Procurement for Departmental Stores

- A study on Shoppers’ Stop & Akbarallys’

ObjectivesTo understand Procurement pattern of shoppers stop

One of the fastest growing departmental stores

One of the only stores to implement ERP and Supply chain management

To Understand the Procurement pattern of Akbarally’s –the oldest departmental store in Mumbai

To compare and contrast the 2 models and identify problem areas

Give suggestions to Akbarally’s by benchmarking Shoppers’ Stop

MethodologyInterview were conducted of approximately 70 minutes each with the following designated individuals

Purchase Manager

Merchandise manager

Logistics Manager

References

Mr.Devdas- Logistics Head – Shoppers’ Stop

Mr.Gopal – Head Men’s Division – Shoppers’ Stop

Mr.Yunus – Purchase Manager – Akbarally’s

Shoppers’ Stop

I. Shoppers Stop Profile

Setting up shop in 1991 with its flagship store in Andheri, Mumbai, and Shoppers’ Stop is a member of the K. Raheja Corp. of Companies. Shoppers' Stop is the first retail venture by the K. Raheja Corp. Promoted by Mr. Chandru L. Raheja, Mr. Ravi C. Raheja and Mr. Neel C. Raheja, the K. Raheja Corp. have been leaders in the construction business for over 48 years.

With its wide range of merchandise, exclusive shop-in-shop counters of international brands and world class customer service, Shoppers' Stop brought international standards of shopping to the Indian consumer providing them with a complete shopping experience.

India - 2000 & Beyond: Expanding its operations to Bangalore, Hyderabad, Jaipur, Delhi, Chennai, Ghatkopar, Pune (Mumbai) and most recently Calcutta, Shoppers' Stop is today recognised as India's premier shopping destination. It was awarded the "Most Admired Apparel Retailer" at the Images Fashion Awards 2000. With a customer entry of about 20,000 customers a day, a national presence with over 3,00,000 square feet of retail space and stocking over 450 brands of garments and accessories, Shoppers' Stop has clearly become a one stop shop for all customers.

Customer ProfileShoppers' Stop's core customers represent a strong SEC A and B+ skew. They fall between the age group of 16 to 40, the majority of them being families and young couples with a monthly household income above Rs. 10,000.

Range of the MerchandiseThe stores offer a complete range of apparel and lifestyle accessories for the entire family. From apparel brands like Provogue, Colour Plus, Arrow, Levi's, Scullers, Zodiac to cosmetic brands like Lakme, Chambor, Le Teint Ricci etc., Shoppers' Stop caters to every lifestyle need. Shoppers' Stop has also introduced its own line of clothing in the classic, value classic and value fashion segments. These are LIFE, STOP, KARROT and KASHISH that are available across different categories. The merchandise at Shoppers' Stop is sold at a quality and price assurance backed by its guarantee stamp on every bill.

Shoppers’ Stop has 4 division the Men’s apparels, ladies apparels, kids wear and the Non-apparels. Following is their contribution to the turnover.

Men’s 43% of sales Women’s 18% of sales Kids 8% of sales Non-Apparels 31% of sales

It operates with 90 departments handling around 450 brands managing a combined footfall of over 20,000 customers each day.

Shoppers’ Stop Motto: "We are responsible for the goods we sell".

Top Management Shoppers' Stop is headed by Mr. B.S. Nagesh, Customer Care Associate, Managing Director & CEO. The company has recruited top line professionals with hardcore retail experience from the leading companies in India and the UK.

Hierarchy in the logistics departmentDirector Buying and Merchandising

Supply chain management head

Manager logistics and distribution

Distribution Coordinator (link between SS and DC’s)

Four Distribution Centres

Operating costsThe logistics cost equals to 1% of the total turnover and includes the follow expenses Warehousing (OH, rents, staff, facilities), Transportation, Handling charges, Allocated Expenses, Re-packaging.

SWOT Analysis of Supply Chain

o Strengths – Suppliers, Efficient logistics, partners

o Weakness – Less control over inbound logistics

o Opportunities – Floor ready, Ready to sell garments

o Threats – Competitors, rapidly changing systems

II. Buying Channel

Shoppers stop has 4 regional distribution centres. Previously each store had its warehouse(DC) but that turned out to be a wrong strategy as the flexibility was being affected and costs were building up. There was also a lot of inventory pile up in each of these stores and hence added to cost in inventory and transportation from one store to another to transfer excess inventory.

III. Procurement Strategy Shoppers Stop has Centralized Procurement and no regional buying, the following are the benefits of centralized procurement:

Target profile same across the country

Better Cost Controls

Better Bargaining Power

Better inventory management

100% inventory control

100% tracking of inventory – (what’s selling what’s not?)

IV. Buying Process

Manufacturer

Mumbai DC Delhi DC Bangalore DC Calcutta DC

6 stores 3 stores 3 stores 1 store

Purchase Order Sent to the manufacturer

Delivery Authorization

Manufacturer Dispatches merchandise to the DC

DC’s check the merchandise and confirms through its systems

Accounts Department receives the confirmation

Payment to the manufacturer

DC transports weekly requirements to the store

Stocks updated in-store

Pre-retailing team displays the merchandise

Illustration

Purchase order for 5000 shirts of ArrowPurchase order is a guarantee from shoppers stop that they will buy but supplier cannot dispatch goods on PO. PO helps is reducing inventory cost as the goods are ready and stocked at the manufacturers place, so no inventory pile up at the DC’s or stores. 4 purchase orders are sent by the buying and merchandising manager for 4 DC’s.For eg Vendor ABC gets 4 Purchase orders from shoppers stop, for four DC’s Mumbai DC 2500 shirts catering to 6 storesBanglore DC 1000 Shirts catering to 3 stores Delhi DC 1000 shirts catering to 3 storesCalcutta DC 500 shirts catering to 1 store

Delivery Authorisation for 500 ShirtsDelivery Authorization is an international system followed by all major retailers. DA is prepared on the projected sales for that week. So if the PO (6monthly for 2 seasons) for all 13 stores is 5000 and for a particular week shoppers stop sells 500 shirts, it will send a DA for 500 shirts. Thus with delivery authorization system Shoppers Stop can place order according to the demand assessment with the condition that it would pick up a fixed amt every week. Thus it doesn’t have to stock goods at his place and block money in inventory. It also helps in better inventory management as it is based on weekly projections. It is an assurance for both the Shoppers Stop as well as the manufacturer.

Manufacturer dispatches the weekly requirements to the 4 DC’s according to the DA’s

DC’s check the details (date, number) of the product and match it with the invoice. Anything not matching even if it is one piece is rejected. If accepted it causes a mis-match between the Purchase Order and Delivery Authorisation. Hence the PO has to match with the Invoice carried by the Manufacturer.

Accounts department receives confirmation in the system for the pieces physically accepted. The accounts department can make payment that very second, in which they receive confirmation. This process is so stable and fast because of being connected and fully integrated.

Once the confirmation is sent by the DC, the stocks are transported to the stores. Dispatches are always made early morning. There is a PRE-

RETAILING Team that receives the stocks and their duty is to put them on display before 10.30 when the store opens, so that when the customer enters everything is on display.

Stocks are updated in the store

V. Warehousing o Regional Warehouses

o No in-store warehouses

o Number of warehouses - 4

o Location – Metros (Mumbai, Delhi, Banglore, Calcutta)

o Floor Area – 20,000 to 22,000 sq.ft

o Transportation from warehouse to Store – Done by the DC’s

Distribution centersDistribution centers for S.S are 100% outsourced to another company. Each of the distributions centers has a floor area of around 22000 sq.ft.. The DC is divided in to zones and1000 based on the brands or vendors. When a delivery comes in the person in-charge feeds in the details like merchandise type, brand name, size, color, batch number, date, etc. the system give him a ticket describing where the merchandise has to be kept. It gives a detailed description of the pile and rack number. Thus, even if the person is unacquainted with the slots of the DC, the system will tell him where to keep the merchandise. The systems are thus not dependant on any person and can work independently. This whole activity is outsourced to another company who acts as a internal supplier for SS. The delivery transportation from the DC to the stores is the DC’s task.

Advantages of having outsourced the activities Cost benefit No Labor problems – handling labor unions No liability for pilferage by own staff and damages Specialized expertise of the company Dictate terms to the outsourced company – 24 hours delivery, etc

VI. Inventory Management SS has a system of checking stocks on a continuous basis. There are 90 departments at SS each day one department is frozen after closing hours and the staff is made to scan the tags and feed in the stock levels in the system. The staff is completely unaware of the stock levels according to the system.

The system then compares the actual to the customary and gives a variance reports. Thus there is stock matching done everyday and the entire store completes a cycle in 3 months. That means SS conducts 4 cycles of stock taking each year. This has helped them get the pilferage to its minimum. As each day is accounted for and there is a complete match on a constant basis. In the day inventory levels get collated store wise. While in the night this information gets polled in the server and is integrated at the national level. Thus, each day the information on stocks available for that day and at which store is made accessible to each and every store.

Every day Auto Replenishment:Shoppers’ Stop has determined its minimum stock keeping units and as soon as the stocks in the store touch that level, the DC is triggered to send the replenishment. Thus the system automatically checks for stock out and replenishes it. The lead time for replenishment is 1 day. Every night data is collated and a store-wise list of merchandise is generated. During the day the dispatched is made ready and the next day morning 6.00am the truck leaves reaching the store in an hours time. The Pre-retailing team display’s the stock and by 11am when the store opens their work has to be complete.

Stock keeping UnitsStock keeping units are determined on the basis of moving averages. The system generates averages of the required quantities for the last two weeks. As the process is concurrent to the market conditions they go up with the demand and fall with the slump. The minimum units are fixed which are based on the past lows and highs.

How does the organization handle product discrepancies?Saturdays and Sunday’s account for 40% of the week’s business hence most fluctuations are expected on these two days. Inventory is stocked up on Friday based on the weekly forecast. But demand is never really unpredictable at shoppers stop. product discrepancies takes place very rarely.

VII. Sales Forecasting Sales forecasting is done for each brand then built up to the category then the division then store and then the entire organization. For example the men’s division head decides how much business Arrow can do this year and thus similarly for its other brand similarly the other division heads build up the figures for each brand and then each division arriving at a common figure at the top. After further deliberation and discussion with the CEO and Division head the company finalises its sales forecast.

Sales forecast for the spring summer season (1st April to 30th September) is done on 1st October, six months in advance. This sales if broken down division wise and further brand wise.

For Example:Shoppers’ Stop has targeted a business of 1crore with Arrow for its Andheri branch for the year 2003-04.For its spring summer business it targets a sale of 50,00,000

Season – 50lakhs Monthly - 8.33 lakhs Weekly – 2.08 lakhs

They keep a cover of 7 weeks hence need a stock of 14.56lakhs.

On an average a Arrow shirts Costs Rs.1000/- and a Arrow trouser costs Rs.1200/-. And the ratio of shirts to trousers is 70:30That means it needs to stock shirts worth 1.46lakhs and trousers worth 0.62lakhs of trousers for a week. This is equivalent to 146 shirts and 52 trousers. Shirts are in the ratio of 1:2:3:1 for sizes 38:40:42:44.

At the store Arrow shirts are kept at their average required units, that is 2 of size 38, 3 of 40, 4 of 42 and 2 of 44, and trousers too in their respective ratio. As soon as one shirt of arrow of size 38 is sold, the system alerts the DC to send one shirt of size 38 of arrow for the specific style and option. Thus the stocks are automatically replenished.

The DC also follows the same system. The DC stocks with a cover of 7 weeks so as soon as its stocks are at its minimum levels it sends a DA to the manufacturer to dispatch the order already kept ready for them. Shoppers stop give a 10 days delivery time to the manufacturer. If the good don’t reach in 10 days the order is cancelled. Thus they are very stern on the execution of their policies.

VIII. Payment Models Payment Systems: Shoppers stop uses 3 models for payments.1. Outright Model:In this model the company picks up the total merchandise on the payment of cash or on credit terms depending on the terms decided in the contract. They buy on outright 100% payment depending on the normal credit terms of 10 to 15 days. The main advantage in this model is they can avail discounts but if the stocks are unsold they incur losses as the last stage is that they have to be sent to charity!

2. Consignment Model- In this case the company pays only for the number of products they sell & the unsold are given back to the vendor. Pay only for Sale. They have this model with Arrow Shirts, wherein they put arrow shirts on display but pay only for the ones that are sold and the rest are returned. The benefit here is, no inventory cost and no risks, but the margins are very low in this model.

3. Concession Model- In this case space is given to another co. for opening a store within S.S something like shop in shop. EG: Nali saree. The advantages are Fixed rentals and commission but it suffers from low margins.

IX. Systems o Secondary (Update Records) – ERP – JD Edwardso Merchandise Management system and front endo Warehouse Management systemo B2B website - S.S has around 400 vendors supplying around 450

brands. Most of the vendors are connected to S.S B2B site. Each vendor can check the stocks and movement of his merchandise. They can track which product is selling best in which city and which one is not. The vendor need not call SS for information when all that he wants is available by click of a mouse

Realizing the role of IT way back in 1991, Shoppers' Stop was among the first few retailers to use scanners and barcodes and completely computerized its operations. Today it is one of the few stores in India to have retail ERP in place which has now been integrated with Oracle Financials and the Arthur Planning System, the best retail planning system in the world. With the help of the ERP, they are able to replicate stores, open new stores faster and get information about merchandise and customers online, which reduces the turnaround time in taking quick decision. Shoppers' Stop has also set up a WAN system to link all units and distribution centers and facilitating seamless operations across all the outlets.

Supply Chain ManagementRealizing the importance of distribution and logistics in ensuring the availability of merchandise on the shop floor, Shoppers' Stop has streamlined its supply chain. The company has developed process manuals for each part of the logistics chain. These modules include vendor management, purchase order management, stock receiving systems, purchase verification and inventory build up, generation and fixing of price and store tags, despatch of stocks to the retail floor and forwarding of bills for payment. The Company now has an off location warehouse and has also streamlined the layout of its Distribution Centre. Shoppers' Stop has also tied up with Sembcorp Logistics (P) Ltd. as its logistics partner.

X. Transportation o Manufacture to DC – Manufacturer handleso DC to Store – DC handleso DC to Vendor (Reverse Logistics) – AFLo DC to DC – AFLo Internal transfers between Stores - AFLo Modes of Transportation - Tempos

Reverse LogisticsReverse logistics comes in to action for 3 reason return due to

Manufacturing defects Laying defects Consignment stocks – Stocks purchased on consignement basis

need to be sent back if they are unsold

Line defect- Here the no. of complaints are more & the problem is also same across all the sections so the product line itself is withdrawn from the stores across the country. For eg. There is a constant complaint for arrow’s blue checks shirt. The entire stock for blue checks in all the sizes is removed from the store and sent back to the manufacturer.

Process for Reverse logistics:1. Physical transfer of goods from stores to DC’s2. DC makes RTV(return to vendor)3. System Debits the vendor

XI. Future plans Shoppers' Stop aims to position itself as a global retailer. The company intends to bring the world's best retail technology, retail practices and sales to India. Their goal is to increase sales and cross the Rs 800 cr. mark by the year 2005-06. To achieve the set target, they plan to expand their family by opening 4 new stores every year. The latest addition to their family is the Calcutta store.

Internalize in-bound logistics to exercise more control and efficient planning. Today the manufacturer takes 1% as cost for transport which may or may not be the actually cost. Shoppers Stop ran a pilot and concluded that there are definite cost advantages and the cost can be lowered to as low as .80% if done internally.

IT system for reading manufacturers tags: Shoppers stop has to re-tag all the merchandise because their systems cannot accept manufacturer’s codes. This involves re-packing expenses, expenses for tags and plastic holders, labor cost, etc. All these cost could be completely done away with if the system could understand the manufacturer’s codes. SS is in the process of buying a system which reads these codes.

The Reasons for Sales and MarkdownsSale is the best method to increase sales volume or to get rid of the excess stock piled up. But the reasons for Shopper’s stop’s sale are different.

Wrong predictions of fashion: Fashion is highly unpredictable! Knowing what a SEC A customer of 25 years of age would want to buy six months from now is rather a difficult task. And this task lies in the hands of the Buyer and the Merchandiser at Shoppers Stop. They are together responsible for the bad performance of a certain style or option. Sales at Shoppers are usually to get rid of this failed merchandise or out of fashion styles.

High sale forecasting:Sales forecast is rather aggressive than conservative. Sales forecast are purposely kept higher than achievable to push sales and keep the pressure on the employees. Thus it is not realistic and the deviation is expected.

Shoppers stop needs to have a more realistic sales forecast and it their aggressive selling strategy should not be only based on stocking up the stores but by concurrent promotions and programs to make customer buy more and have a higher rate of conversion.

I. Akbarally’s Profile

One of India's oldest retailers –more than 100 years old company. Akbarallys has been a part of the retail landscape for a long time, with the Khorakiwala family at the helm. The management style has been conservative all along and the core principle on which it reaches out to its customers is trust. The format so far: a department store that has evolved as a family store over decades, with only three stores in Mumbai spread across 35,000 sq. ft. with each store on an average attracting 2,500 customers a day.

Number of stores: 3

No. of departments : 13

SKUs: Around 12000 in each of the stores.

No. of employees: 150

Average footfalls:

o 400-600(weekdays)

o 1000-2000(weekends)

Akbarallys operational structure

They have a corporate office, which takes care of purchase, finance and human resources. For day-to-day management, they have store managers. They also have between 10,000 and 12,000 stock-keeping units in each of our stores.

Hierarchy in the logistics departmentCEO (Mr.Khorakhiwala)

Purchase Manager

Merchandise Manager

Store Manager

Department Manager

Akbarallys positioningPositioning is the key to communication. Akbarallys is a family store, where they can satisfy the needs of the entire family. They have everything, from

apparels and gifts to cosmetics, appliances, electronics, homeware, kitchenware, etc.

Akbarallys customer profileTheir departmental stores cater to the upwardly mobile socio-economic class (A1/A2/B1) of society.

II. Buying Channel

Akbarally’s Purchase manager is approached by the manufacturer or distributor who wishes to stock his product at the store. The Purchase Manager and the Merchandise Manager collectively take the decision of purchasing or not purchasing the product.

Once they take the decision of purchasing the goods, the manufacturer transports the goods to the store warehouse. Payment is made only after the goods reach the store.

III. Procurement Strategy Akbarally’s follow decentralized procurement. Merchandise is purchased as and when it’s required. Most of the store procurement is from local players hence they procure just in time. Merchandise is transported to the store warehouse by the manufacturer or distributor following which the merchandise I relabeled and stocked. The required quantity for sale is stocked at the display counters

Akbarally’s does not believe in bulk buying. They buy as per their need. Thereby saving on capital blocked in inventory and lower warehousing costs. They buy as per their requirements and hence avoid over stocking.

Cost Benefit: Lesser space required to store inventory Lower storage costs Low investment in a warehouse Low capital investments in stocks No over stocking Inventory management works on a kind of JIT system

Dis-advantages

Manufacturer/Distributor

Godown (Chembur)Godown

(Fort)

Akbarally’s (Chembur)Akbarally’s

(Fort)

Godown(Crawford arket)

Akbarallys (Crawford Market)

Loss of sale due to stock out No benefits of bulk buying – no discounts and credit period advantages

IV. Buying Process

V. Warehousing Akbarally’s follows a decentralized warehousing strategy. Each store has its in-store warehouse and they do not follow the hub system of warehousing.

Benefits of in-store warehouse Easy access No internal transportation cost between warehouse and store Low levels of stock at the display counter, providing more area for

different merchandise

Disadvantages High warehousing costs Weak logistics systems High cost of internal transfers incase of discrepancies

VI. Inventory Management

The Economic Order Quantity is normally based on the past trends and experience.

When to replenish is decided by the Department head in the store. This decision about when and how much to replenish taken by the

department head after consultation with the individual counter sales persons who after working at the same counter for some period become aware of the usual momentum of a particular merchandise.

For e.g. if it is observed that 6 units of betel fixed line phone brand sell in a month the stock levels for betel fixed line phones are maintained at 6 units and accordingly the replenishment is done.

Manufacturer Approaches Purchase Manager

Purchase Manager & Merchandise Manager’s collective decision

Merchandise Supplied to the store warehouse

Warehouse Checks and confirms

Payment to the Manufacturer

In peak seasons like festival time, the stock replenishment is higher as compared to other times. That is also decided on the basis of past trends of festival seasons.

Replenishment Process

VII. Payment Models

Outright Model:In this model the company picks up the merchandise on cash payment basis. The credit period given by the manufacturers and distributors varies from product to product. Akbarally’s enjoys as high as 60day credit also. But the normal terms are 30 days or 60 days, depending upon the merchandise and the relations with the distributor. The main advantage in this model is they can avail low prices and discounts but if the stocks are unsold they incurr losses as the last stage is that they have to be sent to charity.

VIII. Systems Systems at Akbarally’s are primary level record keeping systems. Records of each transaction are maintained and inventory check is done when the management asks for it. Systems are not use efficiently to know the sales trends and the bottlenecks. Hence we can say that IT is not used very efficiently in the procurement process.

IX. Transportation

Manufacturer/distributor to the Akbarally’s Warehouse – Manufacturer/distributor’s responsibility

Counter Staff reports requirement

Store Manager prepares a memo

Purchase Manager checks

PM places order with the Manufacturer or Distributor

Distributor sends merchandise to the store

Warehouse to Store – In store warehouse so no transportation costs

Inter Store Transfers – Courier

Communication between suppliers and the stores:The communication is through:

Phone Fax Email

X. Future Plans

By 2004 they will be opening another 20 mini supermarkets and three additional departmental stores.

At the store level, Akbarally’s is becoming more fashion oriented to attune itself to the changing customer profile and to attract the younger generation which has a relatively higher propensity to spend. Thus, cosmetics and health-related products are being given more importance. The format itself is being revamped, as Akbarally’s perceived the need to give people more reason to step into its stores. If Pyramid decided that it wanted to have a supermarket in its store to offer convenience to customers, then Akbarally’s, too, has done that. In fact, it has gone one step ahead and added a medicine corner, too, at the flagship store at Fort. Ironically enough, Akbarally’s, years ago, had both these formats in its store but decided to discontinue them in 1992, because they were not considered appropriate in the mix.

Left to itself, probably Akbarally’s would prefer to remain the same. The company has been facing the issue of expansion and the reason why it has not expanded beyond the three stores it has till now is the cost, when doing it alone. Going with someone else has been an option and it has been getting offers, especially from outside parties to set up a store in partnership. It has been cautious on this front as it is quite wary about something going wrong and affecting its trusted image. But a changing market means that Akbarally’s has to remodel its strategy so that in the next five years, it can hold its own in what is certain to be a vastly different retail landscape.

Problem Identification No bulk buying benefits

Akbarallys’ buying from distributors:

Loss of sale due to stock out

Pilferage in the warehouse due to bad handling, shoplifting

All of Akbarally’s warehouses are at Prime Location, thus blocking premium area and lowering per.sq.feet sales. The area allocated for warehouse can be made available for merchandise display. Thus increasing the sku’s and options for customer, leading to more foot falls.

The warehouses being at the prime location demand high rentals and capital investments.

Akbarally’s has 2 warehouses in a area of 10 kms.

Once the merchandise reaches the in-store warehouse, the merchandise is labeled and stocked. There are people appointed for labeling and there is a cost attached to this re-labeling.

Suggestions• Buying Channel: An improvement in the buying channel is the

need of the hour. Akbarallys needs to have better systems to forecast its sales and thus avail bulk buying. They need to buy directly from the manufacturer to avail better prices and no channel costs.

• Centralized Warehousing: in the form of hub system would lower real estate cost and instill better efficiency. The combined stock levels maintained will be lower to what is being stored in each store currently. Low stock levels mean low inventory cost and low pilferage thus making warehousing more efficient. If the

Manufacturer

Central Warehouse

Chembur Fort VT

organization plans to grow, they can outsource the warehouse operations once its operations are stable.

• Outsource Logistics: Akbarally’s can outsource the logistics between the warehouse and the store to ensure higher logistics efficiency level. At any point deviating from its core business of retailing would lead to opportunity loss. Outsourcing also instills a commanding position thus making sure that there is 99% efficiency level. Damages in transit and carrying cost would now become the logistics partners look out.

• Buying from Manufacturer: as explained earlier, Akbarally’s needs to buy from the manufacturers rather than the distributor to avail better pricing and bulk buying benefits. Akarally’s can also ask its manufacturers to do the labeling thus saving the time and cost of labeling each and every sku.

• Inventory Management system: Better inventory management systems are the need of the hour. Simple need based buying and first level record keeping systems are not growth oriented. Akbarally’s needs to develop a second level system which helps them in better inventory management. One of the major benefits will be tracking merchandise and knowing what’s selling and what’ not. The other being prompt re-order level, thus avoiding stock outs and loss of sale.