Inventory Practices at Organised and Unorganised Retail - observations

Submitted By:-

Group 22, Section C

Xavier Institute of Management,

Bhubaneswar

Anuj Das (U109107)

Anup Merkap (U109108)

Ashutosh Didwania (U109109)

Binay Prasanna Jena (U109110)

Biswajit Ku Mahapatra (u109111)

Chiranjit Mandhata (U109112)

Procurement and Inventory Practices in Organized Retail

and Kirana Stores

Procurement and Inventory Practices at Organised Retail and Kirana Stores

Contents___________________________________________________________________________________________________

Acknowledgement..........................................................................................................................3

Inventory........................................................................................................................................4

Inventory Costs...............................................................................................................................4

Inventory Systems...........................................................................................................................5

Single Period Inventory Model........................................................................................................5

Multi-period Inventory Model.........................................................................................................5

Fixed Order Quantity Model............................................................................................................5

Fixed Time Period Model................................................................................................................5

Price Break Models.........................................................................................................................6

Retail..............................................................................................................................................6

What is Retail?................................................................................................................................6

Stages of Retailing...........................................................................................................................6

Types of Retailing............................................................................................................................6

Organized Retail & Unorganized Retail............................................................................................6

Organised Retail Store: The World..................................................................................................7

FMCG procurement and inventory practice.....................................................................................7

Non- FMCG procurement and inventory practice............................................................................8

Recommendations: The World........................................................................................................9

Customised Information System.....................................................................................................9

Introduction of CRM software.........................................................................................................9

Shifting the Administrative Centre and Office to basement.............................................................9

Improvement in Storage Space Facilities.......................................................................................10

Increasing the Space for Renting Company specific products.........................................................10

Unorganized Retail Kirana Store: Panda Variety Store...................................................................11

Recommendations: Panda Variety Store.......................................................................................13

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Operations Management - II


Following ABC Inventory Classification..........................................................................................13

Restructuring of the shop layout...................................................................................................14

Maintaining a register of the inventory.........................................................................................15

Acknowledgement

We extend our grateful thanks to all those who have helped us in our project related to

inventory management practices of kirana stores and organized retail. First of all, we

would like to thank our Operation Management faculty, Prof. S.K.Bishwal who gave us

the opportunity to do this project.

Next, we would like to thank Kirana store co-owner Mr. Prashant Kumar Panda (Panda

Variety Store, Maitri Vihar) and Organized retail outlet ‘The World’ employees

[Mr.Sudhanshu Sekhar Padhi, Purchase Manager, The World, Bhubaneswar] who helped

us in due fact gathering step, without whose help and contribution our project would

not have been possible.

Lastly we would like to thank all the people who helped us throughout this project.

Declaration: The assignment report is the original work of undersigned. This activity and all related details have been gathered for the purpose of this academic assignment. Absolute confidentiality regarding the details and processes shared will be maintained and will not be shared for any purpose whatsoever beyond academic reasons.

Group 22, Section C, PGDM 2009-2011

Anuj Das (U109107)

Anup Merkap (U109108)

Ashutosh Didwania (U109109)

Binay Prasanna Jena (U109110)

Biswajit Ku Mahapatra (u109111)

Chiranjit Mandhata (U109112)

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Inventory

Inventory is the stock of any item or resource in an organization. An inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished and how large the orders should be. All firms maintain a supply of inventory for the following reasons:

To maintain independence of operations: Supply of materials at a work station allows that center flexibility in operations.

To meet variation in product demand: If the demand for the product is known precisely, it may be possible to produce the product to exactly meet the demand.

To allow flexibility in production scheduling: A stock of inventory relieves the pressure on the production system to get the goods out. This causes longer lead times, which permit production planning for smoother flow and low-cost operation through larger lot-size production.

To provide a safeguard for variation in raw material delivery time: Delays can occur in material delivery for a variety of reasons: normal variation in shipping time, shortage of material at the vendor’s plant causing backlogs, lost order, etc.

To take advantage of economic purchase order size: There are costs to place each order. Larger the order size, smaller is the number of orders, and hence, lesser is the cost.

Manufacturing inventory refers to items that contribute to a firm’s product output. Manufacturing inventory is classified into raw materials, finished products, component parts, finished supplies and work-in-process. In the service sector, inventory generally refers to the tangible goods to be sold and the supplies necessary to administer the service.

Inventory Costs

The following are the inventory costs:

1. Holding (or Carrying) Costs: This includes the storage, handling, breakage, depreciation, taxes and the opportunity cost of capital. High holding cost leads a company to maintain low level of inventory.

2. Set-up Costs: To make each product involves obtaining the necessary materials, arranging equipment set up, etc.

3. Ordering Costs: This cost refers to the managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details such as counting items and calculating order quantities. The costs associated with maintenance of the system needed to track orders are also included in ordering costs.

4. Shortage Costs: When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled. There is a trade-off between

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carrying stock to satisfy demand and the costs resulting from stock out. This balance is sometimes difficult to obtain, because it may not be possible to estimate lost profits, the effects of lost customers, or lateness penalties.

Inventory Systems

An inventory system provides the organizational structure and the operating policies for maintaining and controlling goods to be stocked. The system is responsible for ordering and receipt of goods, timing the order placement and keeping the track of what has been ordered, how much and from whom. There are different types of inventory model which are mentioned below:

1. Single Period Inventory Model

2. Multi-period Inventory Model

3. Fixed order quantity Model

4. Fixed time period Model

5. Price Break Model.

Single Period Inventory Model

This type of problem is related to the fact that we have a product that has a high degree of perishability or obsolescence. At the end of the period the product has either sold out or there is a surplus of unsold items which will be sold for a salvage value. A penalty might be associated with under-ordering as well as when we over-order.

Multi-period Inventory Model

There are basically two types of multi-period inventory systems:

Fixed order quantity models (EOQ or Q-Model) Fixed time period models (Periodic Review System or P-Model)

Multi period inventory systems are designed to ensure that an item will be available throughout the year. Usually, the item will be ordered multiple times throughout the year, where the logic in the system dictates the actual quantity ordered and the timing of the year.

Fixed Order Quantity Model

Fixed order quantity models attempt to determine the specific point at which an order will be placed and the size of that order (Q). That is why it is called a Q-model. The order point is always a specified number of units. An order of size Q is ordered when the inventory available reaches a particular point. The optimal quantity to be ordered is known as Economic Order Quantity (EOQ).

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Fixed Time Period Model

In this system, inventory is counted only at particular times, such as every week or every month. Counting inventory and placing orders periodically is done in such situations. These models generate order quantities that vary from period to period, depending on usage rates. These require a higher level of safety stock than a fixed order quantity system.

Price Break Models

Price break models deal with the fact that the selling price of an item varies with order size.

Retail

What is Retail?

The everyday definition of retail can be described as the act of selling of goods and merchandise from a fixed location. In other words retailing is a distribution channel function where the retailing organization will buy products from certain manufacturers and then sell it directly to consumers. A retailer is a reseller from which a consumer purchases products.

Stages of Retailing

Suppliers and/or Manufacturers Logistics Partners Warehouse Distribution Centers Stores Customers

Types of Retailing

Organized Retail & Unorganized Retail

Organized retailing is based on the principle of unity and unorganized retailing is based on the principle of singularity. Both organized and unorganized retailing is found in most countries throughout the world. Today many countries have a growing economy because of the influx of organized retailers into their markets. The demand for giant malls with large department stores, cinema complexes, supermarkets, and pharmacy chains is the result of higher incomes and urban customers looking for convenience in shopping. Large chains such as WalMart, McDonald's and other organized retailers have reached across the world sharing their retailing expertise.

The unorganized mom and pop retailers and independent retailers continue to fulfill a need. The organized retailing giants are trading organizational expertise for a share of the markets across the world.

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Organised Retail Store: The World

Shopping - not only in terms of product availability, rather even providing a complete shopping experience has been the driver behind the advent of shopping malls. Strategic locations, ease of shopping, availability of all necessities under a single roof has led to the bloom of such convenience shopping malls across urban centres.

For the purpose of studying the procurement and inventory practices in organised retail sector we chose the retail outlet “The World”, a unit of Crackers India Infrastructure Limited, located near Kalinga Stadium, Bhubaneswar. The shopping mall is part of a chain of malls (started since 2007) spread across the state. Currently other The World stores are located in 4 different towns of Orissa. The mall with its tagline “A Family Shopping Mall” deals with wide array of product categories: Ground Floor - FMCG – Staples, Non-food, Food, Drinks and Beverages, Plastics, Greeting Cards, Stationeries; First Floor (Ladies Section) – Jeans, Tops, Salwars, Sarees, Ladies Shoes and Bags, Jewellery, Cosmetics, Lingerie; Second Floor (Men’s Section) – Jeans, Trousers, Formal Shirts, Casual Shirts, T-shirts, Accessories and Under Garments, Luggage, Shoes; Third Floor (Kids and Home Appliances) – Kids Boys, Kids Girls, Infants, Home Furnishing, Crockery, Home Décor, Shoes.

With a total floor area of 25000 sq ft and spread over 4 floors, The World employs 32 floor staff (including a supervisor for each floor). The basement of the mall is used for the purpose of stocking of FMCG goods as well as housing the purchase office of the mall. For stocking of non-FMCG (primarily garments, shoes and home furnishings), the mall has a separate warehouse at Mancheswar, Bhubaneswar. 6 persons (excluding the mall Purchase Manager) are employed in the basement for stock receipt, stacking, categorising, barcoding and carrying goods to shelves. The warehouse (at Mancheswar) employs 16 personnel - 10 of whom are dedicated for barcoding, stacking, logistics and transportation of non-FMCG goods (rest people handle relationships, accounts, management and co-ordination responsibilities). The warehouse serves the inventory needs of mall at Berhampur.

Regarding procurement and inventory practices for the mall, the products have been divided into two broad categories (on the basis of marked difference in procurement, sourcing and storing practices) – FMCG and non- FMCG items.

FMCG procurement and inventory practice

Fixed Time Period Model – weekly replenishment of stock along with periodic review- daily and fixed order quantity practice is being used primarily as part of its inventory policy. Each manufacturing unit had its own (or contracted) carrying and forwarding agent to deal with state’s distributor. Sales representatives of these distributors used to pay weekly visits (not necessarily on same day for all distributors). Say, HULs sales representative visits on Tuesdays,

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then P&G’s visits mall’s purchase department on weekly basis on Wednesdays. Each floor has a floor level meeting each morning to discuss customer issues and past day’s updates. Each morning the category wise indent figures are sent to purchase department (although weekly replenishment policy is followed, still daily review of indent figures is done to identify whether any category/brand/SKU specific purchase order is to be issued). Stocks are replenished with a day’s lead time. Sales for certain products are done by manufacturer’s own staff/ sales force, while greater margins or offers are sought on display or promotional hoardings. Minimum Base Quantity method of identifying the re-order point is practised. The MBQ model adopted was category specific. For eg. – for certain categories the MBQ level was decided based on shelf-space and for some it was a proportion of number of SKUs on shelf. Complan for instance had MBQ level of 2/3rd of shelfspace (=18 X500 gm tins) Scanning of daily indents identified MBQ levels if any, indicative of any sales trends, category/SKU specific preferences and accordingly stocking up inventory to avoid any loss of customer. Sales of products/brand enjoying promotional offers are normally comparatively higher than non-promotional products/ categories. Normally FIFO method is followed while maintaining inventory, however in case of any failures to clear out old stock is replaced with distributor, if identified within stipulated time. For certain items with less demand, and unwillingness of being replaced by distributor – stock of such goods is normally cleared out with promotional offers, with minimal margins on such sales. Items are stacked on the basement after shelving SKUs (category/shelf size specific quantities).Random sampling to check for any defective pieces in the lot or verification of expiry date is done while receiving the stock from the distributor. Occasionally these items stacked in the basement run the risk of pilferage or damage due to rodents or weather or human negligence. Payment for the purchase orders made may vary from 7 days to a month’s credit depending on relationship with distributor and latter’s policy. Order quantities are normally fixed exceptions being observed. Inventory stocks are inflated during peak demand seasons like marriages or festivals – depending on customer’s preferences for particular product categories during the season.

Non- FMCG procurement and inventory practice

The warehouse at Mancheswar stocks up garments, shoes and home furnishings. Staff [6 out of 16] (apart from administrative ones) at warehouse is responsible for receipt, barcoding, sorting (SKU-wise), stacking, transportation [since non-FMCG stock needs of Berhampur counterpart of this mall is also catered by this warehouse] and logistics operations. Replenishment of the stock is done on a quarterly basis.

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Recommendations: The World

Customised Information System

The existing stock-tracking system in place while being effective clearly lacks an efficient software driven Order Processing/ Tracking Sytem to support and facilitate it. Generally the routine checks of stocks sold and the stocks remaining are done daily, at the end of day’s operations. Though this ensures a more or less accurate picture of the expected business and forecasting the segment relative sales, there have been instances which necessitate a computerised and real time stock tracking system. For example, when the recent Youth Festival was held near Kalinga Stadium, loads of youngsters exhausted the Store’s soft drinks and aerated water stocks. And there was no way the Store could replenish the stocks at such short notice and many customers were turned down. So while the existing barcode system gives an exact idea of Stock figures on days of routine demand, it cannot handle sudden spurt in demand or any other sporadic changes in day’s sales. Thus a Sale Tracking System if implemented will send alerts about product categories at each two-hour intervals – thus triggering any purchase orders or any adhoc measures if required. This would help identify customer preferences during particular period of year. Again the expiry date of products could be fed into the system so that replacement of stocks can be done prior to expiry of products than after it. Again floor managers can independently keep track of the sales on their floor as this would minimise the time than taking complete stock of products across all floors. It can also keep track of customer’s purchase tendencies as well as staffing considerations by keeping track of footfall count and its trends during the day.

Introduction of CRM Software

While on the outset CRM seems to be a purely marketing gimmick, it can actually aid in optimisation of the organisation’s inventory management practises. Given the cut-throat competition existing in the Retail sector in Bhubaneswar market, profits are often hard to come by. Low barriers to entry and the ease with which competitors copy services undermine differentiation. The CRM software would help not only improve the store’s relationship with the customer, the only defensible competitive advantage it would also generate customer loyalty that would translate into reduced price competition. Also predictable buying patterns would reduce distribution costs, reduce inventory holding costs and spoilage. It also serves to extend product life cycle as only those goods that the regular customers want are stocked in large numbers. For example, the sale of Amul Butter is quite low in The World as compared to say, Big Bazaar. But the apparels section shows relatively stronger sales. So CRM software would aid in Business Intelligence and ably support customised information system.

Shifting the Administrative Centre and Office to Basement

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The Store’s warehouse though adequately stocked is quite far from the store being located in Mancheswar. So though its a sound strategy to hold bulk amounts of clothing accessories and products with longer shelf life, its not feasible to stock perishable items or FMCG goods at the warehouse. Instead they are stocked at Basement Storage Space. However the space in the basement hasn’t been optimally utilised with space being allocated for Parking and Toilets. The Office and its administrative centre on the other hand is located at Rasulgarh. This hampers taking on-the-spot decisions or keeping ready tab on purchase orders to be placed. Because it has often been seen that discrepancies exist in the cumulative figure of sales based on Salesmen’s feedback and the barcode generated stock figures. In such scenario its imperative to shift the office to basement and hence better utilisation of the space as well as keep better tabs on the day’s operations and also prompt deal negotiation with Product suppliers as well as customers ordering in bulk.

Improvement in Storage Space Facilities

While the storage space in basement is meant for perishable products in particular, there are frequent cases of rodent infestation and water spillage and product spoilage on account of lack of proper Cold Storage facilities as well as air ventilation (due to improper stacking). Such Improvements can only help in improving the shelf life of the products and reduce the transportation costs involved in dispatch of damaged or expired products and its replenishment.

Increasing the Space for Renting Company Specific Products

In segments like Beauty Care products, the company stations its own salesmen to sell them. So this could be utilised as a strategy where separate store Space is given to the companies on rent and the company’s salesmen themselves can keep a track of the stocks transactions. This would make it easier or the store to negotiate with individual companies as per the specific quantity of stocks that needs to be ordered and also determine the safety stock requirements of that company’s product line more accurately. So in all those places where its possible, segment wise stocking of goods can be usurped by Company relative stocking arrangement.

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Unorganized Retail Kirana Store : Panda Variety Store

To study unorganized retail, we visited a kirana shop at Maitri Vihar. Panda Variety Store, located in front of LIC Colony presented a picture that was a stark contrast to what we had seen at The World though quite a few parallels could still be drawn with respect to the products sold, their procurement process, storage and sales.

The shop with an area of 25 X 12 sq. feet is co-owned by two brothers who take turns to take care of the shop. They have hired no other employee and take care of the business all by themselves. When we visited the shop, younger of the two, Mr. Prashant Kumar Panda was at the store and helped us understand his operational strategy stressing on the procurement process and the inventory management method used.

The shop had the following items:

Food and beverage: rice, pulses, flour, oil, salt, spices, biscuits, chocolates, soft drinks, fruit juices, ketchups, noodles and other ready-to-cook-ready-to-eat food products, milk, bread, cakes and other dairy and bakery products.

Toiletries: Soaps, detergents, liquid soaps

Personal Products: Cosmetics, Shampoos

Others : Home appliances and decorative items, SIM cards of various cellular operators.

They bought all these varieties of items from multiple distributors. The procurement of the items was done using the fixed period model. All the distributors send their sales representative once a week to the store. For example, the representative from Proctar & Gamble visits the store every Thursday. Other distributors send their representatives on other days of the week. The store-owner, if he feels the need of replenishment, places an order to the distributor. The order quantity is based on his estimation and hence may not guarantee a correct order quantity all the time. The lead time for the orders to be delivered is generally within two days. While some distributors supply the orders the very same day in the evening after getting the order in the morning, others like HUL take two days while P & G products reach the shop the next day of placing the orders. The payment of the orders is mostly done after seven days of delivery of the order, in case of HUL the payment is done after 15 days. The bakery and dairy products are, on the other hand, procured and sold on a daily basis. The shop owner estimated the fill rate to be that of one week. Though hardly any major inspection is done during delivery of the orders, thanks to the trust on the distributors, the damaged items, if found then, are immediately replaced or are simply returned back to the distributor.

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The procured items are stored inside the store. There is no separate arrangement for storing the inventory. The shelf space is filled up by most of the products while others find some place for them on the floor. Some of the cosmetics and other products are provided attractive self-spaces which they get when the company pays the shop-owner extra charges for the special display of their products. The cartons of inventory are kept inside the same shop in such a manner that they don’t block the customer’s view of the shelves. Some of the cartons are also placed outside the store only to be brought in during the closing of the shop. Normally, the stocks of the goods ordered lasts a period of one week. During this period there are possibility of damage of products by the pests and rats. In this case, the products are either replaced by the distributor or the shop owner tries to sell any such damaged products with a discount offer on its sales, or simply consider it as a loss. If the product however, crosses its expiry date it is duly replaced by another one by the distributor. In case of dairy and bakery products, if they remain unsold for a couple of days, they are also returned to the distributor. Thus, the shop owner hardly loses any money on inventory not being sold off. Similarly, if an item runs out of stock and the customer asks for it, the shop owner admitted to convince him to buy a similar item rather than waiting for the particular item to arrive. For example, if a customer asks for Maggi and the seller doesn’t have any packet of Maggi left, he would rather suggest the customer to try another noodle rather than going to other shops for the desired product. Thus, the shop owner claimed that it is the shop owner and the customer’s relation with the shop owner that is a more influencing factor than the product or the brand. It is this trust that even prompts to sell the product on credit to the customers. Generally, the demand for the product is high during the first week of the month.

Also, these days, with the government and public sector employees getting their salary in the last week of the month itself, the demand again increases during this period. Hence, Mr. Panda said that he orders a higher amount of the items during these two weeks while the order quantity and the demand drops in the middle weeks of a month. Again during special poojas and other festive occasions the sales increase and he ensures prevention of stock outs by ordering more in these occasions.

Thus this is how the procurement process and inventory management operates in a kirana shop as observed by the group.

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Recommendations: Panda Variety Store

1) Following ABC Inventory Classification

The current lay out in the Kirana shop is highly disorganized. There is no systematic inventory control system being followed in the shop as a result of which there is huge amount of unaccountable cost incurred by the shop owner which he is not aware of. The loss may be in the form of unsatisfied customers or may be due to lack of proper inventory level. There may be several reasons for these problems. One of the major reasons is the management of the stock and inventory. No particular pattern is followed in the shop, due to which during peak times it becomes very difficult for the shop owner to locate the product. Also due to such type of arrangement the shop owner is not able to leverage upon the display charge that generally the distributors offer to the local retail shop for having displayed their product in a key strategic location. For this we suggest the shop owner to follow – ‘ABC Inventory Classification’ in which the products are classified into 3 categories basing upon their order of importance. The categories being –

Category A – outstanding important; Category B – average important; Category C – relatively unimportant.

The items are grouped on the basis of annual sales volume, in order to find out the small number of items that will generate the maximum profit. It is a form of Pareto analysis and it gives us an insight as to what should be the different levels of significance of the range of items and how they should be handled or controlled differently.

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Now once we identify the Category A products we can safely assume a constant greater demand for these products and maintain a relatively high safety stock for these products. We can forecast inventory or such products. However for the categories B and C, the shop keeper can continue using the fixed period inventory model. The shop owner was using his estimation based on years of experience for deciding the quantity of demand to be ordered each time. However, using a simple forecasting technique like moving average method could give a better result of the expected demand and hence reduce the inventory and operating cost of the shop-owner. What we have found out that the demand for the goods rises up towards the end of the month when the government employees get their salaries on 25th of the month till the mid of the 2nd week of the next month and then the sales drop. So the forecasting model can be built accordingly. Also the overall demand for the month may vary according to the climatic condition and special occasion. This can also be reflected in the model taking seasonality into account.

2) Restructuring of the Shop Layout

As had already been mentioned the shop faces acute storage issue, as a result of which many unsatisfied customer are sent back empty handed. And such opportunity cost may prove to be very expensive because when once lost, the customer might not come back. So it is very necessary to make use of the given space in the best possible way. Currently the shop area is 25 x 12 x 10 cubic feet with shelves all along the wall. The depth of the shelf is 1.5. Given below is the lay out of the shop.

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Now we propose to restructure the lay out so as to increase the store area. The front area is too big and is completely unutilized. So we propose a glass cover to half of the exposed area. The advantage of such erection would be the increase in the shelf space and also by using glass wall, we can increase the visibility area and thus area could be utilized for endorsing products and attract more revenue. Also we propose an erection of a wall in the middle of the shop as shown in the lay out below

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Shelf space area comes out to be:

25 X 10 X 1.5 + 10.5 X 10 X 1.5 + 10.5 X 10 X 1.5

= 680 cubic feet


Now, the shelf space has increased by 547.5 cubic feet. With such strategy in place, the shop keeper is not sacrificing on the existing display space instead increasing it. Also the space behind the newly erected wall can be used to store certain cartons which initially laid on the floor and gave the shop a dismal look. And the shelf space behind this wall can be used to store certain products which don’t require visibility as such.

3) Maintaining a Register of the Inventory

We didn’t see the shop-owners maintaining any registers where they could note down the number of items and the quantity of each item they had. They just relied on their experience, vision and memory to keep a note of the items and used it to estimate the demand and order quantity. Also, no record was maintained of the defective pieces or items that had crossed their expiry dates. They were just kept separately and returned to the sales representative of the distributors. However, there is always a possibility of missing out on any of these defective products if no written record is kept.

It won’t take much effort for either of the two brothers to just manually keep a stock of the inventory at hand twice a day- once in the morning, and then before closing the shop in the night. In this way he can keep a tab on the daily sales of his products and hence can forecast the demand of the items more accurately. He need not follow this approach for all the items present in the shop but for the essential items that are sold in large quantity or the ones that have a small shelf life or are very costly.

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Shelf Space now comes out to be:

25X10X1.5 + 10.5X10X1.5 + 10.5X10X1.5 + 13X3X10 + 10.5X10X1.5

=1227.5 cubic feet


Also, the register will have the information about the defective pieces and the ones that have gone past their expiry dates. This will not only help them to keep a note of all these unsalable items but also help them to get disposed of them as soon as possible by returning them to the distributors and getting their replacements in return.

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Inventory Practices at Organised and Unorganised Retail - observations

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