front. Sales of t-shirts and jerseys are not predictable because Reebok does not know which teams will be ‘hot’ at the beginning of the season. On top of this, different customers may need jerseys of different size and Reebok does not know how many XL, L or XXL they will need before the season. The different choices of team name, player name, colour scheme, and size make it extremely difficult to predict demand of an individual item during the pre-season.

The Way Reebok Handled it Reebok used the concept of supply chain postponement to handle this and decided that it is better to wait until there is certainty about the outcome of a game before producing apparel with the winning team’s name on it. As a result they keep white or blank shirts on hand ready for printing. They use offshore contract manufacturers for producing blank jerseys and keep these ready. The final finishing portion i.e. embedding the name of the team or the player’s name or both is done at their own manufacturing unit in US. Though the cost of this final finishing operation may be higher in home country, they prefer to do it as they can do it very fast i.e. there is no loss of sales and they do it after the exact demand of the winning team or best player’s name is known and there is no chance of products remained unsold. If they were off shoring this operation, though the cost would have been less, they will get the product after several weeks and that may result in lost sales i.e. they would have missed out in the increase in sales generated within two weeks after a big win. Figure 12.4 explains Reebok’s supply chain. It is important to understand that all of Reebok’s products are not customised items i.e. there are many stable items i.e. finished apparel that is produced to a forecast much earlier in the

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season. The difference in the lead time for both of these items is significant. Retailers expect lead time to be 3–12 weeks for the stable items and as little as one week for the hot customised items. Reebok segmented its product categories accordingly i.e. l Stable items for which customers are ready to wait like Blank jerseys, manufacturing is totally outsourced/offshore to India l Customised items which need quick turnaround time: For this Reebok outsourced part of its operation and do the final finishing themselves. Reebok get the blank jerseys in the US and do screen printing and embroidering. For this Reebok had invested in big finishing facility in US. Reebok’s supply chain strategy is working on four simple principles: 1. Use offshore contract manufacturers for blank jersey production. Also, outsource manufacturing of jackets, ties and shirts which are standard and do not have a logo of team or player. 2. Get these products in U.S. and sell some of these, as there always is a stable demand for standard items. 3. Keep aside a percentage of these items for customisation. 4. Do the final finishing operation of the products needing customization in the U.S. [for example, winning team’s name or particular player’s name on it]. Do it fast so that it can reach store within weeks when the demand for them is very high. Reebok is a good example of supply chain design based on customer’s willingness to wait for different types of items. Manufacturing the blank jerseys requires low-skilled labour that can be outsourced so Reebok had offshore it. However for final finishing for some particular types of jerseys, they do it in house to keep high service level. Thus they had taken advantage of both lower labour costs for the production of blank jerseys and optimised service levels by doing final assembly in US. Source: Paper submitted by Susan M. Rietze, B. S. Operations Research to Massachusetts Institute of Technology for Master of Science and Transportation Degree, June 2006; Paper “Critical Fractile Approach for a class of partial postponement problems” by Qi Fu and Chung Ye Lee of Department of Industrial Engg and Logistics Management, HKUST, 26th August 2008

Case in Point: Benetton Benetton works on the simple principle that value should be added in the supply chain, as late as possible, as per customer needs. For this Benetton uses an innovative manufacturing and supply chain strategy based on postponement. Benetton does not dye the yarn or cloth before making certain sweaters, but the entire sweater when knowing the colour demand by the customer. After initial shipments of dyed sweaters are shipped to stores, the company receives information about the colours they are selling. Next they dye the remainder of their sweaters to more accurately meet the emerging demand pattern for different colours. Value should be added in the supply chain as late as possible as per customer needs. This process provides cost savings by delaying the addition of expensive dyes, increase sales by having right product against a demand.

2. Managing High Volume and High Variety This is a typical problem for apparel retailer where in each season there are only few styles which sells in large volumes and most others sell in small volumes. For example, if each fashion season generally began with ten alternative colours of which only two or three recorded high demand. The retailer can not neglect the latter as that segment gives the retailer substantial profit. Benetton a leading Italian retailer has managed it well through a dual approach to manage this supply chain issue. The case below describes this in detail.

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Case in Point: Benetton’s Dual Supply Chain Italy based clothing company Benetton adopted the ‘Dual Supply Chain’ system. These two systems are known as ‘Speculation’ and ‘Postponement’. Retailers selling Benetton products need to order Benetton’s agents as much as eight months in advance of the season i.e. they need to ‘Speculate’ the demand. This is a bit of speculation as in most cases it is difficult to get a feel of the market before eight months. Agents aggregate retail orders and put orders on Benetton manufacturing and this allows Benetton factories operate on a make to order basis. However the retailers carry a significant forecasting risk at their end. To help them to commit eight months in advance of the season, Benetton gives them the full liberty to ‘postpone’ actual colour choice upto much later i.e. upto two to three weeks before the actual delivery. In some cases they can even finalise sizes one month before delivery i.e. upto the point Benetton starts sewing operation in their factory. Figure 12.4 explains what Benetton does differently from other retailers.

Fig. 12.4 Benetton—Supply Chain Postponement On demand side, Benetton employ agents who oversee a network of franchised, small retail outlets and their agents have key responsibility for acting as intermediaries between manufacturing and stores in their region. On supply side, Benetton employs a core contractor network of approximately 220 employee owned contractors, and a wider network of subcontractors. Benetton’s own manufacturing focuses on high volume, low variety, high capital intensive process, whereas contractor’s operations are focused on a wider range, lower volume and lower capital intensity processes—typically the labour intensive finishing processes of apparel making that is generally postponed and as per the actual customer order. Benetton’s strategy is to adopt large scale operations for centralised activities and small scale operations to provide local focus and provide flexibility in the network. While technically sophisticated parts of the garment manufacturing process are retained in house, labour intensive parts are outsourced. Source: Camuffo A. Romano, P. and Vinelli A. (2001): Back to the future: Benetton transforms its Global network: Slogan management review: 43; Signorelli S. and Heskett J. L. (A): Harvard Business School. Case Study No. 9-685-014.

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3. Fast Response In this chapter we discussed earlier that apparel retailing is about speed and bringing the new fashion in the store earlier than the competitor. It ensures increased sales and less markdown at the end of the season. Now we discuss a case study of a leading Spanish retailer who had done it successfully, designed the whole supply chain around speed and fast response. In the process they had not adopted the usual strategy of outsourcing which typically almost every European apparel retailer follows. A part of this case is discussed earlier when we talked about Zara’s product development process in Product life cycle management chapter i.e. how Zara brings products quickly to market. In this chapter we discuss about Zara’s supply chain design elements that help them to response fast.

Case in Point: Zara Zara, is a leading retailer based at Spain and have stores around the world. Zara is known globally for its fast response strategy i.e. it can complete from conceptualisation to develop and delivery to stores of a new garment line within two to three weeks. In this process Zara has one single point agenda driving the supply chain i.e. reduce lead time. Zara does it in multiple ways.

A. Speedy Product Development Zara can move from identifying a trend to have clothes in its stores within 30 days whereas most other retailers take six to nine months for this. This is because Zara can quickly identify winning fashion trends and in most cases its product developments starts based on an e mail or phone call received from the stores i.e. Zara does not forecast but actually responds to an actual need. In Product lifecycle management chapter we discussed Zara’s product development process in detail. However there are other supply chain design elements where Zara excels to make the fast response successful.

B. Processing as and when Required as Capacity and Raw Material is Available on Demand Unlike most European retailers, who outsource manufacturing to Asian countries, Zara’s production is mostly concentrated in and around Spain close to its various other business functions—this helps in coordination, closer control, taking joint decisions quickly and great flexibility as production capacity is available on demand. As in Europe labour is costly, Zara mainly does the capital intensive processes like fabric dyeing and processing, cutting and garment finishing etc., of its own while labour intensive process of garment stitching is subcontracted. Zara buys undyed fabric in bulk from the Far East in advance as per the forecast and this gives them the flexibility to colour or print the fabric to the desired effect, as and when it is needed. As it controls all processing capacity, Zara virtually has complete control on man, machine and materials—three ingredients of manufacturing.

C. Speedy Distribution Zara has its own railway track on which the goods move to the distribution centre. Its distribution facility functions with minimal human intervention and optical reading devices sort out and distribute thousands of clothing an hour i.e. there is no human sorting.

D. Using Information Technology to Manage Supply Chain Critical areas where Zara uses information technology to increase speed are as follows:

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l

Getting information on what matters to consumers Sales trend information from store flows daily and is stored in a central database at H.O. This information is used to create new lines, modify existing products, deciding price point of the new garment etc. Getting product information Zara stores all the product information and specifications with common definitions, allowing it to quickly and accurately prepare designs and to come up with manufacturing instructions. Inventory management Manage thousands of fabric and trim specifications, design specifications as well as their physical inventory.

Source: An article by Devangshu Dutta, CEO of Third Eyesight (www.3isite.com)

FOOTWEAR RETAILING Indian Footwear Market Footwear is a large retail category in India and about 37.8 percent of footwear retail is the organised segment, which qualifies it as the second most organised retail category in India, next only to watches. The footwear market can be segmented into a number of categories: Premium/High end, medium priced, low priced and plastic slippers/leather strapped ones. Again, organised footwear retail has a number of segments like sports footwear, semi formal/casual footwear, formalwear and utility footwear. In terms of number of units sold, casual comprises more than 60 percent of the organised branded footwear market in India, followed by mass/economy range at about 20 percent and sports/active wear and premium non leather footwear at 7–10 percent each. In terms of volume breakup between men, ladies and kids, men comprises around 58 percent, children/kids around 29 percent and ladies around 13 percent. The volume in organised ladies footwear segment remains low as nearly 80–90 percent purchases happen in the unorganised market largely due to considerations of durability. Comfort is less important than colours and designs that go with dress. The children’s segment also accounts for a significant share due to the increased emphasis on sporty looks. Indian footwear segment has number of players including both homegrown and international brands.

Major Drivers of Indian Footwear Retail Supply Chain Change in style Modern lifestyle demands footwear with comfort at reasonable price. This is the main reason why branded and organised segments are becoming popular in the market. Almost all of the world’s top active wear and sportswear brands are entering India. Consumer preferences are shifting towards casual and younger styles, international trends and lifestyle brands especially for the working population. With the use of latest information technologies like Computer Aided Design (CAD)—Computer Aided Manufacturing (CAM), manufacturers today can offer increased product variety. Opportunities for global sourcing and branded retailing India is the second largest manufacturer of footwear in the world after China, however per capita ownership is just 1.1 pairs in India (i.e. around 1.1 billion pairs per annum), compared to five pairs per annum in Europe. India’s share of the global footwear trade is less than three percent. Globally there is a migration in installed capacities from developed to developing countries on account of high wages and environmental issues. Recent reduction in rate of excise duty on footwear helped footwear manufacturers address competition from the unorganised sector and imports. Globally, the trend towards sourcing to countries with low cost production continues. The imposition of an anti dumping duty by the European Union on imports of certain footwear categories from China and Vietnam created an opportunity for

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Indian exporters. Advantage for Indian footwear industry is large raw material base, large installed capacity of production, strong domestic market, technology and design capability. India exports about 42 million pairs. Indian footwear industry has witnessed a growth with the advent of new retail brands and formats in the Indian markets. India is especially strong in the men’s footwear segment though the world’s major production is in ladies footwear. In recent years the market has seen entry of a host of new domestic and foreign brands like Drish, Lotto, Lotus Bawa, Now, Oakridge, Royal Elastic, Teva, Vans etc. and fashionable brands like Stryde, Red Tape and MNC brands like Allen Cooper, Franco Leone, Gucci, Lee Cooper etc. They are further developing the market by creating new segments. However as the industry is labour intensive and concentrated in the small and cottage industry sectors, a good part always remains unbranded. In India, focus on footwear retailing is mainly on men’s shoes, though there exists substantial opportunities in the exclusive ladies and kids footwear segment. With the Indian woman becoming more brand conscious, more and more internationally renowned players are expected to enter the Indian market. The London based Carlton group became the first overseas player to enter the Indian women’s footwear market. Value retailing In recent times, numerous factory outlets for shoes offering branded products at very affordable prices are coming up. These are showing up in cities attracting consumers to discounted prices. One of the good examples of such outlets is Hiranandani owned Loft store which is in Mumbai, spread over 18,000 sq. ft and houses a collection of over 90 brands under one roof. The Loft has achieved a record 2,000 customer walk-ins per day on an average, the highest in the country for a footwear store. Value added services Few footwear retailers started offering value added services in the store like in-house cobbler service, pedicure centre etc. Competition from non-specialist retailers In the near future mainstream footwear retailers in India like Bata, Liberty, Nike, Woodland etc., will face increasing competition from non-specialist retailers like apparel retailers diversifying into footwear. Discount hypermarkets and retailers such as Big Bazaar and Vishal Mega Mart may come up with private labels. Mainstream retailers need to invest in their brands and product differentiation in order to stay competitive. Innovative distribution strategies In India, establishing a distribution network across the country is challenging. Traditional players like Bata and Liberty have established a stranglehold in the industry primarily due to their massive distribution capabilities both through exclusive showrooms as well as multi-brand outlets. Tie-ups of international players with local players will help them to ride on the existing distribution network and give visibility to their brands. For example, Reebok India tied up with Bata in 2001 for sale of its Reebok and Rockport footwear in Bata outlets. Innovative products SreeLeathers, the leading footwear retailing company is planning to have a separate shoe segment designed for diabetic patients and pregnant women at its new outlet. These segments have medicated shoes that will massage pressure points to improve blood circulation. In addition, there will be a round-the-clock orthopaedic doctor to examine people’s feet and recommend shoes that would be the best fit for them. The doctor will also advise customers with orthopaedic ailments. Leading retailers are introducing private labels A good example of this is Reliance Retail and its footwear format Reliance Footprint. Footprint has plans for several specialised footwear retail formats including a multi-brand international footwear format only with international brands. Footprint has a 20:80 ratio of private label footwear to other known domestic and international brands. The company has created footwear private labels such as Viviana, Tosca, Mancini and Monza for different occasions like casual, formal, party, sports etc. The company sources 90 per cent of the private labels directly from manufacturers.

Apparel and Footwear Retailing Supply Chain 339 EVA is becoming popular in non-leather categories Non-leather footwear i.e. chappals (Hawai and Eva) are cheap and one of the largest selling segment in rural areas. Traditionally, rubber based hawai chappals make most of this category in terms of volume. However recently EVA injected products are getting popular in this segment as these are light in weight, durable, has cosmetic appeal compared to traditional Hawai chappal and there is marginal cost difference with rubber based products. Most footwear retailers are opting for manufacturing outsourcing SreeLeathers, the leading footwear retailer of Eastern India has several shops (mostly franchisee outlets) in Eastern India. SreeLeathers also boasts the country’s largest footwear outlet at Connaught Place in New Delhi, a 20,000 sq ft showroom located in three floors. The company believes that it is possible to create a worthy global brand without any manufacturing activity, as long as the quality is maintained at all stages. SreeLeathers follows a business model based on 100 per cent outsourcing. Leading retailers are collaborating with footwear manufacturers Liberty-Pantaloon footwear venture is a good example of this feature. Liberty Shoes is planning to launch two new branded retail chains to cater to the mass and premium markets as part of its joint venture with Pantaloon Retail. This company registered under the name Foot Mart Retail Ltd will cater to two different segments of the footwear industry. One set of stores would cater to the masses with value-for-money footwear products while the other chain of stores would comprise premium footwear, targeting the fashion conscious consumers. Apart from shoes there would be accessories such as handbags, foot care and shoe care products. By combining the retail expertise of Pantaloon with Liberty’s design, sourcing and merchandising expertise, the new company plans to launch several standalone stores and is targeting both metros and mini-metros. Figure 12.5 explains different supply chain challenges a footwear retailer faces.

Fig. 12.5

Supply Chain Challenges for a Footwear Retailer

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Leading Footwear retailers in India: l Bata l Liberty l Khadim’s (mostly in East and South of India) l Woodlands l Metro Other players are Regal shoes, Sree Leathers (mainly in eastern India), Elite, Loft etc. Leading Sportswear retailers l Reebok India Ltd l Nike l Adidas l Action l Planet Sports

Manufacturing Process for Footwear The manufacturing of footwear consists of conceptualisation and designing, procuring raw material, finalisation of product and design, manufacturing footwear either internally or outsourcing, finishing and packaging and storing in warehouse. The overall manufacturing process flows is shown in Figure 12.6.

MANAGING FOOTWEAR RETAILING SUPPLY CHAIN EFFICIENTLY: CASE STUDY: KHADIM Khadim is among the top three footwear retailers in India (on the basis of the number of stores) and its flagship brand ‘Khadim’s’ is considered as the most preferred footwear brand in Eastern India (IMRB survey). They have over 260 retail outlets (including owned stores and exclusive dealers) across 22 Indian states and offer a wide range of footwear for the entire family, at various price points, catering to the different income groups. Khadim’s journey in the footwear sector began in the year 1965 when its chairman Mr. S. P. Roy Burman took over K. M. Khadim and Co., a firm then owned by Mr. K. M. Khadim. Thereafter, the business of Khadim’s grew all across India under the leadership of Mr. Roy Burman. Khadim always followed the concept of value retail in India i.e. to sell quality goods at reasonable prices by either manufacturing of its own or directly procuring from manufacturers (primarily from small and medium size vendors and manufacturers). Khadim is into footwear retail since 1993. Before that it was into wholesaling and distribution of footwear. Currently it is engaged in manufacturing, wholesaling and retailing of footwear. On an average they have 4,000 SKUs at any point of time. Khadim is viewed as a brand of quality products at affordable prices. They use a mix of outsourced product and manufactured products.

Products Khadim provides a wide range of footwear for every age group and for all segments of the society. In order to cater to the varied market demands, Khadim has a wide range of designs to match every requirement i.e. shoes for every age and mood a like: l Shoes

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l l l l l l l l

Gents Ladies Kids Hawai Eva Wash and wear Sports Accessories—Ladies handbag, Wallet, Leather bag, Belt (Contd.)

Fig. 12.6

Shoe Manufacturing Process

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Distribution Channels Khadim has a pan India retail presence marked by owned outlets, exclusive dealers supported by other dealers spread across all states. Khadim’s footwear products are sold through the following channels: l Owned Retail Outlets Khadim has its own footwear retail stores across the country. All these stores maintain the same décor and interiors so that the customers have the same feel irrespective of the store they are visiting. The kind of stock depends on the location and the profile of the people in the particular location. l Exclusive Dealers There are dedicated exclusive dealer outlets spread throughout the country. An exclusive dealer procures its entire product requirement from Khadim and sells the same at the company’s M.R.P. Such outlets are in the name of ‘Khadims’ and are identical in terms of its look and feel as any of its owned outlets. The exclusivity remains in the fact that these dealers have contractual obligation to sell exclusively Khadim’s products from the premises to which the contract relates and also to comply with the terms and conditions and policies of the company. Under the exclusive dealership agreements, the dealers operate the stores. The expenditure for establishing the stores and holding the inventory is incurred by the dealers. l Dealers Like exclusive dealers, these stores also deal mainly in Khadim’s footwear. Such dealers procure their product requirements from Khadim directly. l Multi-brand Dealers These stores sell footwear of various brands and makes along with Khadim products. l Distributors Distributors are an integral part of Khadim’s supply chain. Khadim directly supplies to many exclusive dealers and other dealers. Distributors provide Khadim footwear to dealers and multi-brand stores at places where Khadim do not find it feasible to set up our their own distribution channels due to factors like low demand. However, these distributors do not supply directly to customers through stores or outlets. l Industrial/Institutional Large industries and private or public institutions who need to buy footwear for their workers can approach Khadim directly for their requirement Logistics and Distribution Khadim’s possesses about 40,000 sq. ft. of area of footwear manufacturing facility across two locations of the Kasba Industrial Estate in Kolkata with a consolidated capacity to produce 15,000 pairs of footwear in a day. The company’s manufacturing capacity is reinforced by an outsourcing arrangement with a number of dedicated vendors who are located within close proximity to its principal manufacturing facilities. Khadim’s distribution and logistics network comprises of three distribution centres i.e. Kolkata, Delhi and Chennai comprising of seven warehouses, five in Kolkata and one each in Delhi and Chennai and has a central distribution centre around Kolkata to cater to regional distribution centres and stores. This well networked distribution and logistics set up allows Khadim to fulfill the store requisition within shortest period of time from generation and receipt of order and minimise transportation costs. This also reduces the requirement of a dedicated storage space at every store. Khadim also intend to increase footwear brand and product visibility and sales and distribution network through strategic stores and outlets that enable them to benefit from an increased store density through a lower capital outlay. These smaller outlets enable them to offer their product aimed at the customer demography of the specific outlet and enable frequent renewal of inventory. Khadim continues to develop their existing network of independent footwear outlets in various cities through the appointment of additional distributors for various cities. Khadim has built a system to monitor the inventory position on a real time basis at each store, under which a stock requisition or delivery order is generated when pre-determined stock or re-order levels are reached. The re order levels for stores are determined based on factors such as display levels, lead time for replenishment and average daily sales. The re order levels are reviewed on

Apparel and Footwear Retailing Supply Chain 343 continuous basis to factor in variances in demand based on seasons, trends and promotional schemes. Stores that will be serviced by each distribution centre are clearly identified. The reorder levels for distribution centers are ascertained on the basis of factors like average daily sales of all the stores services, lead time for replenishment and buffer stock, which caters to both the existing and proposed stores to be fed. The distribution centres and stores are connected through companywide virtual network connection through broadband which helps to efficiently manage the network of stores and distribution centres throughout the country. The services of logistic solution providers is used including low cost transport service providers in order to deliver products on time to our stores and optimise transportation costs. Distribution centres operations have been streamlined through the standardisation of racking system, layouts and implementation of automatic replenishment system. As a measure of optimum utilisation of space, Khadim has adopted an efficient racking system by deploying relatively higher racks to maximise the space available in a store. The upper slabs of a rack are utilised for storage and the lower ones for display. This helps in eliminating the need of dedicated storage space in most of the stores. Managing 4,000 plus SKUs moving seamlessly across all states is a complex supply chain to be managed. Khadim had engaged renowned logistic management companies like GATI and AFL for supply of merchandise to the sales/storage points including its retail stores on a just-in-time basis. Procurement Footwear industry is highly driven by changing fashion and design. To meet these challenges, Khadim uses a business model where procurement and outsourcing plays a very crucial role. A substantial part of footwear is procured from various vendors located mainly at Kolkata and Agra. Khadim has an outsourcing arrangement with more than 100 dedicated vendors. These vendors supply footwear as per Khadim’s requirements of style, quality and material. Recently Khadim has also started sourcing from low cost countries like China. Khadim’s own manufactured footwear constitutes only 20 percent of our total footwear sale and the balance is sourced from dedicated vendors. Improved vendor management and negotiation also resulted in favourable procurement cost resulting in the reduction of raw materials as a percentage to sales. A major concern area for procurement for all footwear manufacturers is that a major portion of raw material for footwear is petroleum derivatives, which are prone to price fluctuations due to volatility in international crude oil prices. Quality Control Quality Control plays an important role in footwear business as a substantial part of the product is outsourced. A team of professionals is engaged in benchmarking procurement and outsourcing plans and in the process has brought in certain strategic modifications in the areas of vendor selection, standardisation of size and fittings, introducing unique identification code for better control and strengthening of supply back up. All manufacturing facilities has been accredited with ‘ISO 9001:2000’ management system certificate from RWTUV Systems GmbH for manufacture and supply of PVC, leather and synthetic footwear. For in house products, there are quality check points at various stages in the manufacturing process starting from the raw material feed points. Similar policies are followed in respect of the outsourced products at the vendor levels. The finished products are also subjected to strict quality and durability checks before they are despatched to the stores. For EVA products, pure granules are used to maintain the quality of finished products. About 85 percent of the footwear sold is outsourced from dedicated vendors, who manufacture footwear as per specified quality standards prescribed by it. Design and Technical Competency Product Development and Merchandising (PDM) plays a very vital role in footwear business. The fast changing horizon of style and design has made PDM a way of life for Khadim. In order to stay ahead of competitors in product range and value proposition, many new initiatives have been taken by Khadim: l The creation of a specialised design team that matches prevailing fashion trends with product functionality.

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A unique outsourcing model that makes it possible to translate concepts into successful products in the shortest time. l An ongoing collection of feedback from channel partners on evolving consumer preferences leading to relevant product evolution. l An ongoing permutation of various styles, material, sizes and textures resulting in the most aesthetic combination. l An ongoing customisation of geographic preferences into designs. Retail business requires efficient information technology systems for control over the functioning of various stores including stock management, pricing and promotion, replenishment, sales, quality control and financial accounting. Currently Khadim is in the process of implementation of ERP applications for this activity. Source: Khadim IPO prospectus l

Conclusion In this section we discussed the drivers of apparel and footwear retailing supply chain. Unlike food and grocery supply chain the drivers here are response time, bringing new innovations in terms of colour, design or style quickly in the market and effective controlling of outsourced vendors, as in most cases manufacturing is outsourced. This sector is important from another perspective as India is a major sourcing hub for global retailers for apparel and footwear products for reasons like cheap labour, having abundant supply of raw materials, capability of bringing design innovations etc. Private labels are very common here and some segments of this sector like women wear is totally dominated by private labels. While the Zara case study was a good example of how responsive supply chain can be designed without any outsourcing, the Reebok case study explained another important concept of this supply chain—try to postpone the final part of value addition in products to the extent possible—if possible do it only when you have a confirmed order. Benetton was a good example of managing a dual supply chain.

Review Questions 1. Explain the apparel supply chain processes. 2. What are the characteristics and challenges of apparel supply chain? 3. Explain the concept of pre pack planning. Why is it required? What are the advantages and disadvantages of the process? 4. What are the typical trends of apparel retailing in India? 5. Why apparel manufacturers are getting into retailing business? 6. Name some of the leading apparel brands and apparel retailers in the country. 7. Explain the concept of Postponement with the Reebok example. 8. Explain the concept of fast response? What steps Zara had taken to make its supply chain responsive? 9. Explain the concept of dual supply chain. Why Benetton had taken this approach? 10. What are the supply chain drivers of footwear retailing in India?

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Assignments A. Study two apparel retailers. Understand the supply chain key performance indicators they monitor on daily basis and drivers of their supply chain. Study their strategies for assortment, pricing and private labels. B. Study the supply chain of two leading footwear retailers. Study their strategy of private labels, outsourcing and distribution.

[CHAPTER]

LEARNING OBJECTIVES

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In this chapter we will explain the following concepts: 1. 2. 3. 4. 5. 6. 7. 8.

Consumer Electronics Retailing—Understanding the Segment Consumer Electronics Retailing Supply Chain Characteristic Jewellery Retailing—Supply Chain Characteristics Home Furnishing Retailing Health and Beauty Retailing Pharma Retailing—Supply Chain Challenges Book and Music Retailing Other Category Retailing

CONSUMER ELECTRONICS RETAILING—UNDERSTANDING THE SEGMENT Before discussing the supply chain characteristic of this segment, it is important first to understand the composition of this segment. The consumer electronics sector can be classified under following major categories of products:

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Category

Products

White Goods

Washing machine (Front loading, Fully automatic top loading, Semi Automatic Twin Tub) AC (Window, Split)/Cooler Microwave (Conventional, With Grill) Refrigerator (Direct Cool, Frost Free, Single door, Double door) T.V. (CTV, LCD TV, Flat TV, Plasma and HD TV, Projection TV) VCD / DVD / MP3 Players Home Theatre, Music Systems, IPODs Digital Camera, Handycam Desktop, Laptops, Printer, Peripherals Cell Phone, Telephone/Cordless, Phone accessories Mixer—Grinder, Cooker etc. Blood pressure measuring instrument Blood sugar measuring instrument Gaming Software/Music CDs/VCDs/DVDs

Entertainment

Imaging Computer, Peripherals, Home office Communication Home Appliances Home Medical Electronics items Softwares

Leading Players in Consumer Electronics Retailing in India l l l l l l l

Vivek’s Vasanth Videocon NEXT and Planet M Croma (Promoted by Tata Group and Woolworth Australia) Reliance Digital E Zone/Electronics Bazaar promoted by Future group Great Eastern (mainly in Kolkata)

CONSUMER ELECTRONICS RETAILING SUPPLY CHAIN CHARACTERISTICS 1. Complex features Consumer electronics products are increasingly coming with complex features like refrigerators operating in fuzzy logic, mobile phones and cameras with increasingly advanced features etc. This means retailers need to have more qualified sales people in stores to explain these features to customers. Increasingly, consumers take help of specialised internet sites that compares different brands on specific features, take help of social networking sites and blogs to understand the particular brand/model which will suit their kind of requirement. This also means that consumer durable companies need to have online presence. Sometimes retailers create special stores for handling these kinds of products.

Case in Point—Vivek Plans High-End Consumer Electronics Stores To capitalise on the surging sales witnessed by the high end consumer electronic products, the Rs 330 crore consumer durables retailer Vivek Ltd plans to open more exclusive showrooms to sell

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these products in the South. The company opened exclusive showroom to sell high end consumer electronic products such as LCDs, Plasma TVs, laptops, digital cameras and computers. These products constituted around 5 per cent of the sales of consumer electronic goods which was growing at 200–300 per cent a year as its base was small. These outlets would sell products in the price range of Rs 30,000 to Rs 3 lakh. Source: An article by R. K. Narayanan of The Hindu Business Line: thehindubusinessline.com (accessed on 28th June 2006)

2. Several sales channels and channel conflicts Until recently, ‘sales channel’ mostly meant specialised consumer durables retail stores. In U.S. Best Buy, Circuit City and in India Vivek’s, Vasanth’s were examples of this. But today, there are several channels. Manufacturers themselves are getting into their own brick and mortar store like Videocon in India is getting into this sector. General retailers such as Wal-Mart and amazon.com in U.S. have also entered the Consumer Electronics (CE) sales channel in a big way and are finding great success in this field. In India all large retail groups like Future group (E Zone), Tata group (Croma), Reliance group (Reliance digital) are entering into CE sales. Moreover every manufacturer today has internet stores as direct sales channel. Several sales channels may result in channel conflict that may arise between the conventional distribution channels and others. In India the modern retail is considered undesirable competition by traditional distribution channels and organised retail may become a threat to conventional distribution. LG Electronics India Pvt. Ltd. believe that they are relatively weak in the organised retail segment. They are working on strengthening their presence in the segment and would target 30 percent of their distribution through modern retail in the coming years. LG has appointed a leading consultant firm to analyse the present conditions and formulate plans to tackle organised retail. The company has set up a separate division to focus on the same.

3. Internet sales channel is becoming popular Internet shops represent increasingly important sales channels for CE manufacturers. Online sales of CE products are estimated to grow from US$9.8 billion in 2006 to US$17.3 billion in 2010, a compound annual growth rate (CAGR) of 15.3 percent. Internet shops of CE manufacturers are in direct competition with those of large retailers (channel conflict) and can directly threaten their revenues. Also, some manufacturers such as Apple are opening their own brick and mortar stores that will compete with the stores of their retail partners. CE manufacturers will move toward these kinds of direct channels to deliver the total customer experience when they find that the retailers are not being effective.

Example: Apple—Boosting Revenue through Direct Sales Channels Historically, Apple mostly sold products through the traditional retailer chain. But in 2001, Apple launched its storefront programme for the new Mac (‘center of digital lifestyle’). It now has 155 stores worldwide (mainly U.S., Canada, Japan and the UK) with 17 million visitors during 2006, generating US$2.4 billion revenue in 2005 (100 percent growth year-to-year). Apple’s revenues from traditional indirect channels grew 43 percent in the same period. Also Apple’s online music store iTunes commands 88 percent of legal U.S. music download market (1.5 billion songs downloaded). With its own stores, Apple has greater brand control and can offer more services such as the genius bar (hands-on technical support), the studio (creative advice for movies, songs or photos), Pro Care

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(a deeper level of service and support) and workshops (a variety of free one-hour workshops). Revenues from its direct channels are growing rapidly. Source: Apple Annual Report 2005 “iTunes store” (http://en.wikipedia.org); Apple Annual Report 2005; Sellers, Dennis, “Other companies following Apple’s ‘risky’ retail strategy”, Macsimum News, July 27, 2006 (http://www.macsimumnews.com)

Example: Videocon Back in India, Videocon Group-promoted Next Retail is planning to start an online venture for its consumer durables retailing business. Offering to sell all its consumer durable brands online, the Rs 1,500 crore Next Retail would take charge of demonstration, installation and even offer warranty for its products. Videocon would be offering warranty across all products and brands and branded after sales services. Source: The Hindu Business Line: thehindubusinessline.com (accessed on 7th August 2008)

4. Importance of service Almost all CE products are covered by warranty and service plays an important role in CE retailing. Traditionally service is provided by original product manufacturers. However increasingly there is a change in trend and retailers have started providing such service. Here are few examples: l Videocon group promoted Next Retail is planning to start a new branded after-sales service under the name ‘Blue’. l Reliance digital introduces ‘RelianceresQ’, an end to end solution related to all technology products. RelianceresQ, through a network of in-house service centres will provide the consumers with pre sales and post sales support services. 5. Short product life cycles Product life cycle varies across consumer products. Typically for products like mobile phones, cameras etc., consumers generally prefer to upgrade to a new advanced model, even when the earlier one is operational—this leads to a vibrant second hand product market in developing countries. People sometime prefer to move into newer brands also because of the high cost of repairing (especially in developed countries) or non availability of spares for earlier models. Increasingly many CE products are used with ‘use and through’ concept. 6. Cut-throat competition Most CE manufacturers and retailers operate on wafer thin margins. Many CE products are interchangeable and unit prices continue to fall leading to increased product commoditisation. 7. Retailers are starting to develop solutions that compete with CE manufacturers For example, Best Buy, Sandisk and RealNetworks have partnered to deliver a competing solution to Apple’s iPod/iTunes solution. However, by doing so, Best Buy is now directly competing with other CE manufacturers, many of whom also use Best Buy as a retail channel.

‘Reliance Digital Presents Microsoft Connected Home’ It is a first of its kind wireless home networking that brings together music, movies, entertainment across a single platform in homes. This technology will help create homes where everyone is

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connected across various interfaces used in any home from gaming devices/LCD TV/computers etc. The objective is to demonstrate and demystify technology yet showcase how products can talk to each other. Source: The Hindu Business Line: thehindubusinessline.com (accessed on 8th March 2008)

8. Retailers are getting into manufacturing/private labels CE manufacturers used to be the only ones that created CE products but increasingly retailers are starting to move into this manufacturer space (via partnerships), attempting to take market share, which is a direct threat to the manufacturers’ revenues. In India, Future Group is promoting its own CE brand through Big Bazaar stores. 9. Consumer purchase pattern is changing The act of purchasing CE products has changed. Product information (models, features, prices) is available instantly via the Internet, which lets the consumer make a comparison at wide variety of retailers very quickly to select exactly the solution they want and where they will buy it. Traditionally, consumers were getting attracted by new technologies, or fancy product features, or even lowest cost. Today, they are looking for reasonably priced solutions to real consumer problems. They are often looking for solutions which integrate a CE device with content and services to optimise a buyer’s experience. The Apple iPod with iTunes is already a classic example of such an innovative solution. 10. High end products cause bigger challenge in consumer electronics supply chain As consumer electronics purchases have moved towards larger products, such as plasma screen televisions, the supply chain has become more challenging. Circuit City arranges all the various accessories that are needed to get such a state-of-the-art home theatre system installed and operating to peak performance, typically requiring product sourcing from various suppliers. Collaboration with those manufacturers is key to staying on top of maximised efficiency. 11. Online and offline inventory integration Integrating inventory across these two channels is always a challenge for CE manufacturer. Circuit city is a good example here. One customer benefit derived from Circuit City’s supply chain is their 24/24 Pickup Guarantee, which allows customers to purchase merchandise online through the company’s web site, www.circuitcity.com, and then pick it up at the nearest store. If the store does not have the purchase ready within 24 minutes, the customer receives a US$24 gift card. This guarantee requires inventory level integration between the retailer’s web site and stores, and reinforces the importance of efficiency maximisation.

JEWELLERY RETAILING Gems and Jewellery retailing, a sector predominantly dominated by family jewellers, had seen recently the entry of organised retail players such as Tata with its Tanishq brand, Gitanjali Jewels with its Gili brand, P. C. Chandra, Reliance Retail, Fortune Group and several foreign players like De Beers, Cartiers, Tiffany, Ashton Mining, Damas India etc.

Jewellery Retailing Supply Chain Characteristics In this section let us look at the supply chain parameters which are important in this form of retailing: Quality and purity of metal Jewellery is considered an investment in India particularly gold jewellery. This is the main reason for dependence on the family jeweller in the locality. A retailer needs to build trust with its consumers in this area and this requires stricter quality norms and

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hallmarking. Indian government follows strict quality norms today for international trade and has strict certification process. The Gems and Jewellery Promotion Council is India’s certification authority. The government’s Central Board of Excise and Customs has banned the import or export of rough diamond shipments, which are not accompanied by a Kimberley Process certificate launched in Switzerland. ‘Certificates of origin’ is must for export by several international importers. This industry needs to be compliant with international quality norms such as the Kimberly Process and the Patriot Act, etc., for international trade. Designs Exclusive designs are important in this business. Different companies are packaging their designs in the form of exclusive collections to differentiate themselves and build brand equity. These days traditional ethnic and chunky designs are giving way to fashionable, lightweight and innovative designs. Trends also show that traditional handcrafted jewellery is slowly giving way to machine made jewellery. Thus modern jewellery manufacturing facilities are equipped with the latest CAD/ CAM and other advanced design systems. Urban consumers in India got exposed to western lifestyles, primarily through overseas travel leading to increased preference for products and designs that are popular abroad. Wearability of the item is becoming more important. Importance of design has been well understood by Tanishq long back. Given the diverse nature of Indian ethnicity and to satisfy the tastes of all regions, Tanishq decided to transpose designs by stocking Bengali designs in Delhi, Keralite designs in Tamil Nadu and typical designs from Tamil Nadu in Mumbai, in order to appeal to a variety of people. High dependence on import of raw materials The main raw materials for the gems and jewellery industry are rough diamonds, recycled gold and gold bars. The industry is highly dependent on imports for its requirement. Rough diamonds and gold bars are imported, while recycled gold is obtained from the domestic market. This leads to fluctuations in price for end item. How much raw material to order, how much to keep in stock and at what price to procure raw material has much bearing on retailer’s profitability. Increase in distribution channels 90 percent of jewellery in the country is still sold through traditional local jewellery shops. However these days several new formats such as boutiques, supermarkets, banks (during periods like Dhanteras) etc. are emerging, for example: l Lifestyle stores Leading jewellery retailer Gili struck alliances with several leading lifestyle and department stores to display their trendy range of products. l Hypermarkets and super markets are selling jewelleries. Big Bazaar is launching a Gold section. Supermarkets like Lifestyle and Shopper’s Stop have jewellery outlets. l Organised specialty retailers Reliance Retail is planning an aggressive entry into the jewellery retail market through several jewellery retail outlets across the country. Damas India, part of one of the largest jewellery retail outlets in the world, is adding new stores at regular intervals. l Online Gili has placed its catalogue on its web site to encourage NRIs to buy gifts online for friends and family in India. l Institutional customers Titan has followed a similar pattern in past. In 1998, it launched the corporate gold gift scheme—When you want to say thank you, say it in gold’. In 1999, Tanishq delivered gold coins worth Rs. 20 crores to Maruti Udyog Ltd., to be given away as gifts to Maruti car owners. In early 2000, it made miniature gold cars for Hyundai Motors to be given to selected dealers. Changing pricing structure Traditionally jewellery in conventional shop is sold using this formula: Weight of the item ´ Prevailing gold price per gram + Labour cost and Margin. Branded jewellery in organised retail shops is sold on fixed price basis.

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Changing product assortment Traditionally gold based jewellery is the bread and butter of jewellery retailers. As of now there is growing interest in white gold and newer precious metals such as platinum, diamond studded jewellery etc. This calls for changing the product portfolio for retailers and more attractive assortment strategy. Changing product seasonality Traditionally marriage and festival seasons (like Dhanteras) are peak seasons for jewellery as this is considered as well investment particularly gold jewellery (gold jewellery is regarded as investment, as they can be easily converted to cash either through sale or for guaranteeing loans). These days jewellery is getting positioned as a source of fashion accessory and gifting and demand is distributed throughout the year.

HOME FURNISHING RETAILING Understanding the Segment Home furnishing is not one segment and may mean several categories of items. Typically this segment has following major categories of products: Category Home Textiles Window fittings Kitchenwares Bathroom Decor Lightings Decorative Accents Rugs, Mats, Floor coverings Furniture Housewares

Products Bed linen, Kitchen linen, Bath linen, Furniture covers Curtains, Draperies, Blinds and Shutters etc. Home appliances, Cookwear sets, Dinnerware, Tableware , Barware items etc. Bath accessories, Bathroom fittings Floor lamps, Different type of lamp shades, Ceiling fans etc. Ceiling fans, Wall clocks, Candle holders, Flower accents, Decorative door locks , Tabletops, Wall hangings, Paintings etc. Different kind of normal and decorative rugs and mats, Floor coverings Furniture for Bed room, Kids room, Living room, Home office, Outdoor, Entertainment storage etc. Air Purifier, Laundry Helpers, Heaters, Floor Care products, Home storage items etc.

Each of these categories of its own is large enough. KSA Technopack estimates the bed and bath market at Rs 1,800 crore and home furniture around Rs 14,000 crores. Organised players contribute less than 10 percent of the total home furnishing market in India. The global home furnishing retail industry is pegged at US 502.9 billion. Europe has the biggest share of this with 49.3 percent followed by the US at 22.4 percent and Asia-Pacific at 20.9 percent.

Home Furnishing—Current Trends Home furnishing is becoming a highly diversified segment these days Several building material retailers are entering this space. For example paint companies which traditionally used to sell paints through their distribution network are increasingly taking up house painting as one of their service offerings. You can see the shops of Asian Paints Home solutions or Louis Berger Home services in most of the home furnishing malls these days. Companies selling floor tiles, granites or handicraft items are increasingly becoming home furnishing companies. Home furnishing market getting branded and home furnishing manufacturers are getting into retailing Traditionally, this is an unorganised segment with presence of very few brands like Bombay Dyeing in home textile, Philips in home lighting, Welspun in terry towels etc. The high

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growth in this market has made many other home furnishing manufacturing companies to get into retailing. The mattress-maker Kurlon entered this segment with interest in retailing under the name ‘Karlon Nests’ while expanding its product portfolio and entering into bed and bath linen, curtains and towels. Welspun has entered this segment with a home textile brand, ‘Spaces’ and planning to offer a range of bed, bath, and kitchen and table linen etc. Creative Mobus Fabrics another Indian company has now brought in a home furnishings brand from New York, called Portico, through a licensing arrangement and positioning at the premium end of the market. They are planning to set up its own chain of stores under the ‘Creative Living’ brand name with a product range that includes furniture, crockery and candles. Neel Kamal, the famous plastic furniture manufacturers are getting into retailing with stores under name @Home. Godrej and Boyce Manufacturing under its furniture brand ‘Godrej Interio’ offer home and office furniture and have opened several outlets. Gautier, the leading French furniture manufacturer is making its Indian presence strong. Other furniture retailers like Zuari, Featherline etc., also have similar plans. Organised retail players are getting into home retailing Reliance announced its foray into the home furnishing format through ‘Reliance Living Furnishings’. This home furnishing format will offer coordinated three tiered private label range namely Home One (Basic), My Home (Mid segment) and My Home Premium (Lifestyle). The stores will have products like bedding, bath textiles, curtains, cushions, floor covering, table and kitchen linen etc. 80 per cent of home furnishing items would be company’s own labels. Future Group has launched ‘Home Town’ its home furnishing format and Furniture Bazaar showrooms as its specialty Furniture and Home Décor Store offering modular kitchens, lighting, furnishings, crockery and home accents. Most of the large retailers follow similar shop formats like Big Bazaar stores have ‘Furniture Bazaar’.

Supply Chain Considerations for Home Furnishing Retailing Concept assortment The assortment strategy of home furnishing companies follow concept assortment strategy, for example all bedroom furniture and bed linen items will be displayed in a Concept or Model bedroom. This provide customers a first hand look and feel of how the furniture and other items (say: room lighting, curtain, bed cover etc.) will look in their homes. Global home furnishing major Ikea is known for this and that is why visiting Ikea stores are always an experience. In India Future Group in their Furniture Bazaar stores have started an exhibition section for this which provides live display of living rooms, bedrooms, modular kitchens, bathrooms etc. Services is an integral part of home furnishing retailing in India Unlike the west where people believe in Do It Yourself format because of high labour cost—in India people expect service from home furnishing retailers—for example when you buy a new cot you expect the retailer to deliver it at your house and fit it and if possible, give the final paint touch. Keeping service in mind Home Town have a specialised team of experts for providing this service that consumers need while doing up their home. The services section of Home town offer service options as—Mr. Carpenter, Mr. Plumber, Mr. Electrician, Mr. Painter, Tilewala, Design centre, Door delivery, Installation etc. Typically while building homes, we need to find information from different sources and often rely on advice from unqualified sources—Hometown help consumers by giving professional advice on various aspects, ranging from interiors, carpentry, plumbing, painting, etc. HomeTown also guarantees workmanship of the job it undertakes, for one year, from the time the job is completed. Source: www.indiaprwire.com (accessed on 9th April 2007)

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In India fake home furnishing items is a matter of concern Out of every 100 mattress sold as Kurl-on, 70 are duplicate—this simple statistics talks about the risk home furnishing brands carry in the country. This is one of the reasons analysts believe that organised retailing will grow in the country—as people are sure about product quality. Uniqueness of the product matters more than any thing else People want their homes to be unique—we want to have the most uncommon and beautiful wall hanging in the wall of our house, the most stylish lamp shade in our living room etc. This calls for creative designs and high end craftsmanship. This also requires trying with many conventional materials like bamboo, jute, coconut shell inlays, polished brass, stained glass etc., to design some of the most unconventional handicraft items. Location of the store is not the most important factor here Globally it is seen that if the home furnishing store can offer unique choice of items, it need not be on the high street or prime locations since consumers would be willing to travel relatively longer distances to purchase these ‘high-involvement’ products. Most of the Ikea stores globally are not in high streets. Globally becoming green compliant is number one issue for furniture retailers Furniture retailers are one of the major consumers of natural wood. Though these days many alternate materials (like plastic, metal, bamboo, cane etc.,) have been developed, still wood furniture is more than 50 percent of the total volume. Home furnishing retailers like Ikea and Home Depot have taken a set of measures to keep them green compliant.

HEALTH AND BEAUTY RETAILING Health and beauty retailing is getting much attention from organised retailers these days and the domestic beauty industry is more than Rs 6,000 cr excluding retail pharmacy which alone is around Rs 16,000 cr. Many new players are setting up health stores to cater to this market and players also plan to introduce established international brands and private labels. Traditionally women are prime target consumers for these stores. However Health and Beauty (H & B) stores are dedicating a large part of their assortment for men’s products as male grooming market is also growing at a fast pace. Most prominent players in this segment are l Health n Glow (H and G), a JV between the RPG group and Guardian, part of Dairy Farm International (DFI), based in Hong Kong provides a full range of beauty services through the H and G salon. The store also operates a full service pharmacy and widest range of beauty products for women and men under one roof. l Dabur launched new-u, its Health and Beauty format stores. l Pantaloon currently has few Health Village centres (holistic wellness and beauty centres), and offer products such as colour cosmetics, fragrances, herbal and specialty skin items, hair products, bath accessories etc., in its food bazaar stores. Health village is supposed to offer products and services ranging from beauty salons, pharmacies, ayurveda, spas, yoga centres to fitness equipments. Health Village have sub-brands to cater to each segment. For instance, its beauty salons would come under the name of Star and Sitara, its pharmacy has been called Tulsi, the beauty stores would carry the name of Turmeric, and the fitness centres would be Roots while its health café would be called Elaichi. It plans to extend the same brand names to products being sold under similar categories like its Fitness brand—Roots—would stand for its gyms, spas and fitness equipments while its pharmacy brand of Tulsi would get extended for its range of health products and services. l Reliance have ventured in H and B retailing with Reliance wellness stores and plans to sell several categories like health foods, personal care products, healthcare products, pharma products, general nutrition products, sports nutrition products etc.

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International brands like Body Shop and M.A.C are setting up their exclusive outlets. Beauty and Slimming segment is seeing action by major brands like VLCC, Lakme Salons etc., and the services offered by most of these brands include slimming, beauty services, hair care, skin care, and fitness. Increasingly H and B stores are focusing on service. For example, Reliance wellness is focusing on many health related service retailing like: l It houses an optical shop backed by a qualified ophthalmologist to test and prescribe lenses. l It introduced a ‘Medical Compliance Program’ for customers who are on long-term medication and they will get reminders and alerts on the use and replenishments. l It plans to give pathlab services at discounted rates to its customers by tieing up with leading laboratories in the country. l It also offer customers free medical insurance benefits once he becomes member of the Reliance Wellness store under Reliance One, the customer loyalty programme. l It plans to provide optical and complimentary eye checkups to customers walking into the store. l Smaller players who have entered into this segment are Bangalore based Bare Body Essentials and Mumbai based beauty boutique. l l

PHARMA RETAILING Pharma is a huge market in India and different analysts suggest this market size to be around US $ 5 billion and regard it is one of the recession proof segments of retailing. There are around 8,00,000 pharmacies in India today, with about 60,000 distributors supplying to them i.e. the segment is extremely fragmented. India ranks 13th in the world pharma market in value and 4th in volumes. Organised pharma contributes just Rs 400–600 crore which is roughly 1.5 to two percent of the total market size. In developed countries like US 85 percent of pharma sales happens through organised retailers and pharmacy retailing has seen consolidation the world over. Only five pharmacy chains control 40 percent of the sales in the US and seven pharmacy chains control more than 60 percent of the market in UK whereas one pharmacy chain alone does not even control 0.1 percent of the total market. This gives huge opportunity for organised pharma players in India. Organised pharma retail players in India are: l Apollo Healthcare l Medicine Shoppe l MedPlus l Guardian Pharmacy from Gurdian Lifecare l 98.4 from Global Healthline Pvt. Ltd. l CRS Health from SAK Industries l RPG group’s Health & Glow (it is not a pure play pharma retailer but more in the health and beauty care business). l Zydus Cadila has invested in Dial for Health l Herbal healthcare company Himalaya Drugs l Planet Health from Sagar Drugs and Pharmaceuticals l Life Spring (Morepan) l Body Shop (acquired by Loreal) l LifeKen (Lifetime healthcare) l Fortis HealthWorld from Ranbaxy group

356 l

l

Supply Chain Management for Retailing Tulsi from Pantaloon group. Pantaloon also had rolled out Medicine Bazaar to be part of either its Big Bazaar or Food Bazaar Dabur India

Supply chain issues for Indian unorganised pharma retailers: l Storage conditions Majority of the medicines needs to be stored under cool conditions (below 35°C). In countries like India where day time temperatures frequently cross above 40ºC it makes the efficacy of the medicines questionable. Chemists need to air condition their outlets to maintain the efficacy and shelf life of the medicines. l Spurious drugs This is a global issue for pharma industry, however it is more so for countries like India as most of the drugs are sold through unorganised retail chains. There are several handoffs before the drugs actually reach retailer from manufacturer. As per estimate Indian market is estimated to have upto 25 percent spurious drugs i.e. the annual sales figure of spurious drugs is close to Rs 4,500 crores (US$ 1 billion). Trust in a retailer is a major issue in pharma retailing. l Big difference between factory price and the price consumers pay Organised retail chains are few in India and most of the market is dominated by small pharma retail shops— there are around five to six tiers in the distribution. In the process, each agent takes his own margin in the supply chain and the final price the customers pay is much higher then factory price. l Shelf life and expiry As there are close to five or six tiers in distribution, after being through all these channels, by the time the drugs reach the retailer, it is close to expiry date. While the drug is in the store, it is difficult for the retailer to remember the expiry date of so many drugs (in most cases it is between 10 and 15 thousands) without any system support. l Huge number of SKUs Even a small pharmacy can maintain anywhere between 10 to 15 thousand stock keeping units (SKUs), without any system support in terms for managing inventory—it is difficult to manage so many SKUs. l Retailer’s knowledge Most of the retail stores do not have a qualified pharmacist who can explain the product, suggest a suitable alternative. In developed countries the pharmacist maintains the patient’s drug profile; provides information about drugs and their usage etc., which is not existent in our country. However just to remember that few of these are not specific supply chain issues only for India and are more like global issues in pharma retailing like: l Proliferation of SKUs. The smallest retailer carries upto 10,000 SKUs and a large distributor can carry upto 50,000 SKUs. l Pharma products often require strict control of storage/transportation environments such as temperature. l Products have expiration date beyond which the product should not be dispensed. l Drugs are often repackaged within supply chain. Maintaining pedigrees on this volume and variety of product can be overwhelming. l Abundance of small wholesalers buying and selling medications creates active secondary or grey market. In some situations, drugs change hands many times (can be as many as 10 times) before reaching pharmacies and this increases the opportunity to introduce counterfeit into the supply chain. Computer technology available today to forge levels can reproduce any level today thus increasing the chance of counterfeit/mishandling. l Drug traceability and Security. l Pedigree regulation/e pedigree requirement: In some developed countries it requires all wholesalers who are not buying directly from manufacturers, to report the product code, batch

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number and serial number of each medical item purchased and sold with information up to where bought and to whom sold to. This is a mandatory requirement. Waste management is important as all medical wastes such as used syringes, dressing materials and radioactive materials used in nuclear waste need to be properly disposed of. Globally many pharma retailers offer pathology services as well. In these cases the test samples need to reach the lab within few hours of collection from several locations.

Pharma Traceability—RFID is Becoming Popular FDA (Food and Drug Administration) wants integrity of drugs throughout the pharma supply chain and mandating guidelines for track and trace to detect counterfeiting, drug diversions and mishandling. Tracking involves knowing the physical location of a particular drug within the supply chain at all times. Tracing is ability to know the historical locations, the time spent at each location, record of ownership, packaging configurations and environmental storage conditions for a particular drug. For pharma packaging RFID levels are helpful as these levels can be read through multiple layers of packaging without operator intervention which can reduce product handling, labour, time and chances of error. RFID can also deter return fraud and diversion. When items are presented for return, they would be scanned to record lot number. Based on this information return can be authorised or refused. A similar application can help detect the source of diverted products. When these products are recovered, authorities can check database records and follow the audit trail to see who last had possession of them. Analysts believe that the days are not far when pharma retailing will follow the trend of becoming more organised and corporatised as has happened with every other retailing formats like food, apparel etc. The stake is higher here as it is related to people’s health. With India becoming a major destination for medical tourism, Indian pharma retailers need to follow the global standards in the days to come. The last and most important reason is that there is huge money in the business. No wonder organised pharma retailers are planning to introduce value added services for the consumer such as home delivery, prescription records, reminder services and health stores consist of a stateof-the-art pharmacy, special diabetic care section, self diagnostic equipment etc.

BOOKS AND MUSIC As per images—KSA study, the book industry is estimated at over Rs. 3,000 crore out of which organised retail accounts for only 7 percent at Rs. 210 crore and text book constitute almost 50 percent of this. The size of the Indian music industry is estimated at Rs. 1,100 crore of which organised music retailing constitutes about 14 percent, equivalent to Rs.150 crore. Indian organised book retailing is dominated by retail chains like Kolkata based Apeejay Surendra Group promoted Oxford, Chennai based Tata group promoted Landmark, Mumbai based Shopper’s Stop Ltd owned Crosswords. Music retailing is dominated by players like RPG owned Music world, Videocon group owned Planet M etc. There are strong regional players also like Bangalore based Shankar’s The Book People, Chennai based Higginbotham in Book retailing and Symphony in Kolkata in music retailing. Reliance is also entering this segment with Timeout stores whereas Archies is a household name in gift retailing.

New Trends in Book Retailing Book retailing has come a long way in India where you need to go to a book store, ask for a particular book or ask the salesman to show some books in particular category, browse and then

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decide to buy one. Traditional retail formats give less scope for browsing and that is something modern day book retailers are committed to change. Modern day book stores can provide facilities to its readers such as reading, taking some hot beverage while in the store as well as listening to and buying music and movies. These retailers want to make shopping of books as an experience by adding different services to enrich that experience, for example. Positioning as a lifestyle store New generation bookstores are large, with enough space and reading tables to browse books for long hours. They have added cha bars or coffee café with refreshments. While Crossword has tied up with Barista, the Oxford Bookstore has the Cha Bar. Designing innovative events Book retailers are designing different innovative events like inviting people during book launches, interactive discussions with authors, reading with authors’ sessions, quizzes, book reading sessions etc. Offering value added services Few retailers have added listening stations’ zones where you can hear book extracts etc. Crossword introduced home delivery, with Dial-a-book, Fax-a-book and email-a-book programmes. Getting online Oxford launched the portal www.oxford bookstore.com, India’s largest online bookstore that boasts of over half a million of book and music titles. The online sites also provide reviews which customers can consult before making purchase decisions. Offering wider merchandise mix Most of these book stores have a strong merchandise mix of music, movies, stationery products, toys, gifts etc.

Music Retailing Prior to the introduction of organised retailing, music cassettes and CDs were sold through a huge network of distributors and retailers spread all over India. The organised retail chains like Planet M and Music world changed this concept. Some of the key trends emerging in music retail industry supply chain are as follows. Getting into non music related merchandising Beside music, music retail chains today are looking at making footprint in whole home entertainment business. Planet M, currently a division of Videocon Industries Ltd (earlier it was the arm of media house Bennett, Coleman and Co) retail mobiles, Play Station, iPods, MP3 players, Microsoft’s X box, VCDs, Books etc beyond music. This non music has seen good growth for music retailers in recent times. Reducing the tiers in music distribution In the past the absence of any major countrywide organised sector players, music companies had to shell out a huge amount as margins at various levels in the distribution channel and chances of duplication used to rise. Organised retailing should improve this situation. Music selling formats change every few years From long playing disks to mini disks to cassettes to CDs to DVDs and finally to MP3 formats—music retailing has seen several formats in the past. The retailer needs to keep an optimised mix of these different categories. For example Music world had bought down the ratio of cassettes to CDs sold from 7:1 to 2:1. The formats are again evolving with FM radio and online download formats becoming popular today. Piracy is a huge issue in this business Music piracy is a huge issue in India and out of every 100 CDs or DVDs sold—close to 40 are pirated. Retailers are fighting this problem across the world and India is no exception. The industry loses about US$5 billion every year to piracy worldwide— US$1 million a day in the United States alone. Innovative models are emerging in music and entertainment retailing There are many innovative models emerging in entertainment retailing. Below is an example.

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Bigflix.com, the online and offline movie rental business of the Reliance Anil Dhirubhai Ambani Group (ADAG) which has registered membership base of 80,000 in first year of operation is a good example of this. This operates in an extremely fragmented market where you have small video libraries and shops that operate in almost every locality in India who rents CDs and DVDs. Bigflix got into this segment with around 110 stores in 10 cities and created a good market share in offline movie business. It allows you to create a list of your favourite movies, prioritise it and make a home delivery as per your instruction through SMS; all at a very competitive cost. With around 18,000 titles in around 15 languages and 1,500 titles for video on demand, now it has the widest assortment in India in terms of movie rental retailers. While the offline business is mainly targeted at domestic customers, video on demand has both domestic and international customers. Source: www.bigflix.com (accessed on 3rd July 2009)

OTHER CATEGORY RETAILING Fuel retailing This sector in India is mainly dominated by public sector companies like Indian Oil, BPCL, IBP, HPCL etc. Some of the private sector companies like Reliance entered this segment and did not succeed much. Oil retailing in India does not have traditional retail challenges like assortment, pricing, promotion etc., as they deal in few products and prices are mostly administered by government of India. However these days oil retailers are not restricted just to oil retailing and a good part of their revenue is coming from non fuel business like grocery store at the outlet, food joint etc. For example, BPCL has convenience store chain called In and Out Stores in its fuel stations. This brings traditional supply chain challenges of food and grocery retailing as discussed earlier. Customer service is increasingly becoming a key issue here and oil companies are coming with items like loyalty cards mostly on account of their association with leading private and PSU banks. BPCL introduced the Petro card concept, a prepaid card with which you can fuel your vehicle. HP followed with the HP Smart 1 card while IOC came up with the Indian Oil Citibank cobranded credit card. Can you imagine a petrol station at Bangalore has a pharmacy, a phone booth, a coffee dispenser, a computerised emission testing centre, a FabMart store, an ATM, and an outlet for car accessories? Facilities like free air, water, and washroom are taken for granted. Mobile retailing This retailing concept was almost non existent few years back where PSUs like BSNL or MTNL used to control the telecommunication market in India. However this has become a big business now with many players like mobile manufacturers (Nokia, Sony Ericssion, Motorola etc., who make instruments and provide service), mobile service providers (like Airtel, Vodafone, Reliance, Spice, BSNL, Idea, Aircel etc., who give pre paid and post paid connections) and organised mobile retail companies (like Essar group’s The Mobile Store, RPG’s Cellcom etc., who sell everything from instruments, postpaid cards, prepaid connections etc., and offer service) and thousands of small retailers are making their presence in the country. Penetration of this retail industry is much beyond large cities (where generally organised retailers for other sectors are concentrated) and they are spread across Tier 2 cities and towns. Price, promotion, new products, new schemes being the driver for this business, service also plays a major role here. The mobile manufacturers like Nokia, Sony Ericsson and Motorola have set up concept stores in the country, which allow consumers to ‘interact’ with the phones and accessories and personalise handsets to their liking like choosing their favourite ring tones, screen savers etc. Operators such as Vodafone, Bharti Airtel and R-Com are offering more bundled packages for handset and services to lock in subscribers for longer time. The large mobile retailer like The Mobile Store, the mobile retail arm of Essar Group is expanding their offerings and dealing in handsets, connections, mobile accessories, repair and services. They are positioning themselves as a multibrand and multiservice mobile retail chain having operations across several cities in India.

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Conclusion In this chapter we have discussed some of the emerging specialised retail categories and the supply chain challenges for the same. l Consumer electronics is a category having several sub categories like white goods, home entertainment, computer, home appliances etc. These categories have supply chain challenges in terms of complex features, channel conflicts, short product life cycle, service requirements, private labels and cut throat competition. l Jewellery retailing has supply chain requirements like quality and purity of metal, designs, increase in distribution channels, product assortment and product seasonality challenges. l Home furnishing is a highly diversified segment which is getting branded and organised retail players are entering this segment. This sector has supply chain challenges like concept assortment, service, uniqueness of product and green compliance. l Health and Beauty retailing is an emerging format. Pharma is the promising health segment among health and beauty retailing. However this segment suffers several supply chain issues like number of SKUs, spurious drugs, storage condition, expiry, drug traceability and offering associated services. l Book and Music retailing is seeing different emerging trends like positioning stores as lifestyle stores, designing innovative events, offering value added services and wider merchandise mix, getting online, getting into non music retailing and new selling formats. While the industry is fighting hard against piracy, this retailing format is still in the evolutionary stage in India. l This chapter also discussed about two other retailing categories i.e. fuel and mobile phone retailing.

Review Questions 1. 2. 3. 4. 5. 6. 7.

What are the supply chain challenges in consumer electronics retailing? Explain the supply chain issues jewellery retailers face. What are the current trends in home furnishing retailing? What are the supply chain challenges in home furnishing retailing? Explain the current trends in health and beauty retailing. List supply chain challenges of Pharma retailing. How RFID can help? What are the emerging trends in Book and Music retailing?

Assignments 1. Identify two consumer electronics retailers. Study their assortment strategy, pricing scheme, distribution and sourcing process. 2. Select two retailers each from home furnishing, book and music and health and beauty segment. Study how they are trying to differentiate themselves from unorganised retailers in the sector.

[CHAPTER]

LEARNING OBJECTIVES

Managing Supply Chains of Different Retail Formats

14 In this chapter we will explain the following concepts: 1. Classification of Retailers 2. Organised B2C Retail Chain Formats 3. Organised B2B Cash and Carry Formats 4. Rural Retail Formats 5. Airport Retailing 6. Co-operative Formats 7. Non Store Based Retail Formats 8. Online Shopping/E Tailing 9. Service Retailing 10. Retailing of Financial Products and Retail Banking 11. Courier Service Retailing

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If you have talked with the CEO of any of the leading organised retail chains a few months back— the thing most probably you might have heard of is that he is expanding—his next hypermart store is coming in Mumbai and the next round of specialty stores are planned in few more cities. Even though space is at a premium and rents have skyrocked in the beginning of 2008 before taking a downturn, shopping malls are continue to open on almost every major city. The Future Group is planning more stores in Big Bazaar format, opening value format store like Brand factory, making specialised store in home furnishing and launching its e-tail website. Every retailer is trying with new formats—the formats which were evolved almost among last fifty years in the West—have all come in India in last five years. There are different ways analysts classify different retail formats—based on ownership mode, based on store size etc. Most importantly, these formats also differ in their underlying supply chain characteristics. In this chapter we will discuss supply chain characteristics of different retail formats.

CLASSIFICATION OF RETAILERS Typically, retailers can be classified first, based on whether they sell products or service. Retailers selling apparel, grocery or consumer durables are product retailers whereas restaurants, banks, movie rental shops, shops selling mobile connections, courier services etc., are examples of service retailers. However these lines are blurring and it is difficult to get a product retailer who is not offering any service as many product retailers today offer services like home delivery, maintenance service for products sold etc.—however service is not the main line of business for product retailers but an addition to support their product sales. In the next level product retailers can be classified as store based retailers and non store retailers. The first category sells products through physical stores like supermarket, hypermarket, departmental stores, convenience stores, specialty stores, factory outlets, value stores, cash and carry retailers, rural retail stores, airport retail stores etc. The second category does not have physical stores and include formats like online retailing/e tailing, mail order, automatic vending machine/kiosks, direct selling, tele shopping etc. Some times store based retailers are also classified in several other ways. The retailers who generally concentrated themselves in particular geographic areas like rural retailers or airport retailers are considered to be a different retail format. Generally most retailers sell directly to consumers— however cash and carry retailers sell to small businesses who in turn sell to final consumers—so this B2B format is considered to be a specialised retail format. Store based retailers can also be classified based on ownership status like Independent retailers, Co-operative stores, Retail chains and Franchise. While independent stores and cooperative stores are present in this country for several decades, the modern retail is mostly the growth story of retail chains and franchises where most of the organised retail segment operates today. Most of the store formats discussed earlier like supermarkets, hypermarkets, departmental stores, specialty stores were part of retail chain and franchise model. Table below explains the different retail formats. Type of offering

Category

Sub category

Product retailers

Store based

Cooperative stores Rural formats Airport retailing

Formats

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(Contd.) Organised B2B formats

Cash and carry retailers

Organised B2C retail chain formats

Supermarket, Hypermarket, Departmental stores, Convenience stores, Specialty stores, Factory outlets, Value stores, Category killer

Non store based

Online retailing/E tailing, Mail order, Automatic vending machine, Direct selling, Tele shopping

Service retailers

Restaurants, Retailing of financial products, Movie rental shops, Shops selling mobile connections, Courier services

ORGANISED B2C RETAIL CHAIN FORMATS Retail formats have evolved over time depending on store size and several other supply chain characteristics. The supply chain characteristics are features like product offering, assortment strategy, category management, price and level of service. The table below shows a comparison of these supply chain characteristic in different retail formats Table 14.1 Store type

Supply chain characteristic or organised retail formats Product / category strategy

Assortment strategy

Price

Service level

Example

Hypermarket

Huge collection, Multiple categories, Sells every thing

Wide assortment, Average depth

Low

Self service

Walmart (US), Big Bazaar, HyperCITY, Star India Bazaar, Mustafa (Singapore)

Supermarket

Sells selected products mostly food and grocery category

Selected assortment, Average depth

Low

Self service

Foodworld, Nilgiri's, more (Aditya Birla Group)

Specialty stores

Sells particular category like book, music, home furnishing, durables etc

Selected assortment, Good depth

Average

High

Cross word (Book), Music world (Music), Viveks (Durable), Ikea (Home furnishing)

Category specialist / Category killer

Sells particular category like toys, durables etc.

Selected assortment, Good depth

Lower than market

Average

Toys R US (USToys), Loft (Mumbai—Footwear)

Wide assortment, Average depth

Average/ High

High

Pantaloons, Globus, Ebony, Shopper's stop, Westside, Lifestyle, Marks and Spencer

Departmental Large store selling store several categories under different department

(Contd.)

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Small store, located within residential areas, offer selected products of daily need

Selected assortment, Low depth

Low

Self service

7 Eleven, In and Out, Stores adjacent to fuel stations

Factory outlets

Sell branded merchandise away from main market

Low

Self service

Allen Solly factory outlet, Levi's factory outlet

Value store

Sell branded merchandise of selected categories like apparel

Assortment of particular brand, Good depth within the brand Wide assortment and depth within particular category

Low

Self service

Future Group's Brand Factory, Arvind's Megamart

While the supply chain characteristics of different retail formats vary, it is also important to understand that these formats have evolved to meet the needs of different target customers. For example, the high end departmental stores or fashion stores are targeted at affluent customers who are conscious about style, fashion and service level of the store while factory outlets are typically for value conscious customers for whom price matters most. Different formats also are targeted to meet the need of same customer at different point of time. For example people visit a convenience store to pick up their daily needs like bread, milk etc. quickly whereas you may visit a Food Bazaar store once monthly to pick up your monthly grocery ration. Visiting a departmental store may be a weekend fun trip for you—where you spend time, see and compare different products and brands and then take a purchase decision. It is not necessary that only organised retail chains are successful with formats. The good example of this is Mustafa, a standalone store in Singapore, not part of any global retail chain but perhaps a must see hypermarket for any one traveling to Singapore. The leading Indian retailers are doing many experiments with different formats. The best example of this is India’s largest retail chain Future Group, which successfully experimented many such formats. Today, Future Group is running stores under 20 different formats and interestingly the logistics need of most of them are catered by Future Group’s own logistics arm called Future logistics. The table below shows different active retail formats of Future Group. Format type

Merchandise category

Formats

Hypermarket

Every thing Apparel Food and Grocery Home Furnishing

Big Bazaar Pantaloon Food Bazaar Home Town, Furniture Bazaar, Collection I (High end furnishing)

Specialty stores

Book, Stationery, Gift Consumer durables/ White goods /Electronics Footwear

Depot Electronics Bazaar, E Zone Shoe Factory (Contd.)

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(Contd.)

Lifestyle Mall Value Store Retail Finance

Fashion Items Sportswear and sports items

Fashion Station Planet sports

Lifestyle products Mainly Apparel Financial products

Central Brand Factory, KB’s Fair Price Future Money

Reliance is also trying with several formats. However till date the most number of stores are under Reliance Fresh for which Reliance is heavily investing on back end integration, logistics infrastructure and planning to enter into contract farming in a big way for the future. Format type

Merchandise category

Formats

Hypermarket Mini Hypermarket

Every thing Every thing Food and Grocery Apparel

Reliance Mart Reliance Super Reliance Fresh Reliance Trends

Specialty stores

Consumer durables/White goods/Electronics Book, Music, Stationery, Gift, Toy Consumer durables/White goods Health/Beauty/Pharma/ Personal care Jewellery items Footwear Automotive specialty

Reliance Digital, iStore (Apple Products)

Highway Hospitality service

Food joints

Reliance TimeOut Electronics Bazaar, E Zone Reliance Wellness Reliance Jewels Reliance Footprint Reliance Autozone A1 Dhaba

Tata, the India’s most prominent business house got into retailing long back with Titan and Tanishq stores for watch and jewellery retailing. Of late they have entered into several specialised categories and want to start their B2B venture in near future. Format type

Merchandise category

Formats

Hypermarket Specialty stores

Every thing Apparel Jewellery Watches Book Consumer durables/ White goods/Electronics

Star India Bazaar Westside Tanishq Titan Stores Landmark Croma

K Raheja Group known for Shopper’s Stop have changed the way book retailing is done in India through their Crossword stores. Recent addition is to get into Hypermarket and Home furnishing. Format type

Merchandise category

Formats

Hypermarket Departmental Specialty stores

Every thing Every thing Home Book

Hyper CITY Shoppers’ stop Home Stop Crossword

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RPG Group known for Music World stores and the largest music production company in India having H.M.V. brand in their portfolio is also trying with several retail formats. Format type

Merchandise category

Formats

Hypermarket Supermarket Specialty stores

Every thing Every thing Food and Grocery Music

Spencer’s Hypermarket Spencer’s Supermarket Spencer’s Daily Music World

ORGANISED B2B CASH AND CARRY FORMATS Cash and carry is a wholesale or B2B retail format where customers are also business people who come to store, select items, do their own picking, and pay in cash and carry the merchandise themselves. Globally this is a successful format that intends to reduce several layers in the wholesale business and brings significant benefits to small businesses such as retailers, traders, hospitality segment, hotels, restaurants, caterers, vegetable resellers, small to medium business enterprises etc. As cash and carry retailers buy directly from producers/manufacturers/farmers/agricultural cooperatives and sell to business customers in large volume from their no-frills stores (there is no home delivery, people to help you in picking etc.), they can offer substantial price advantage. Cash-andcarry retailers do not sell directly to retail consumers as it is prohibited by existing government guidelines on foreign investment i.e. 100 percent foreign investment is permitted only in cash and carry retail and in no other formats. This segment has huge potential as India has close to 15 million kirana stores and as kirana stores dominate Indian retailing cash and carry is a very viable model here. Moreover kirana stores are not the only customers for cash and carry—hotels, restaurants, hospitality sector, caterers can become its customer. In recent times cash and carry retailing in this country has been in the news headlines for various reasons. Cash and carry retailers are expanding their operations Currently India has two global retail chains operating cash and carry format in the country. Metro AG from Germany and Shoprite of South Africa. Several global retailers are showing interest in this business The most talked about story here is of Walmart-Bharti story. The world’s largest retailer has shown interest to start their India operation through this format. A typical facility will be between 50,000 and 1,00,000 square feet selling a wide range of fruits and vegetables, groceries, staples, stationery, footwear, clothing, consumer durables and other general merchandise items. This venture has a major focus in fresh food and vegetables. Tata group’s retrial arm Trent is joining hands with UK retailer Tesco to enter this business. Under this agreement Tesco will receive a fee and in turn Trent can benefit from Tesco’s retail expertise and technical capability to support its hypermarket business Star Bazaar. France’s Carrefour SA also has plans to enter this market. Indian large organised retailers are looking at this format Large organised Indian retail chains are getting ready with their cash and carry formats—for example Future Group is already putting together their strategy for this format.

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Recent objections against cash and carry traders Cash and carry trade in India has seen several protests from wholesale traders and different political parties in the country in recent times with the objection that they are trying to monopolise the retail trade. There was delay and political protests while Metro was planning to open their latest store in Kolkata. There was a belief that small kirana stores would have to close their shops if such kinds of MNC cash and carry establishments are encouraged. Metro defended it by informing that this is nothing more than vested interests of few wholesale traders who enjoy a virtual monopoly on agricultural trade and want to maintain status quo. Metro also believed that these wholesalers were felling insecure as Metro was paying more price to farmers. Farmers in future will ask the same from the wholesale traders as well and that is the reason wholesale traders wanted Metro not to deal in agricultural products. Metro’s claim was—all they are trying to do is to offer attractive prices by efficient handing of supply chain and thus reducing cost. In India the organised cash and carry retail not even contributes 0.1 percent of the total wholesale trade—so the notion they will take away business from all wholesalers may be a far fetched assumption. Even in developed countries in Europe where cash and carry is pretty common it does not contribute more than 55 percent of any country’s total wholesale trade. There were also complaints that Metro was actually selling directly to consumers which they are not allowed and anyone can get a Metro card whether he owns a business or not. AMPC guidelines need to be amended for effective cash and carry retailing in Agricultural products Cash and carry traders have been expecting amendment in this act for long time. Agricultural Produce Marketing Committee (APMC) guidelines prevent entities to trade in agricultural products from outside the APMC yards. The APMC guidelines in India vary from state to state i.e. Andhra Pradesh’s guidelines are very different from that of Karnataka and in Karnataka buying directly from farmers are not allowed. The union government had felt the need for making a change in APMC rules to break the monopoly of APMC traders so that there is investment in modern trade infrastructure like cold chain.

Cash and Carry Retailing—Supply Chain Dimensions Cash and carry retailing is all about managing the supply chain better and proper sourcing is the key driver for this business. The major supply chain dimensions of cash and carry retailing in India are: l Cash and carry can reduce wastage, middleman and final price of product In India, 45 per cent of the cost of throughput produced by small manufacturers is on account of the inefficient and fragmented supply chain. Products are first taken from the manufacturing unit to the distributor, and then to the wholesaler and the semi-wholesaler before reaching the retailer i.e. the neighbourhood kirana stores and everyone on the supply chain doing almost the same job adds absolutely no value, only costs. The maximum retail price (MRP) printed on a product takes this inefficiency into consideration and provide money to each link. For example, for agricultural products the supply chain is so long and fragmented, farmers get only a small fraction of the value at which their goods are sold in the consumer markets. This also results in very high wastage levels of fresh produce. As cash and carry buys products directly from farmers and manufacturers and sell directly to retailers, it reduces all these middlemen in the process. It thus provide better price both for customer and farmer/producer. l Cash and carry retailers improve efficiency of supply chain by investing in infrastructure and technology Cash and carry retailers in India have plans to make investment in world-class modern supply chain and back-end logistics infrastructure. This would enable them bring global best practices in areas as just-in-time inventory, retail information systems, GPS for truck and trailer tracking, cold storage etc., to improve supply chain efficiency.

368 l

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Supply Chain Management for Retailing Cash and carry offer wide assortment for small retailers under one roof at competitive price Entrepreneurs and retailers in Tier-II and Tier-III cities have access to the entire range of products available in the market. For example, Metro stocks approximately 19,000 SKUs in the food and non-food segment across more than hundred product categories. By aggregating the demand of small and medium businesses, cash and carry retailers can buy in bulk quantities and the savings made is passed on to the customers. Wide choice at competitive price is something everyone looks for. Cash and carry retailers offer distribution strength to farmers and small manufacturers Typically farmers and small manufacturers can not reach large markets due to lack of distribution strength and are forced to sell to wholesalers next door. Cash and carry model allows them to reach bigger market.

Successful Cash and Carry Business Model in India Metro, the world’s market leader in wholsale business had started their operations in Bangalore in Oct’2003. Since then Metro has opened five stores in the country—the most recent one being in Kolkata. Metro’s business model allows only registered business customers to purchase at Metro. Entry is restricted to authorised purchasers of business customers with a valid bar-coded photo identity card and this is controlled at the customer entrance. During the enrolment process, an agreement is signed between Metro and the customer organisation clearly specifying the conditions of sale, one of which is that all purchases will be for business purposes. Metro Cash and Carry has a membership of over a lakh in Bangalore, its main customers being hoteliers and restaurateurs, small food traders and retailers, and small business establishments. Metro is already doing substantial business in fish, meat and dairy products, having set up a landing platform in Mangalore and working directly with fish and meat suppliers. It has also tied up with 45,000 sheep farmers from Karnataka and Andhra Pradesh. Source: www.rediff.com (accessed on 29th September 2008); www.business-standard.com (accessed on 27th September 2008); www.thehindubusinessline.com (accessed on 7th August 2007)

Cash and carry retailing has one important message for wholesale trade—the wholesale trade needs to added value in supply chain process. Till date most of the wholesalers in our country add very little value in supply chain—bring it from the earlier link of the supply chain—store it for a few days—and sell it to the next link and add their commission for this activity. They need to look at their business processes—need to invest in technology and infrastructure for better supply chain efficiency—need to have better information about customers, buying patterns and what is happening at the field i.e. retail stores. Only then will their commission be justified.

RURAL RETAIL FORMATS Rural Retailing—Opportunity Rural Market is Really Large Here are some statistics l Two-thirds of the country’s consumers live in rural areas and almost half of the national income is generated here. l 70 percent of India’s population lives in 6,27,000 villages in rural areas.

Managing Supply Chains of Different Retail Formats l

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There are almost twice as many ‘lower middle income’ households in rural areas as in the urban areas. With 128 million households, the rural population is nearly three times the urban. Rural India has a large consuming class with 41 per cent of India’s middle class and 58 per cent of the total disposable income. Rural market accounts for close to 70 per cent of toilet soap users and 38 per cent of all twowheelers purchased. The rural market accounts for half the total market for TV sets, common durables and FMCG products. Rural market for FMCG products is growing much faster than the urban counterpart.

Rural Retailing—Challenges Supply Chain Complexities l

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Infrastructure facilities Rural infrastructure i.e. roads, warehouses, communication systems etc., are grossly inadequate, which makes physical distribution costly. Some times villages are inaccessible during the monsoon. To service remote villages, stockists use autorickshaws, bullock carts and even boats in the backwaters of Kerela. Coca-Cola, has evolved a hub and spoke distribution model to reach the villages. To ensure full loads, the company depot supplies, twice a week, to large distributors who act as hubs. These distributors appoint and supply, once a week, smaller distributors in adjoining areas. To control the rural supply chain HLL engaged a network of rural sub-stockists, who are based in the villages and started Project Shakti with rural women (described later). In most cases product availability becomes the major determinant of which brand to choose. Highly scattered market India’s 6,27,000 villages are spread over 3.2 million sq km, consists of 70 crore consumers. There are some villages with a population of more than 5,000, which any rural marketer or retailer will look for. This highly scattered market makes it difficult to ensure the availability of a brand all over the country. Availability of spurious brands For any successful branded product, local variants are available which are much cheaper. Seasonal income and hence higher seasonality in demand For most of the people, the only source of income is agriculture. Hence rural prosperity is tied with agricultural prosperity and demand is more skewed during harvest seasons especially for items like durables. Relook at product strategy for affordable products Per capita incomes in rural areas are low compared to urban areas as most of the consumers here are on daily wages and this raises the issue of affordability for rural consumers. Companies came up with innovative product designs to handle this i.e. introducing small unit packs like Godrej’s Cinthol in 50 gm packs, priced at Rs 4–5, HUL’s largest selling soap brand, Lifebuoy at Rs 2 for 50 gm, Coca-Cola’s returnable 200 ml glass bottle priced at Rs 5. Communication Communicating to rural consumers is always a challenge due to low level of literacy, many languages and dialects and low reach of mass media. Low level of literacy creates problems for print media. Number of languages/dialects varies widely from region to region and village to village. Any pricing information, sales promotion, product quality features need to be delivered in local languages/dialects. Mass medias like television have not reached 50 percent of villagers till date and radio is the most common mass media. Marketers are taking help of many unconventional, innovative media these days to reach rural people like events (fairs and festivals), Haats, Vans, Road shows, shop-fronts, walls, putting stickers on the hand

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Supply Chain Management for Retailing pumps etc. Godrej Consumer Products and Coca-Cola use radio to reach the local people in their language. Communicating in local language is must for all marketers.

Few Successful Rural Retail Formats Direct Retail/Direct to Home Distribution—Project Shakti Project Shakti was launched by HUL in the year 2001 and the purpose was to integrate social interest with business rationale. The pilot project was done in Nalgonda district of Andhra Pradesh in 50 villages in year 2000 with support from Andhra government. Since then It has since been extended to several other states and today there are more then 40, 000 Shakti Entrepreneurs. Under project Shakti, HUL offers a range of products to SHGs relevant to rural customers (like soap, toothpaste etc), help them to get micro credit. The people work with the women on the field and provide them with on-the-job training and support to manage their enterprise. This is a win win situation for both as this gives women sustainable income contributing towards better living and for HUL, these SHGs become direct-to-home distributors in rural markets and help in penetration of HUL products to reach areas of low access and low market potential (HUL has a large distribution network comprising 5,000 redistribution stockists and 40 CFAs (Clearing and Forwarding Agents). Yet this network covers only 75,000 villages directly out of the total 6, 00,000 villages in India). A Shakti entrepreneur receives stocks at her doorstep from the HLL rural distributor and sells direct to consumers as well as to other retailers in the village. Each Shakti entrepreneur services 6–10 villages in the population strata of 1,000–2,000 people. HUL has target to create 1, 00, 000 Shakti Entrepreneurs covering 5, 00,000 villages, and touching the lives of 600 million rural people by the year 2010. Extending this concept further in 2003, HUL introduced ‘i-Shakti’ in 400 villages of Andhra Pradesh, an IT based rural information service to provide information and services to meet rural needs in agriculture, education and health and hygiene. HUL will work with ICICI bank to distribute financial products through i-Shakti kiosks like life and general insurance products, mutual funds, bonds, personal credit, and rural savings accounts etc. HUL is talking with non-competing companies like Philips (bulbs) for a partnership to distribute their products through this network. Source: www.coolavenues.net (An article of Navya Chaudhary, NIFT); The Hindu Business Line, 29th May 2003; and The Financial Express, 2nd March 2004

Aadhaar Godrej Aadhaar is the agri services cum retail initiative of Godrej Agrovet Ltd offering services like: crop advisory, soil and water testing, buy back of output, crop finance, supply of agri inputs and animal feeds, door delivery of products etc., and offering a number of other product categories like durables, FMCG, apparels, footwear etc. Presently there are around 50 Aadhaar Centres across the country. GODREJ Aadhaar is planning to set up at least 1,000 stores across rural India in the next five years. The company is now in the process of developing these outlets into a one-stop solution for all the needs of the rural population and in the process of roping in corporates to partner in the venture. On the anvil is an array of services for rural house holds from the basic food, grocery, apparel, footwear to furniture, kitchenware and home appliances to value-added services including banking, postal services, pharmacy to be made available at these stores to ease the burden of the entire farmer community. The company is in the process of talking among others to Apollo Hospitals to set up pharmacy/polyclinics at the large format stores. Recently Future Group had taken 70 per cent stake in Godrej Aadhar and wants Aadhar to serve as a procurement hub for the Future

Managing Supply Chains of Different Retail Formats

Group’s different food and grocery retail formats like Food Bazaar, KB’s Fair Price etc., and in future to other retailers as well. Aadhar Retailing will buy the farmers’ produce and getting into the business of output management with the intention of selling the farmers’ produce to other retailers. Currently the company is reaching out to 50,000 farmers every month across 2,000 odd villages across Punjab, Haryana, Maharashtra and Gujarat. Aadhar also intends to provide solutions for farmers i.e. advising farmers on what to produce and giving services such as soil testing and weather prediction facilities etc. The existing Godrej Aadhar outlets will be stocking the Future Group’s private labels and financial products such as insurance based products. Source: www.godrejagrovet.com (accessed on 15th May 2009); www.business-standard.com (accessed on 17th May 2006)

Hariyali Kisaan Bazaar DCM Sriram Consolidated Ltd. (DSCL) have successfully pioneered the concept of Haryali Kissan Bazaars rural departmental stores in 2002 in Hardoi, to meet the diverse needs of the Indian farmer like farm inputs ((fertilisers, seeds, pesticides, animal feed), farm implements, spare parts, irrigation equipment, spraying equipment. Each store covers an area of three to four acres and is managed by a team of seven to eight people whom the company trains continuously. The total number of Hariyali outlets is more than 100 as on date DSCL plans to expand to 250– 300 outlets in future. This Bazaar offers the rural household all farming and consumer products and related services along with financial services under one roof. These include multi-brands of agri inputs, FMCG, consumer durables, apparels, footwear, toys, general merchandise, insurance etc. The outlets also provide the farmer, expert advice on new farming technologies. The company also launched credit services in association with HDFC bank, providing loans for various purposes. The company also takes part in bulk procurement activity and trading activity of various grains (maize, wheat), pulses (chana), oilseeds (mustard), menthe oil, coriander etc. Source: www.dscl.com (accessed on 15th May 2009); www.thehindubusinessline.com (accessed on 28th June 2005)

Rural Retailing—ITC’s Chaupal Sagar Rural Malls ITC’s Chaupal Sagar is an extension of e-chaupal initiative. Chaupal Sagar are warehouses for storing the products that ITC buys through its e-chaupals and a part of the warehouse is treated as mall / supermarket for rural shopping and works as a low cost distribution channel for rural India. The first set of malls came up in Sehore in Madhya Pradesh. (Chaupal) Sagar stores wide variety of products like sarees, kurta-pyjamas, shirts, footwear, groceries, electronic durables, farm consumption products like seeds, fertilisers, pumps, generators, insurance products for farmers etc. Most of the brands it sells are national. These malls will have banking and automated teller machines, primary healthcare facility, training facility on modern farm techniques, Information centres (provide information on commodity rates) etc. Like any other e-chaupals farmers can also come, log on to Internet, check prices and sell their commodities. ITC invests in infrastructure, space, computers etc., and in turn charge a fee for the items sold at the mall. Through this initiative, ITC wants to provide rural farmers a single platform to sell their produce and purchase necessary farm and household goods under the same roof. By setting up the mall next to the warehouse, ITC is trying to monetise the footfalls from farmers; that is every time farmers visit ITC’s

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factories to sell their produce, they also have the opportunity to spend their freshly earned cash and can take these products in the empty vehicle they bought. A local farmer manages each e-Choupal. E Chaupal started with a pilot project in June 2000 in Madhya Pradesh. Currently, it covers six states, multiple commodities and there are around 4,000 Choupals. ITC targets to reach 15 states covering 1,00,000 villages and 20,000 Choupals by 2010. Each e-Choupal equipped with a PC, Internet connectivity, printer and UPS is housed in the farmer’s house, is linked to the Internet via phone lines/VSAT connection, and serves an average of 600 farmers in 10 surrounding villages within about a five kilometre radius. Using the system costs farmers nothing, but the host farmer (known as sanchalak) incurs some operating costs and get a commission paid him for all e-Choupal transactions. The computer can be used to access daily closing prices on local mandis, to track global price trends, to order seed, fertiliser, and other products from ITC or its partners. Generally prices are lower than those available from village traders. The sanchalak aggregates the village demand for these products and transmits the order to ITC. At harvest time, ITC buys crop directly from the farmer at the previous day’s closing price, the crop is then transported to an ITC processing centre for weighing and quality assessment and after that the farmer is paid for the crop and a transport fee. This is a win win model for both where farmers benefit from accurate weighing, prompt payment, a higher price than what they would have received from mandis and a wide range of information about market price, trends etc whereas ITC benefits from lower procurement costs as they buy directly from farmers, control over the quality of what it buys, use this network as a distribution channel for its products. As typically farmers come to e-chaupal only during harvest time and Chaupal Sagar malls are located next to it, one risk is that farmers will also carry cash to Chaupal Sagars only during harvest time. For this ITC is planning a series of strategies so that farmers keep coming to these malls as these malls will house bank, cafeteria, insurance, learning centre offering farmer training programmes, a place to display agricultural machinery, a place for pesticide and fertiliser companies for demonstrating their products, a petrol pump etc. In Chaupal Sagar, ITC first pushed its own products, like salt and then invited others like Parachute and Philips to use this distribution channel. ITC has planned to open 1,000 such rural malls and 40 rural shopping centres in those states where it has a presence through its e-chaupals. Source: www.iteportal.com; india.retailmantra.com (accessed on 15th May 2009)

AIRPORT RETAILING Airport retailing is becoming a big business globally and India is not an exception. Upto 1980 the only retail shops you were accustomed to seeing at most of the Indian airports was one duty free shop. However the last decade had seen dramatic changes in all this and airport retailing has become serious business in India too. The reasons are: l Increase in travel Airfare became affordable as competition increased with several airlines starting operating in Indian sky. The introduction of low cost airlines and smart pricing schemes made air travel less expensive. Travelling for personal needs or travelling abroad on vacation— which was a remote dream for most Indians a few years back, is not so today and it is not uncommon to find your neighbour planning his next vacation in Singapore or Bangkok. l Increased duration the passenger needs to spend in airport The stringent security measures necessitate passengers today to arrive early and need to spend on an average two hours before departing—a good time to check some thing in stores around. l New international airports Most of the Indian airports are going through a modernisation drive with new international airports coming up Bangalore and Hyderabad. Gone are the days

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when a few duty-free shops and newsstands dominated the small commercial space provided in airports. Now a days airports are designed with the goal of incorporating substantial retail space. Some of the best international airports around the world like Heathrow, Dubai, Singapore or Frankfurt have been built keeping the need of ample commercial space in mind. Dubai International airport—the third largest in the world is known for duty free retail around the world. There are some categories of merchandise which are more suitable for airport retailing and these are items like perfumes and cosmetics, luxury goods, wines and spirits, tobacco goods, confectionery, souvenirs etc. Airport retailing is booming because vacationers want to bring home souvenirs of their trips and pick it up from airport. People who want to buy the best wine brands at subsidised prices from airports as it is not available in their city. Supply chain issues in airport retailing: l The space is very much at a premium for airport retailers. The airport stores are much smaller— with no back yard for storage. This necessitates retailer to decide selection of items very carefully and keep in the store exactly what sells. l Logistics of getting goods to the airport store is always a challenge as airports are typically governed by fixed and limited hours of delivery. Servicing outlets need to be quick as there is very little stock and stock can move fast. l Heavy security at airports is also sometimes a challenge for airport retailers. Emergence of liquid explosives threat to airlines have forced several airports to implement strict restrictions on what and how much liquids passengers can carry with them while flying and only small quantities of liquid can be taken through security checks in sealed, tamper proof bags. Though customers need to know these, as a responsible retailer an airport retailer also needs to guide customers while making purchases and ensure proper packing of goods. l One of the other problem in Airport retailing in India is different sales tax from state to state and current Indian customs handbook rules regarding duty free retailing is very subjective. It is open to several interpretations and this lack of consistency causes problems for Indian airport retailers. Airport retailing is a profitable business and profits can be much higher then high street outlets— and that is making many organised retailers in the country to think seriously. Coffee Day already has strategy in place to be present in leading Indian airports. Apollo Pharmacy chain is also present in few Indian airports. In UK, electronics chain Dixons and books retailer WH Smith is present in almost every airport—in India such chains are still to emerge. It is also important to understand that the international airport is the first place where you create a mental image and first impression about that country—as these airports are a country’s entry and exit point for the world. While the layout and design of the airport matters, the airport retailers also can make a difference here with the look and feel of the store.

COOPERATIVE STORES Cooperatives are institutions run by voluntary membership and present in different aspects of our life—especially giving low income groups access to various goods and services like cooperative banks, cooperative housing societies and consumer cooperative stores. Cooperatives are autonomous bodies which have concern for their communities, keep intermediaries away from the channel and thus make essential consumer goods available at fair price, provide employment and provide education, training, information for its members and protects interest of its consumers. Perhaps the most successful example of an Indian cooperative is ‘Amul’ which today is a global brand, provide products to final consumers at competitive price while giving adequate return to its members.

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Some of the large consumer cooperatives in retail in India are l Kendriya Bhandar, Delhi l Apna Bazar, Mumbai l Sahakari Bhandar, Mumbai l Janata Bazar, Karnataka l Priyadarshani Super Market, of M.P. Federation at Bhopal Though much before the organised retail chains started in India—India saw the emergence of its first supermarket self service chains through these cooperatives; unfortunately today most of the cooperatives are making loss and loosing their competitive edge over modern retail chains except a few successful ones like Kendriya Bhander in Delhi. Kendriya Bhandar is the country’s largest consumer cooperative in terms of membership and has around 77,000 members having around 120 stores spread across India. It is known for its competitive price (i.e. selling prices of Kendriya Bhandar is treated as market benchmarks by other retailers) and quality of its products. Several ailing cooperatives are looking at corporate participation and investment to make its operation viable. In some cases such successful models emerged. One of the good examples of this is Sahakari Bhandar, a cooperative chain located in and around Mumbai selling consumer goods and grocery items. While these stores were having problem with funds, Reliance Retail came to their rescue, inked a deal with the cooperative to handle their complete supply chain requirement and sourcing for Sahakari Bhandar, directly from its suppliers. In turn it is paid for the goods by the cooperative. Reliance made investment in renovating the store, gave it a new look, kept it open all seven days for longer hours which helped in increasing their sales. This was a win win proposition for both as Reliance got access to prime locations saving initial infrastructure costs and ready access to a built up ready customer base and a trial ground for trying different options in its retail strategy development—whereas for Sahakari Bhandar—they could pay salaries to their employee and long standing dues of their suppliers getting confidence back from both, revamped their store and supply chain leading to increased sales and profit. Cooperatives understood that to survive they need to change their look, improve their product offerings and needed to improve their supply chain. One of the other cooperatives Apna Bazaar in Mumbai have taken several steps to upgrade themselves—used the expertise of a professional company, Radhakrishna Foodland for improving its supply chain management, store layouts and product mix, entered into diverse new product segments even selling LIC products from its stores and started opening outlets at petrol pumps.

NON STORE BASED RETAIL FORMATS Non store retailing is a retailing format where the product is sold to the customer through a direct relationship. It is broadly classified under two headings l Direct selling or one to one marketing through direct personnel contact. l Direct response marketing—Here the seller does not come in one to one contact with the customer but the customer becomes aware of the product through a non personal medium, orders it and delivery happens directly from the company to the customer. This can take variety of formats like 1. Mail order/Catalogue retailing (Through post mail) 2. Automatic vending machine/Kiosk 3. Tele shopping (Through telephone)

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Direct Selling This selling format involved selling of consumer product or service through personal contact with final consumer at his home or place of work away from a fixed retail location or shop. Direct selling encourages a pattern of multilevel network. Multilevel marketing allows sellers to build a business through their own sales efforts and by inviting others to become sellers. Here the first customer works like a master distributor and he in turn appoints other people who work with him as distributors. Remuneration is based on a seller’s personal sales and on the combined sales of those people he has sponsored, trained and motivated i.e. master distributor earns a commission on the basis of products sold and distributed by people under him. In India direct selling is not new. For long time insurance products was sold through this model where an insurance agent gets in touch with you or visits your house/workplace to sell the policy. It is also common for several other financial products like mutual funds, bonds, house loans etc. HUL’s Shakti project mentioned earlier in this chapter is a good example of direct selling in rural areas. Some of the other companies in India like Eureka Forbes (selling house cleaning machines, Aqua guard etc), Modicare are known for direct selling. Globally Amway is a big player in this space. Managing supply chain is core to direct distribution companies and let us see how the world’s largest direct selling company had redefined their supply chain for India. Amway the global leader in direct selling has presence in over 80 countries and sells more than 500 products. It entered India with its wholly owned subsidiary named as Amway India almost 15 years back and offered products in nutrition and wellness, cosmetics and skincare, personal care and homecare, energy drinks and energy bars etc., and has around 100 products in its portfolio. Though this is a direct distribution company, it has few physical ‘brand assessment centres’ through which Amway provides consultancy services to its customers on nutrition (wellness) and beauty. In India, it outsources close to 85 per cent of its products to contract manufacturers. In India Amway has redefined its primary distribution set up several times to enhance quality of service to distributors who are located in far flung cities. Amway India has also restructured its primary distribution set up. Initially, all supplies from the manufacturing units used to be consolidated at a central warehouse in Nagpur, before being distributed across the country. Later on they abolished the central warehouse and created four regional mother warehouses in four metros, which are serviced directly from manufacturing units. This has helped it to cut lead time and freight costs substantially and move closer to the point of consumption. All Amway warehouses and pick up centres/offices are connected on line, so that inventory planners have access to real time sales and relevant data. Amway also focused on integrating the back end of the supply chain i.e. manufacturing planning and material planning into the overall process. To improve its home delivery coverage exponentially over the coming years, the company has set up a hub and spoke system through its CFAs (clearing and forwarding agents), transporter network and local logistics service providers and not deciding only on courier services. Source: www.amway.in (accessed on 15th May 2009); The Financial Express, 1st February, 2002.

Direct Response Marketing Formats Mail Order/Catalogue Retailing Mail order retailing is a non-store retail format where the retail offering is communicated through a catalogue to the consumer and the major value proposition of this format is convenience as you can shop from home. This retail format became popular in a West in remote towns, to meet the needs of these towns and rural areas where it is difficult to run a regular retail stores profitably for very small volume. However today mail order retailing is only popular for some particular categories.

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There are many retailers who are using catalogue retailing but along with a physical store. The good example of this are furniture and jewellery retailers where you can choose products which are not physically ready yet from a catalogue while visiting the store and the store gives you an idea of retailer’s craftsmanship, quality and most importantly security. Having store presence cements the brand in the consumer’s eye and allows the customer to feel the product and ensures credibility and safety in the consumer mind. However this case is not a non store format. Whether catalogue retailing can work without a physical store has remained a debatable issue—one thing is sure that a combination of both works very well. Catalogue retailing supply chain challenges: l Building an attractive catalogue and keep it updated The catalogue is the only tool through which the retailer has to make an impression in consumer’s mind—so catalogue needs to be designed keeping target consumer in mind. Another challenge is to keep it continuously updated—adding new products, new promotions, dynamic and alive as the store itself, keeping prices updated which generally changes very frequently. l Logistics of delivering one product to individual customer economically The biggest obvious challenge is logistics and logistics network of retailer needs to be efficient enough to handle this. l Handling returns Efficiency of handling returns. l Credibility of retailer Unless the retailers are established as strong retail brands, customers will not experiment with catalogue retailing.

Automatic Vending Machine This is a popular form of retailing abroad where people purchase items like soft drinks, candy, cigarettes, newspaper etc from vending machines. This is a very impersonal form of retailing as the retailer never knows who purchased his item, and does not get any particular buying pattern of individual consumer etc. In India tea, coffee vending machines are getting popular in airports, few malls and some of the office campuses, specially software company campuses. While at the office campuses these vending machines are generally unattended though there are people only replenishing at regular intervals—in malls and airports it is not fully unattended because the cost of labour is cheap here—however this defeats the purpose of vending machine to certain extent. The most successful example of vending machine is definitely ATM. Indian Railways Catering and Tourism Corporation Ltd (IRCTC) plans to have automated vending machines for coffee, coca cola etc., in all railway stations having high footfalls and high density in the country in future. Already few of them are operational. From supply chain point of view monitoring stock at these machines is a challenge as unlike ATM where cash reserve is monitored centrally and also by the ATM security guard, in this case investing on an infrastructure for automated monitor will not justify return at least for next few years—so replenishment based on demand pattern during different hours of the day need to be analysed and replenishment/refilling needs to be planned accordingly so that these machines do not go out of stock.

Television Shopping In this form, the product is advertised on television with details of product features, price etc., and phone numbers are provided for each city where the buyer can call and order the product. The product is home delivered after particular number of days as confirmed during order taking. In India, Asian sky shop first started this and later on there were other teleshopping players like Tellybrand, Shop 24 Seven and TVC. Jewellery linked to religion and astronomy is the hottest selling category in India in tele shopping and majority of the consumers are female. In US, Tele Shopping Network is big business but has not picked up much in India as touch and feel is very important in the Indian context.

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ONLINE SHOPPING/ E TAILING Online Shopping Vessus Physical Retailing—Comparing from Supply Chain Perspective Online Shopping Advantages l

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Much better stock with no inventory A brick and mortar retailer can only carry a limited amount of stock. Store space is finite and there is a restriction on inventory. For the e-tailer, the concept of ‘in stock’ is different. What matters is delivery time. For example, some items can be quoted as ‘in-stock’ on three days delivery, others can be ‘in stock’ on ten days delivery. The interpretation of this is that the items are in-stock somewhere in the supply chain. Effectively, this means e-tailers can carry much bigger stock than brick and mortar retailers without inventory risk. So if a physical retailer offers 20,000 items in a store with many items of outof-stock, the internet offers millions with the potential for far lower out of-stocks. Easier and faster shopping Information of products is few clicks away while the consumer sits in the comfort of his or her home, need not travel and it saves time and extra travel cost. Comparing prices The consumer no longer needs to travel store to store and can compare prices over the internet. Providing better information about the products It is important for certain retail merchandise categories like high end electronics items. Online channel can provide a plethora of information and compare different items based on technical specification. To replicate the same in physical store, you need many knowledgeable sales associates which is not cost effective. The cost of adding information to an electronic channel is likely to be far less than the cost of continually training thousands of sales associates. Measuring lost sales For physical retailer, estimating demand for out of stock items is problematical. The Web retailer can record every purchase request, satisfied or not. This means getting a true figure for lost sales and making sure the mistake is not repeated. Customised pricing In physical stores all customers buy at the same price. The Web retailer can adjust the price, to match the customer. The individual consumer can be treated to individually tailored deals and discounts. Personalisation The electronic channel can economically personalise the information for each customer, the way your nearby mom and pop store knows what the preferred customers want. No restriction The Internet offers unlimited shelf space and is not bound by operational timings and geographical boundaries. Buying unique items The ability to purchase items that may not be readily available or accessible within close proximity and quickly. For instance, book titles, or entertainment and gaming software and video and music, or even personal durables such as cameras etc., where having the ‘latest’ versions may matter to people who belong to the ‘early adopter’ segment. An electronic channel enables retailers to gain valuable insights into their customers’ shopping behaviour and gives him an opportunity to reach new markets.

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Touching, feeling products, trying it out The greatest benefit offered by stores is the opportunity for customers to use all their senses and examine the products—to see and touch it i.e. checking the quality and texture of apparel, checking freshness of grocery items etc. Even the best technologies of online retailing like 3-D representations on a CRT screen will not

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Supply Chain Management for Retailing provide the same level of feeling/information and confidence to consumers. For certain merchandise categories like apparel, customers may like to take a trial before taking a decision to check how it looks and fits him—it is common to have trial rooms with physical retailers— internet retailers can not dream of it. Browsing Generally shoppers who visit the store often only have a general idea of what they want but have still not decided on the specific item. They go to a store to see what is available before they decide what to buy. Most consumers prefer browsing in stores than browsing electronic catalogues of online shoppers. Cash payment Stores accepts cash payments. Many customers prefer to pay cash because it is easy resolves the transaction immediately, and there is no interest payments. As online channels can not accept cash, there are several issues: you need to have first a credit card before starting shopping. In countries like India sometimes people do not like to disclose their credit card number over internet for security reasons etc. Immediate gratification Stores have the advantage of allowing customers to get the merchandise immediately after they buy it. In online it will come to you after few days. Entertainment and social experience Stores are a social experience and sometimes an experience of fun for housewife, elderly people or complete family. Personal service Sales associates still have the capability of providing meaningful, personalised information. They can tell the shopper if a suit looks good, suggest a tie to go with a dress shirt, or answer questions that the shopper might have about what is appropriate to wear at a business or a casual event. Customers for durable goods such as appliances report that salespeople are the most useful information source, more useful than consumer reports, advertising and friends. Online fulfillment Home delivery of the product is the biggest problem of online retailing as it is expensive and it is inconvenient for consumers to return products they do not want.

What Sells Online? Typically the products that sell online better are following items: l Items are not of very high value. l It can be shipped without much problem (i.e. people do not like to order items like carpet or mattress over internet). l Where touch and feel of the products are not important to take decision.